Lawsuits gone wild

Nation's Business, Feb, 1998 by Michael Barrier, David Warner

It sounds like an employer's worst nightmare. A minority employee fails to receive a promotion. He sues the company, charging racial discrimination. His white supervisor -- who has already resigned to take a job with higher pay at another company -- joins in the suit. The supervisor claims that he was first pressured not to promote his subordinate and then, after he supported the subordinate's complaint of discrimination, was denied a promotion himself.

The court record shows no clear-cut evidence that the company discriminated, but a jury finds for the plaintiffs anyway. It awards them a sum covering economic harmn, emotional distress, and punitive damages. The total: $89.5 million, one of the largest awards ever made by a state or federal court in an employment-law case.

An appellate court reduces the punitive damages sharply -- but they still total $7.8 million. The court affirms the damages for emotional distress, which are, at a total of $5.5 million for the two plaintiffs, also extraordinarily high. The damages in all three categories, including $4 million affirmed form economic harm, total $17.3 million.

That case is now before the California Supreme Court, which must decide if the employer, Hughes Aircraft Co., is entitled to a new trial.

Hughes Aircraft, of course, is not small. And a small-business owner may be tempted to dismiss the likelihood of such a calamity happening to him or her as improbably remote. But where employment law is concerned, a case like this has everything to do with small companies.

Employment law is a form of tort law -- the branch of civil law through which plaintiffs seek recompense for wrongs. they supposedly have suffered.

Tort law in recent decades has been a powerful weapon in the hands of trial lawyers. They have drawn blood from business repeatedly, sometimes winning monetary awards that are so astonishing that they attract nationwide attention. (See "The High Costs Of Being Sued," Page 15.)

Although trial lawyers have tended to go after companies with "deep pockets," small companies have become increasingly vulnerable to employment lawsuits. The grounds for such suits have multiplied in the past few decades as a result of state and federal laws barring discrimination based on race, disability, age, and gender.

Sometimes the lawsuits would seem ludicrous if it were not for the costs they impose on the businesses that are targets.

Take, for example, the case of a 16-employee machine shop in a Western state. According to the firm's owner, one of its employees -- a man approaching retirement age -- volunteered in front of witnesses to be laid off if layoffs became necessary.

Eventually, business slowed to the point that the employee had to switch jobs in the plant or be laid off, and, the owner says, the employee chose to be laid off. Two years later the laid-off employee sued, charging age discrimination. In 1997, after a year and a half of litigation, the company settled, paying a total of $140,000 in damages and attorneys' fees.

The owner says that he believed he had no choice. His accountant told him that if he settled for that much, his costs would be no more than they would be if the case went to trial and he won -- and there was the very real danger that a jury would find for the plaintiff and give him a large award. So the owner decided, he says, "to protect the company and the jobs of the people here." (He says the terms of the settlement preclude his being identified in this article.)

"It's really kind of heartbreaking to get involved with the legal system," he says. "You think you're going to be treated fairly, and it all boils down to dollars and cents.'

There are many such examples, says Michael Lotito, managing partner of the San Francisco office of Jackson, Lewis, Schnitzler & Krupman, a New York City-based national law firm that specializes in representing management in labor and employment cases.

He cites one in which an employee appropriated company property for her own use. After she was terminated, she sued, alleging sexual harassment "even though she had never mentioned any type of harassment during her employment,"

Lotito says. To date, the company has had to spend about $100,000 in legal fees to defend itself.

Lotito also cites a case in which an employee's claim of sexual harassment was valid and the company fired the offenders, yet the harassed employee sued anyway -- after she left the company for a better-paying job -- and won punitive damages of $1.2 million. The employee's attorney wants the company to pay his legal fees, which he puts at $600,000; that would be in addition to the fees the company has paid its own lawyers, which total around $300,000.

The Expansion of Damages

Trial lawyers gained new financial incentives to pursue employment-law cases against small firms when Congress passed the Civil Rights Restoration Act of 1991. That law expanded the remedies available to victims of employment discrimination under statutes such as Title VII of the 1964 Civil Rights Act and the Americans with Disabilities Act (ADA), which was enacted in 1990.