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Legal Intelligencer: When to Hire Outside Lawyers to Conduct an Internal Investigation: Revisited

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In the April 9, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “When to Hire Outside Lawyers to Conduct an Internal Investigation: Revisited

In early November 2019, I wrote an article about the high-profile women who had called on Comcast to conduct an internal investigation regarding the alleged widespread culture of sexual harassment within the company. I discussed this issue and the rising calls for internal investigations within many industries and companies and their importance.

Since that article was published, Comcast has not been able to leave the spotlight on this issue. If anything, the calls for an internal investigation have only grown stronger. For example, four Democratic presidential candidates (Cory Booker, Kamala Harris, Bernie Sanders and Elizabeth Warren) called on the Democratic National Committee to make a formal demand on Comcast to perform an investigation regarding sexual misconduct before the November debate which was hosted by Comcast-owed MSNBC. Also, in November, Comcast went before the U.S. Supreme Court in an appeal of a U.S. Court of Appeals for the Ninth Circuit decision permitting a $20 billion racial discrimination suit to proceed against the company. Though the Supreme Court has not yet ruled on the matter, you should keep an eye out for its decision in Comcast v. National Association of African American-Owned Media.

More recently, Arjuna Capital, an activist investor company, filed a proposed shareholder resolution that requested that Comcast conduct an internal review regarding the company’s repeated failures to “prevent workplace sexual harassment.” Comcast has been continually reticent regarding these requests.

Arjuna Capital’s request, however, highlights the importance of conducting internal investigations not merely for moral reasons, but for pragmatic business reasons as well. For a company like Comcast, with billions of shares and millions of people who own these shares (whether as individuals or through financial vehicles such as mutual funds), it is prudent to consider how investors would react as the situation further unfolds—regulatory fines or legal troubles could trouble investors. As Natasha Lamb, a managing partner at Arjuna Capital, pointed out, Wynn Resorts lost $3 billion in its market cap within days of its CEO facing sexual harassment allegations.

It bears mentioning that companies and organizations that do not undertake an internal investigation or otherwise do not perform one satisfactorily shoulder the risk of significant legal consequences. An example of such can be seen in the facts underlying the case of Crawford v. Metropolitan Government of Nashville and Davidson County, Tennessee, 555 U.S. 271 (2009). In Crawford, the events leading to a suit being filed were set in motion when Metropolitan Government of Nashville and Davidson County, Tennessee (Metro) began investigating rumors that Metro School District’s employee relations director, Gene Hughes, was sexually harassing others. A human resources officer asked Vicky Crawford, a long-time Metro employee, whether she had witnessed any such behavior from Hughes. After Crawford and two other people described the myriad of ways in which Hughes sexually harassed them, they were all fired. Hughes, however, remained unscathed. For Crawford in particular, Metro fired her under the guise of “embezzlement.” Crawford then filed a complaint with the Equal Employment Opportunity Commission and later filed her lawsuit in the U.S. District Court for the Middle District of Tennessee. Crawford’s complaint centered around Title VII violations—i.e., the two clauses which make it unlawful for employers to discriminate against their employees if these employees oppose any illegal employment practice or make any charge or participate in any manner in an investigation, hearing, or so on regarding these violations (the former being the “opposition” clause and the other being the “participation” clause).

The district court granted summary judgment in favor of Metro. It ruled that Crawford could satisfy neither the opposition nor the participation clause, because the internal investigation was already-pending—in other words, she did not “oppose” anything—and because the investigation itself was not in relations to a pending EEOC charge (this was based on the Sixth Circuit precedent which confined protecting employees in internal investigations if they were in connection with an EEOC complaint only). The court of appeals affirmed the district court’s decision on the same grounds.

The Supreme Court thought otherwise, however. In a unanimous decision, the court ruled in Crawford’s favor. In the opinion delivered by then-Justice David Souter, the court highlighted the incongruency of the Sixth Circuit’s precedent regarding Title VII violations, especially in regard to the opposition clause. The Sixth Circuit’s interpretation of “oppose” only meant protection from opposition was protected if the opposition in question constituted “active, consistent ‘opposing’ activities.” The Supreme Court instead took a more nuanced view of opposition, not necessarily taking it merely to mean “instigating” actions. Justices Samuel Alito’s and Clarence Thomas’ concurring opinion agreed with the judgment, but discussed the meaning of “opposition” as used by the court, and reiterated the belief that opposition should be active. Alito, who wrote the concurrence, raised the potential issue of employees’ complaints at “water cooler” chat with their other coworkers becoming the focal point of a wrongful termination case (i.e., an employee claiming they were fired due to an offhand comment that was made to a coworker, which ended up being heard by the employer). In any case, all the Justices agreed that the Sixth Circuit’s interpretation of the opposition clause was not strong enough to be supported by the Supreme Court, and the case was remanded down for further proceedings.

Although an atypical situation, the situation from which Crawford stemmed is very much an internal investigation gone awry. Not only were the complaints against Hughes ignored, the employees who spoke out against him were terminated—and one under a faulty premise. What were the consequences? The flawed handling of the situation resulted, not only a poor reputation for the school district for handling the matter in this way, but also years of costly litigation which ended up in the Supreme Court.

One may rightfully ask if the litigation that arose out of the “internal investigation” performed by Metro may have been avoided if it had not been conducted by the district’s HR personnel, but rather by qualified, independent outside investigators. (I note that some refer to an internal investigation conducted by outside investigators hired by the management as an “external” investigation.) Hughes’ position within Metro’s hierarchy also undoubtedly amplified these conflicts of interest. First, Hughes was actually the head of the employee relations department, where the charges of his misconduct would be reported. Second, Hughes also had many friends within Metro’s various leadership, such as the school district’s director. According to Crawford, she felt reluctant to express her complaints with Hughes for a while because of these factors— and for a good reason, as we can see, because her complaints during the internal investigation led to her wrongful termination.

As I wrote in my last article on the subject, although companies and other entities (like school districts, as seen in Crawford) can perform their own internal investigations using their own, otherwise-qualified personnel, the problem is often that conflicts of interest, internal biases and fears of “rocking the boat” do not let justice and the truth come to light. Many people fear retaliation, whether through workplace punishment (demotions, unfair treatment, etc.) or even termination, if they report the wrongdoings of those who are above them in the company hierarchy. Although companies may even have in-house counsel specialized in handling this kind of work, their connections with other departments or upper management may color their ability to perform an unbiased investigation. Consequently, depending on what kind of conduct and who needs to be investigated, sometimes outside investigators can be the best choice.

The ongoing example of Comcast serves as a reminder of what can happen when internal investigations are not conducted, or otherwise conducted inadequately (e.g., conducted by self-interested employees). Major issues such as fraud and harassment, among others, no matter the size of the company, can tarnish the reputation of the company for a long time. Investors and other stakeholders may consequently wish not to be associated with the company anymore, or otherwise fear the economic impact of disciplinary sanctions, such as regulatory fines. There are other reasons investors and others may feel nervous, including the potential shake-up of a company’s structure or the ousting of key personnel. No matter the reasoning, even these fears can slow business down for a company.

For these reasons, it is in the best interest of a company to perform an internal investigation as soon as it becomes apparent that one may be needed. Further, the company should consider whether an internal investigation should be performed by independent outside lawyers (or other investigators). Stemming these issues and investigating them early not only prevents unhappy employees and stakeholders, but it also can prevent the costs and issues associated with litigation or a later investigation that has been instigated by members of the public at large

Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.

Reprinted with permission from the April 9, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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