Nike Board Hit with Sexual Misconduct-Related Derivative Suit

In the latest example of a D&O lawsuit following in the wake of allegations of sexual misconduct, three shareholders have filed a state court derivative lawsuit in Oregon against Nike’s Board of Directors alleging that the defendants failed in their oversight duties and allowing a toxic “boys club” culture of sexual harassment and bullying to take hold. The Nike complaint shows yet again that the accountability process that has emerged as part of the #MeToo movement in many cases has involved efforts to hold company’s boards accountable for permitting misconduct or turning a blind eye. The Nike derivative complaint can be found here.

Reports of sexual harassment and sexual discrimination at the Oregon-based athletic shoe company began circulating earlier this year. A March 15, 2018 Wall Street Journal article reported that the company had received complaints about inappropriate workplace behavior, and that the company’s No. 2 executive, Trevor Edwards had resigned. Later articles reported on departures of other executives. Among other things, the reports included allegations that Edwards had fostered an atmosphere where men inside his “boys club” prospered and advanced, while female employees received lower compensation and were passed over for promotions.

In August 2018, two former Nike employees filed a federal court class action lawsuit accusing the company of pay inequity and gender discrimination. Among other things, the plaintiffs complained about the company’s corporate culture, which they said “devalues and demeans its female employees.” The suit charges that Nike has “perpetuated gender-based pay disparities” for years.

On August 28, 2018, three Nike shareholders filed a shareholder derivative lawsuit in Multnomah County Circuit Court against the company’s board and Edwards. (The defendants named in the suit did not include director Cathleen Benko, who joined the board after the reports of misconduct began to surface.)

The shareholder complaint alleges that the company’s “boys’ club” culture resulted in “bullying, sexual harassment and gender discrimination of the Company’s female employees” and that the board and numerous company officers “engaged in, facilitated, and knowingly ignored the hostile work environment” that both harmed the company’s financial position and its reputation. The complaint alleges further in the “boys’ club” atmosphere, “women were excluded from promotions and leadership opportunities.” Edwards, according to the complaint, was one of the “ringleaders,” but instead of being fired for cause, he was enriched by tens of millions of dollars.

The board, the complaint alleges, “repeatedly turned a blind eye to the long-standing culture of harassment and discrimination,” and failed to investigated allegations of sexual harassment and discrimination; failed to prevent management from harassing and discriminating against female employees; and failed to act to improve its policies and procedures or to implement adequate internal controls and reporting programs to prevent the creating and maintenance of a hostile work environment.

The complaint asserts claims against the board for breach of fiduciary duty and waste of corporate assets, and against Edwards for unjust enrichment. (The complaint alleges that between 2015 and 2018 Edwards received total compensation of over $26 million, and that on his departure Edwards was to receive a $525,000 payout and unvested stock award of $9 million.) The complaint seeks damages from the board of not less than $10 million, and from Edwards of not less than $10 million. An unusual feature of the lawsuit is that large sections of the complaint are heavily redacted; in some cases including entire paragraphs are blacked out, apparently at the request of Nike itself.

Discussion

As I noted at the time, there have been prior D&O lawsuits filed against company officials in the wake of allegations of sexual harassment or discrimination. For example, over the summer, a plaintiff shareholder filed a securities class action lawsuit against CBS following revelation of allegations of sexual misconduct against the company’s CEO. Other companies hit with D&O lawsuits arising out of sexual misconduct allegations include Papa John’s International (here); National Beverage Corp. (here); Wynn Resorts (here); and 21st Century Fox (here).

However, the Nike lawsuit arguably differs in certain respects from the other D&O lawsuits filed after revelations of sexual misconduct. In the prior cases, the alleged underlying misconduct involved alleged instances of unwanted advances, inappropriate touching, and the use of corporate power to try to extract sexual favors. The allegations at Nike are more in the nature of hostile work environment. In both cases, the women who were the victims were demeaned and disadvantaged; but the allegations at Nike do not turn so much as the other cases on specific allegations of unwanted sexual advances or inappropriate touching.

In this instance, the process of holding the company and its executives accountable for permitting or turning a blind eye to the toxic corporate culture includes not only a lawsuit filed on behalf of the persons who suffered directly from the hostile work environment but also a lawsuit filed by company shareholders alleging that the company’s directors failure in their oversight duties harmed the company.

The fact that this D&O lawsuit arose in the wake of hostile workplace environment allegations suggests that the possibility of these kinds of lawsuits may reach more broadly than just companies where executives engage in unwanted sexual advances and sexual contact. Indeed, the allegations that the board failed in its oversight duties by permitting pay inequity and inequities in advancement and promotion suggests the possibility that the potential liability exposure could sweep much more broadly.

As numerous publications have noted in recent days, the #MeToo phenomenon recently passed its first anniversary. However, recent developments suggest that this story will continue to unfold. The recent Kavanagh confirmation created a great deal of debate and controversy but also suggested that revelations of sexual misconduct will continue to emerge. Indeed, just last week the New York Times ran a front page article detailing the controversy at Google after reports that company executives who faced sexual harassment or discrimination allegations had left the company with sizable payouts. As these stories continue to emerge, we are likely to continue to see D&O lawsuit filed involving the revelations in at least some instances.

One final note about the Nike lawsuit. The first named plaintiff is a Nike shareholder named Shiva Stein. Stein is something of a frequent filer. In a story about the Nike lawsuit (here), the Oregon Business News referred to Stein as a “serial litigant” who has made a “cottage industry” out of suing companies. Among the companies she has sued are Goldman Sachs (here), Live Nation (here), Ampio (here), and Flowserve (here). I am not aware of any study specifically tallying how many lawsuits Stein has filed, but I am certain it is many dozens, many filed by the same small set of plaintiffs’ law firms. This is the kind of thing that drives many business groups and litigation reform advocates crazy. The frequency with which Stein’s name appears at the top of the masthead on civil lawsuit complaints and the frequency with which she is represented by the same set of plaintiffs’ firms does raise questions whether the lawsuits themselves represent something other than an actual effort by an aggrieved party seeking redress.