Labor & Employment Litigation / 09.25.2020

Gap Board Diversity Lawsuit Demonstrates New Legal Risks for Employers

By Alan Rauss & Lyndsay Ross

GapThe Gap recently became the latest well-known company to be targeted with a derivative lawsuit by shareholders, alleging a lack of commitment to diversity. Underlying The Gap lawsuit are several key lessons. First, if a company makes a diversity pledge, it should be prepared to honor that pledge or risk potential legal consequences. Second, a new risk for employers may be emerging as persons besides employees attempt to hold companies responsible for their policies.

The Gap lawsuit was filed Sept. 1, 2020 in a federal district court in California. Plaintiff Noelle Lee, a company shareholder, brought claims including breach of fiduciary duty, abuse of control, and unjust enrichment against 14 members of The Gap’s Board of Directors (the “Board”) and The Gap itself. The crux of the lawsuit is that The Gap is only superficially dedicated to diversity and takes just enough steps to appease the public demand. In support, the Complaint includes The Gap’s diversity mandate, which reads in part “Being an inclusive company isn’t optional…We are inclusive, by design. Intentionally. Specifically. With Purpose.” However, Lee also notes that of the 14 Directors, only one individual is a minority.

The Complaint also takes issue with certain corporate practices. For example, Lee criticizes low Board turnover as a mechanism for ensuring the Board makeup does not change. She also alleges that the annual proxy statements signed by the Board serve to mislead the shareholders: the statements include the company’s process for selecting new Board members, of which diversity is a consideration, but fail to give any indication as to the makeup of the Board. The Complaint equates this with a breach of the duty of candor and violation of federal proxy laws. The Gap’s Answer to the Complaint is due Sept. 30, 2020.

Keeping in mind that these allegations are just that, and that the lawsuit is in its infancy, the Complaint nonetheless should make companies mindful of potential legal pitfalls. Perhaps the most obvious takeaway is that if a company announces a commitment to diversity, it should be prepared to follow through, or otherwise risk its words being used against it. Formerly a shield, The Gap lawsuit attempts to turn the diversity mandate into a sword for an alleged failure of the company to live up to its words. If a diversity pledge is included in its handbook or on its website, a company should be prepared to take active steps to uphold that pledge, or risk being painted as misleading.

A second takeaway is that where a company makes a diversity pledge, it should be aware that some individuals will consider it a promise that transcends the employment relationship. A company that publicly announces a commitment to action should be aware that various parties, even if not the employees toward whom the commitment was directed, may seek to hold the company accountable. For example, shareholders rely on a company’s proxy statements and expect those statements to be accurate. Companies should be cautious of blindly stating objectives without offering insight as to where the company stands in meeting those objectives.

Moving forward, companies should stay cognizant of this budding area of litigation. For more information, contact a member of KJK’s employment team today.

 

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