Before last week, few people outside McDonald’s Chicago headquarters knew David Fairhurst’s name.
But a court ruling involving the fast-food group’s former ‘global human resources director’, who was fired following allegations of sexual misconduct in 2019, could become a cautionary tale for businesses across the UNITED STATES.
A judge in Delaware, where two-thirds of Fortune 500 companies are incorporated, has found shareholders could sue Fairhurst for allegedly failing to try to prevent pervasive sexual harassment at the company, which has lost billion in market value after chief executive Steve Easterbrook was fired. about a relationship with a subordinate in 2019.
Fairhurst, whom investors accused of fostering a “celebratory atmosphere” within the group, “had an obligation to make a good faith effort” to gather information about misconduct and alert the board of directors, wrote the Vice Chancellor Travis Laster. The former human resources chief “couldn’t consciously ignore the red flags that the company was going to suffer harm,” Laster added.
The 64-page decision took the commercial litigation world by surprise. This signaled for the first time that Delaware courts would put operating executives, not just board members, in the crosshairs for failing to implement the “oversight” needed to stop the wrongdoing.
“The decision will really expand what we see in terms of claims in the years to come,” said Doug Baumstein, securities attorney at Mintz. “It puts a bit more pressure on boards and management to make sure they really have systems in place to detect misconduct and then do something about it.”
Delaware courts have generally adjudicated mergers and acquisitions and shareholder disputes, not personal wrongdoing claims. But since 2019, after a ruling that an ice cream company’s board could be held liable for breaches of duty for failing to monitor operations in the run-up to a deadly listeria outbreak, investors have increasingly sued directors for not spotting or stopping the company from scandals that cost them money.
The case against Fairhurst was different. Fairhurst had been promoted to director of human resources in 2015 by Easterbrook, with whom he had become close when they both worked at McDonald’s in London. He was not, however, a member of the burger chain’s board of directors.
Shareholders alleged that Fairhurst breached its fiduciary duties by allowing the development of a corporate culture that condoned sexual harassment and misconduct. Recruiters were encouraged to hire “young, pretty women” to work at his headquarters, they said, where he and Easterbrook hosted weekly happy hours and developed a reputation for flirting with female employees. Managers “regularly make female employees uncomfortable,” investors said.
After several co-workers reportedly spoke out against Fairhurst for pulling an employee on her knees at a party for HR staff, shareholders claimed Easterbrook had recommended the company deviate from its zero-tolerance policy for acts of sexual harassment by reducing Fairhurst’s bonus but allowing the HR boss to keep his job.
The lawsuit described ‘massive red flags’ along the way, including numerous accusations that McDonald’s condoned employee harassment in restaurants, including in employee complaints filed with the Equal Opportunities Commission. employment opportunities.
McDonald’s declined to comment, but in its Delaware court filings, the company noted that its board was unaware of the “red flags.” Lawyers for Fairhurst did not respond to requests for comment. An Easterbrook lawyer, who is not a defendant in the case and who has set separately with McDonald’s, declined to comment.
The lawsuit relies on the so-called Caremark Doctrine, referencing a 1996 Delaware decision involving shareholders suing the directors of a health care company over a costly fraud scandal. The Caremark decision concluded that boards of directors retain a duty of oversight over their companies. Such claims have led to costly settlements for some companies, including Boeing, which paid $237.5 million in 2021 for a lawsuit alleging its directors were responsible for the two 737 Max jet crashes.
McDonald’s decision broadened the scope of Caremark’s claims beyond wrongdoing that affects a company’s core business, as well as beyond the duties of board members alone, according to the professor of University of California law Steve Bainbridge, who has criticized the proliferation of such actions.
“Caremark has now grown to encompass what amounts to poor human resource management,” he wrote in a blog post last week. “What should have been a matter of labor law (and severely punished under it) has become a matter of the most controversial doctrine in corporate law.”
Laster, who has served as a judge in Delaware since 2009, has yet to decide whether the board, rather than shareholders, should sue to recover damages on behalf of the company, or he is too confrontational to do so.
“Delaware law is very contextual,” warned a senior corporate attorney working with parties involved in the lawsuit, adding that it was too early to predict a flurry of cases against officers until more new similar decisions are rendered.
“There will be people who will say this is going to lead to a massive flood of litigation,” said Rollo Baker, partner at the Quinn Emanuel law firm. But cases like the one against Fairhurst, he added, “are extremely difficult to allege and prove because they require specific allegations of bad faith, which is just very difficult to do.”
This article has been edited from first publication to clearly state that McDonald’s is headquartered in Chicago, not nearby as originally stated.