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Reliance on Advice of Counsel May Insulate Employers from Punitive Damage Liability in Discrimination Cases

June 26, 2000

For most employers, the specter of being held liable for substantial punitive damages in an employment discrimination case is cause for great concern, especially in light of the numerous substantial and highly-publicized punitive damage awards in recent years. For a discussion of several such awards in 1999, see What Damages Cap? Significant Jury Awards in Employment Cases in 1999 The cost of challenging such awards on appeal can be prohibitive; perhaps more significantly, the negative publicity resulting from a large punitive damage award in favor of an employee or job applicant blunts the impact of an employer's ultimate vindication through a reversal or reduction of that award. Fortunately, there are proactive measures employers can take to reduce their exposure to punitive damage awards. Having an unequivocal, well-communicated and consistently enforced policy against harassment and discrimination is one such measure. Another step employers can take to avoid liability for punitive damages, according to a recent decision of the U.S. Court of Appeals for the Second Circuit, is to consult legal counsel prior to taking an adverse employment action. Weissman v Dawn Joy Fashions, Inc., No. 98-7813 (June 5, 2000).

Punitive damages are available in Title VII discrimination cases where a complaining party demonstrates that the employer engaged in a discriminatory practice or practices with malice or with reckless indifference to the federally protected rights of an aggrieved individual. 42 U.S.C. § 1981a(b)(1). The U.S. Supreme Court recently clarified this standard by interpreting "malice and reckless indifference" to refer to the employer's knowledge that it may be acting in violation of federal law, rather than the severity of the discriminatory conduct. Kolstad v. American Dental Assoc., 119 SC 2118 (June 22, 1999). Under Kolstad, employers who recklessly disregard or are willfully indifferent to Title VII's prohibitions against discrimination may be liable for punitive damages, while employers who are unaware of or who mistakenly misinterpret Title VII are not. Thus, it is the employer's state of mind that is relevant in determining punitive damages, not the severity of the discriminatory conduct. A more detailed discussion of Kolstad may be found at SC Clarifies Standard for Obtaining Punitive Damages Under Title VII.

In Weissman, the Second Circuit took Kolstad's clarification a step further. A jury had awarded the plaintiff both compensatory and punitive damages after finding that he was fired because he had suffered a heart attack, and was refused rehire thereafter because he had filed a complaint with the New York City Commission on Human Rights. While the Second Circuit did not disturb the jury's finding that the plaintiff had been unlawfully discriminated against and then retaliated against, it did vacate the jury's award of $150,000 in punitive damages after concluding that the evidence was not sufficient to show that punitive damages were warranted. This conclusion was based in part on the fact that the employer had consulted legal counsel prior to taking retaliatory action against the plaintiff "and therefore could not have acted in reckless disregard for [his] rights." In other words, the employer's allegedly retaliatory action did not rise to the level of malice or recklessness needed to support a punitive damages award because the employer was relying on the advice of counsel when it took the challenged employment action.

Because good faith reliance on the advice of counsel may significantly reduce employers' exposure to punitive damage awards (even if the challenged action is found to be a violation of law), employers seeking to avoid such liability should consult counsel prior to taking significant adverse actions against employees or applicants for employment.