Corporate America examines DEI policies as risk of anti-discrimination litigation rises

‘Reverse discrimination’ lawsuits challenging organisations’ diversity, equity and inclusion policies are set to increase across the US following the supreme court’s ruling against affirmative action

Company boards in the US are rushing to revise their diversity, equity and inclusion strategies to protect themselves from possible legal challenges, according to US-based experts.

“We have seen a steep rise in companies, across industries and size, requesting our legal advice to examine their existing DEI policies,” says Marcia Goodman, a Chicago-based partner at law firm Mayer Brown. Boards want to know how to justifiably continue their DEI policies without making themselves legally vulnerable, she adds.

The US supreme court’s decision on affirmative action – in the Students for Fair Admissions vs President and Fellows of Harvard College case – has cast doubts on whether companies’ DEI practices can stand up to scrutiny in court.

Earlier this year, the supreme court ruled that race cannot be considered a factor in university admissions. Students can, however, still narrate life experiences related to their race and ethnicity in their personal cover letters.

The ruling has had a trigger effect on the wider context of employment law and diversity initiatives across the US.

For many companies it would be prudent to review DEI programming to ensure all initiatives are legally sound and to consider potential risk mitigation strategies, says Krissy Katzenstein, a partner in Baker McKenzie’s US employment and compensation practice. She expects challenges to DEI programmes in the form of reverse discrimination lawsuits.

Mayer Brown’s Goodman says the issue had been brewing for some time: “Some boards and management actually believed they were legally safe as long as they were promoting diversity, but we have been telling our clients for some time that that is not true.”

The ruling has brought the question “what is the appropriate way of considering diversity in employment?” to public attention, Goodman adds.

Social licence

According to Roraj Pradhananga, partner and managing director of research at Veris Wealth Partners, a US-based impact wealth management firm, these developments do not mean US companies should pull back on their DEI initiatives. “Our view is that prioritising these topics is critical to ensure that companies do not lose their social licence to operate,” he adds.

The message is that boards need to be better at ensuring fairness with enhanced tools that do not disadvantage any other group, agrees Randall Peterson, professor of organisational behaviour and academic director of the Leadership Institute at the London Business School.

He warns, however, that there will always be some form of pushback against DEI initiatives as some market participants believe it is not “the business of business” to pursue broader goals in addition to wealth creation.

So will the risk of anti-diversity lawsuits affect the way US companies source talent? According to Baker McKenzie’s Katzenstein, when done properly, DEI recruitment efforts are permissible, so anti-diversity lawsuits should not affect the many lawful ways that companies source talent.

Ruth Zadikany, Los Angeles-based partner in Mayer Brown’s litigation and dispute resolution practice and co-leader of its US employment litigation and counselling group, also says some companies might need to change the way they structure their DEI programme, but it is still possible to source talent broadly and extensively.

Some red flags to watch out for are numerical thresholds or targets to increase race or gender diversity within an organisation, she adds.

For instance, in the US (as opposed to other jurisdictions) quotas are illegal. A case in point was California’s 2018 Women on Boards legislation, which aimed to tackle all-male corporate boards in the state. The law was struck down four years later on the grounds that it is unconstitutional to treat people differently based on sex.

Overall, though DEI might suffer a temporary setback, partly due to current anti-ESG sentiment in the US, experts don’t believe efforts to ensure corporate diversity will be abandoned.

“Many firms we have spoken to have mentioned that while they are talking less publicly about DEI and ESG, internal efforts are ongoing because of the positive outcomes and impact on their top and bottom line by incorporating DEI and material ESG factors in their business strategy and operations,” says Pradhananga at Veris Wealth Partners.

Baker McKenzie’s Katzenstein agrees that despite challenges, she hasn’t seen a wholesale overhaul of DEI programmes because of reverse discrimination risk. She argues such a risk is still balanced against traditional discrimination risk, which is mitigated by DEI programmes.

Where now for DEI?

The most recent high-profile anti-diversity lawsuit involved Starbucks. Its policy aimed to increase the representation of black, indigenous and people of colour at all corporate levels to at least 30 per cent by 2025. Conservative think-tank the National Center for Public Policy Research sued Starbucks for “illegal racial discrimination”, but the shareholder derivative claim was dismissed in August by a judge in Washington state.

Some conservative organisations in the US have been filing advocacy letters, complaints with federal state agencies and lawsuits challenging the validity of corporate DEI strategies.

For instance, America First Legal, a foundation led by a former Donald Trump aide, has filed numerous complaints with the Equal Employment Opportunity Commission, including against the Major League Baseball, alleging discriminatory and unlawful hiring practices at American companies active in industries such as finance, consumer and even sports.

The EEOC collects yearly employee data by job categories, sex and race or ethnicity from most companies in the US, a practice known as EEO-1 filing.

Jane Swan, partner and senior wealth manager at Veris Wealth Partners, points out some consumers are demanding companies do more on sustainability topics such as climate change and diversity. “If courts further obstruct this process, they will be interfering in a company’s efforts to meet consumer demand,” she says, adding that “after hundreds of years of intentionally exclusionary practices, it will be difficult or impossible to achieve equitable outcomes without making intentionally corrective adjustments”.

At present, the real threat for boards is having made a statement that puts the company at liability for their actions, says Goodman at Mayer Brown. She adds that, in particular, international companies operating in the US, but headquartered outside of the country, must take care when implementing DEI strategies in different jurisdictions since they can have vastly diverse legal frameworks.

In the near term, most lawsuits will be heard in lower courts, and it will take a few years for some to reach courts of appeal, and perhaps eventually the supreme court, says Zadikany at Mayer Brown.

The London Business School’s Peterson says that anti-diversity litigation is likely to continue as long as existing methods of DEI produce unintended negative outcomes. “Although I expect diversity efforts to go into reverse in the short term, I would expect them to return later in better forms that we have not yet seen,” he adds.