Viewpoint -- A Supreme Court Case Worth Watching

Impending decision may impact future liability associated with large-scale layoffs.

With the recession lingering into 2002 and many companies continuing to cut their work forces, the Supreme Court is preparing to hear arguments in a case that could have a dramatic impact on how large-scale reductions in force (RIFs) are carried out in the future. Lower courts have been divided for years over whether the Age Discrimination in Employment Act (ADEA) forbids employers from implementing policies, such as RIFs, which, although not intended to harm older workers disproportionately, have the effect of doing so. The Supreme Court is expected settle this question later this term in the case of Adams v. Florida Power Corp. Oral argument is scheduled for March 20, 2002. In lawyers' parlance, the dispute centers around whether "disparate impact" claims, as opposed to "disparate treatment" claims, are cognizable under the ADEA. Most employment discrimination lawsuits are based on the latter theory of liability, under which the employer is accused of intentionally treating some workers less favorably than others because of their race, color, religion, disability, age or other protected characteristic. In other cases, however, the employers are accused of unintentionally violating the anti-discrimination laws. These lawsuits target employment practices that appear neutral in their treatment of different groups of people but have a disproportionately adverse affect on one group. The Supreme Court first endorsed this "disparate impact" theory of liability in Griggs v. Duke Power Co., a 1971 class-action lawsuit alleging race-based discrimination. At issue in that case was a company's policy of requiring its employees to have a high-school education or pass a standardized general intelligence test as a condition of obtaining certain jobs within the company. The court stated that the requirements operated to disqualify African Americans at a substantially higher rate than Caucasian applicants, while not bearing a demonstrable relationship to job performance. As a result, the court concluded, the employer had violated Title VII of the Civil Rights Act of 1964 ("Title VII"), which prohibits discrimination based on race, color, religion, gender or national origin. Following Griggs, numerous plaintiffs, frustrated by the difficulty of proving that their employers had acted with discriminatory motives, asserted "disparate impact" claims. These plaintiffs often relied upon statistical evidence to show that some company policy, such as a RIF, had a disproportionately adverse effect on their protected class. The Supreme Court temporarily undermined this approach in 1989's Wards Cove Packing Co. v. Atonio, but Congress responded by amending Title VII in 1991 to, among other things, explicitly permit disparate impact cases. At roughly the same time, Congress also amended the ADEA, but without referring to the "disparate impact" theory. For more than two decades, it was almost taken for granted that an age discrimination plaintiff, like a Title VII plaintiff, could challenge an employment policy under the "disparate impact" theory. The central mandate of the ADEA -- that it "shall be an unlawful practice for an employer to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age" -- is nearly identical to Title VII's main clause, and most lower courts simply assumed the statutes should be interpreted similarly. In a 1993 decision, however, the Supreme Court strongly hinted that this assumption was a faulty one. The plaintiff in that case, Hazen Paper Co. v. Biggins, had alleged that his employer had violated the ADEA by firing him to prevent his pension benefits from vesting. Although his claims had been based solely upon a "disparate treatment" theory of liability, the court seemed to go out of its way to discredit the "disparate impact" theory. The majority opinion, for example, explicitly stated: "We have never decided whether a disparate impact theory of liability is available under the ADEA." The Court also stated that disparate treatment "captures the essence of what Congress sought to prohibit in the ADEA." Additionally, a concurrence authored by Justice Anthony Kennedy and joined by Chief Justice William Rehnquist and Justice Clarence Thomas stressed that "nothing in the Court's opinion should be read as incorporating in the ADEA context the so-called 'disparate impact' theory of Title VII." There were no dissents. A number of lower courts have read Hazen Paper literally as leaving the question of "disparate impact" liability under the ADEA unresolved, and have followed their pre-Hazen Paper practice of recognizing such claims. These include the Courts of Appeals for the Second, Eighth and Ninth Circuits. However, other courts, including the Courts of Appeals for the First, Third, Sixth, Seventh, Tenth and Eleventh Circuits, have read Hazen Paper as the writing on the wall that the Supreme Court will reject the "disparate impact" theory under the ADEA as soon as it gets the chance. With the court's decision to consider Adams v. Florida Power, that opportunity is fast approaching. Some of these latter courts have held that despite the apparent similarities between Title VII and ADEA, there at least three distinctions which lead to different treatment of the "disparate impact" theories. First, the ADEA contains language to the effect that employers may treat some workers differently than others if such differentiation is based on "reasonable factors other than age." This language, according to some courts, would stand for nothing more than that "only age discrimination is age discrimination," if it did not preclude "disparate impact" claims. Second, according to these courts, the legislative history of the ADEA indicates that Congress intended only to combat the idea that older persons could not do particular jobs, and that systemic disadvantages facing older workers were to be addressed through extra-legislative means. Thus, these courts conclude, the ADEA was never intended to reach unintentional discrimination claims. Finally, these courts also focus on the fact that unlike the 1991 amendments to Title VII, the contemporaneous amendments to the ADEA did not specifically recognize the "disparate impact" theory. The courts which have continued to permit "disparate impact" claims under the ADEA, post-Hazen Paper, have tended to base their decisions on a reluctance to overturn existing circuit precedent absent a clear command by the Supreme Court to do otherwise. Many legal scholars expect the court to issue such an edict in the Adams case. If this prediction bears out, there are numerous practical implications for employers planning or considering RIFs. The most obvious is that unless the layoffs occur in jurisdictions with state law anti-age-discrimination statutes that provide for "disparate impact" claims, employers will no longer have to worry about whether their termination plans have an unintended, adverse effect on older employees. On the flip side, however, some employers might no longer qualify for insurance coverage if they are sued for discrimination. Certain states prohibit coverage for intentional bad acts, as contrary to public policy, and in any event, many types of policies often contain specific exclusions for such conduct. Employers, therefore, are sometimes left without coverage against claims that they have violated the ADEA by intentionally discriminating against older workers. Claims brought under the "disparate impact" theory, however, are based upon allegations of unintentional discrimination. Several courts have held that policy exclusions do not apply and that public policy is not violated when an employer seeks coverage for "disparate impact" claims. Indeed, these courts have held that where an employer is accused under both the "disparate treatment" and the "disparate impact" theories, the insurer may owe a duty to defend the employer, even if there is no ultimate obligation to indemnify. If the Supreme Court acts as expected in Adams, and prohibits "disparate impact" claims under the ADEA, such a duty to defend may well evaporate. As a practical matter, this change may not have the same impact on Employment Practices Liability Insurance (EPLI), because although EPLI policies are theoretically subject to the same state law prohibitions against the coverage of intentional bad acts, many insurers tend to honor "disparate treatment"-based claims brought under EPLI policies anyway. Of course, there is always the possibility that the Supreme Court will surprise most observers and hold that "disparate impact" claims are valid under the ADEA. It also is conceivable that Congress would respond to a decision limiting "disparate impact" liability in Adams the same way it did after Wards Cove, and amend the ADEA to permit such claims. The prospects of such a reaction occurring, however, could depend on which political party triumphs in November. John A. Houlihan is a Boston-based partner and Mark B. Dubnoff is an associate in the insurance and reinsurance practice group of the full-service law firm of Edwards & Angell LLP.

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