The price of discrimination: The nature of class action employment discrimination litigation and its effects

I. Introduction The last decade has seen an explosion of employment discrimination class action lawsuits that have been resolved through record breaking settlements. The best known of these cases is the $176 million settlement involving Texaco, one that came on the heels of the much publicized discovery of tape-recorded meetings that seemingly indicated the use of explicit racial epithets by management-level employees.1 There have also been substantial settlements involving Coca-Cola ($192 million), Home Depot ($104 million), Shoney's ($105 million), Publix Markets ($81 million), and State Farm Insurance Co. ($157 million).2 A recently filed sex discrimination suit against Wal-Mart appears poised to set a new record.3 Despite the proliferation of these high profile cases, we know surprisingly little about their effects on either the firms that have been sued or the plaintiff classes. For example, we do not know whether the lawsuits produce substantial benefits to the plaintiff class, prompt any changes in corporate culture, or exact costs sufficient to serve as an adequate deterrent IMAGE FORMULA5 against discrimination. Because all of the large cases have been resolved through settlements rather than trial, we also do not know whether the cases involve provable claims of discrimination. In this Article, I will seek to expand our knowledge by analyzing the effect these large class action lawsuits have on firms and plaintiffs. The first part of the Article involves an empirical analysis designed to assess whether the lawsuits or their settlements affect shareholder value, as measured by their effect on stock prices.4 In the second part of the Article, I will present three case studies of lawsuits involving Texaco, Home Depot and Denny's to explore whether the lawsuits produce substantial changes within the corporations or provide meaningful benefits to the plaintiff class.5 This study challenges many of the prevailing views on employment discrimination class action litigation. The statistical study demonstrates that the lawsuits do not substantially influence stock prices, either at their filing or their settlement, and when there is an effect, it tends to be short-lived. Yet, although the lawsuits do not result in significant financial losses to shareholder value, managers still often take them seriously-more seriously than is typically warranted by the financial impact of the suits. Stated somewhat differently, while investors do not appear to be significantly interested in the lawsuits, managers frequently are. Taking the lawsuits seriously, however, does not mean that the managers implement meaningful reform; on the contrary, I will suggest that the settlements frequently produce little to no substantive change within the corporations. Moreover, many of the changes that are implemented tend to be cosmetic in nature and are primarily designed to address public relations problems. As demonstrated in the case studies, many companies, such as Texaco and Home Depot, fail to enact meaningful changes in their employment practices, and monetary recoveries generally constitute the primary direct benefit the lawsuits provide to the plaintiff class. When divided by the size of the class, these benefits tend to be relatively modest, averaging about $10,000 per class member-well below what a plaintiff could expect to recover in a successful individual suit.6 Furthermore, given the size of the defendant corporations, the damages also fail to pose a significant deterrent threat to firms. To give but one example, the record-setting settlement involving Coca-Cola amounted to less than 0.15% of the firm's capitalization.7 Although the damage amounts are often IMAGE FORMULA7 insufficient to compensate plaintiffs or deter defendants, other parties involved in the litigation fare significantly better. Attorneys routinely receive fee awards that are four to six times their actual fees, and a host of groups loosely tied to the diversity industry are likewise collecting a disproportionate share of the settlement funds through diversity training, purchases from minority suppliers, and contributions to various minority groups either as part of the settlement or to repair public relations damage. …