Life, Health & Disability News
Fourth Circuit, In Affirming Termination of LTD Benefits, Rejects Appellant’s Arguments That Plan Administrator Failed to Evaluate His Particular Job Responsibilities, Failed to Perform a Vocational Review or Consult the DOL’s DOT, and Failed to Consider Occupational Stress
By Scott Trager
In Geiger v. Zurich Am. Ins. Co., - - - F.4th - - -. No. 22-1519, 2023 WL 4217009 (4th Cir. June 28, 2023), appellant, Kevin Geiger (“Mr. Geiger”), appealed a judgment entered in favor of appellee, Zurich American Insurance Company (“Zurich”), by the United States District Court for the District of South Carolina. The district court found that Zurich did not abuse its discretion in terminating Mr. Geiger’s long-term disability (“LTD”) claim. The United States Court of Appeals for the Fourth Circuit affirmed the district court, concluded that Zurich’s claim decision was reasonable, and rejected arguments that Zurich failed to evaluate particular job responsibilities, failed to perform a vocational review or consult the Department of Labor’s (“DOL”) Dictionary of Occupational Titles (“DOT”), and failed to consider occupational stress.
Mr. Geiger, who worked at CBS News in New York as a writer/editor, filed a claim for disability benefits in March 2018. Zurich, CBS’s insurer and claims administrator, approved short-term disability (“STD”) benefits for several weeks. While Mr. Geiger returned to work in April 2018, he had to stop again within days. Although Mr. Geiger’s treating cardiologist, Dr. William Cole (“Dr. Cole”), indicated Mr. Geiger was disabled due to moderate pulmonary hypertension and moderate-to-severe pulmonic regurgitation, Dr. Cole projected Mr. Geiger could soon return to work with restrictions and accommodations. In June 2018, Mr. Geiger received a heart catheterization and on July 5, 2018, he underwent open heart surgery to replace his aortic valve. Zurich approved Mr. Geiger’s STD benefits from March 2018 through September 2018.
Following his open heart surgery, Mr. Geiger applied for LTD benefits, which were approved starting the end of September 2018 as Zurich found he was unable to perform his occupation as a writer/editor due to his cardiac condition. Zurich required updates on his medical progress and medical condition. Mr. Geiger thereafter moved from New York to North Carolina and was treated by a new cardiologist, Dr. Brett Izzo (“Dr. Izzo”). In April 2019, Dr. Izzo reported that Mr. Geiger was doing well as he lost about sixty pounds, walked three miles a day, was not experiencing any cardiovascular symptoms, and did not have any symptomatic reoccurrence of atrial fibrillation or flutter. Despite this, however, Dr. Izzo provided a statement to Zurich claiming that Mr. Geiger was disabled due to his mechanical aortic valve replacement and mitral valve repair and noted Mr. Geiger could not work. Zurich followed up with Dr. Izzo who referred Zurich to his clinical note that it would be difficult for Mr. Geiger to return to work due to his extensive cardiac history and need to take high doses of a diarrhetic.
Zurich terminated LTD benefits in July 2019 as Mr. Geiger had a normal echocardiogram and Dr. Izzo’s records showed no cardiovascular symptoms, no recurrence of atrial fibrillation, and no edema. Zurich concluded that the medical information no longer showed Mr. Geiger was “unable to perform the material and substantial duties of [his] regular occupation due solely to [his] sickness or injury” – the standard of disability under the plan. Mr. Geiger thereafter appealed and submitted a written statement from Dr. Izzo dated September 2019, noting that Mr. Geiger’s clinical status was “tenuous.” Zurich ordered a disability peer review by Dr. Mark Sims (“Dr. Sims”), who reviewed the medical records and conferred with Dr. Izzo. Dr. Sims concluded Mr. Geiger would be capable of full-time seated work with certain restrictions and limitations. Mr. Geiger did not submit any additional materials in support of his appeal.
In November 2019, Zurich upheld its denial decision on the grounds Mr. Geiger could perform the material and substantial duties of his regular occupation. Zurich relied on a Physical Requirements and Job Demand Analysis which indicated that Mr. Geiger’s job was sedentary in nature. Mr. Geiger then sued Zurich in district court, challenging Zurich’s LTD benefits denial under ERISA. The parties cross-moved for judgment on the record and, on May 3, 2022, the district court granted Zurich’s motion and denied Mr. Geiger’s motion. Mr. Geiger thereafter appealed to the Fourth Circuit.
The circuit court, which applied the discretionary standard of review, affirmed the district court and found Zurich did not abuse its discretion in terminating Mr. Geiger’s claim for LTD benefits beyond September 2019. The court noted that Zurich initially approved STD benefits to Mr. Geiger from March 2018 through September 2018 and also initially approved his LTD claim, but cautioned him it would require updates on his progress and medical conditions. Moreover, Dr. Izzo’s records belied his conclusion that Mr. Geiger was disabled as he had a normal echocardiogram, had no heart symptoms, lost weight, and walked three miles a day. Zurich further hired Dr. Sims to conduct a peer review analysis which concluded Mr. Geiger could work as long as he had certain physical restrictions and Mr. Geiger did not submit any materials to counter Dr. Sims’ report. In fact, Dr. Sims noted Dr. Izzo did not seem to disagree that Mr. Geiger was capable of full-time work.
Considering the factors set out in Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Benefit Plan, 201 F.3d 335 (4th Cir. 2000), and the discretionary standard of review, the Fourth Circuit found Zurich applied a reasoned and principled decision-making process and its decision was supported by substantial evidence. The court rejected Mr. Geiger’s argument that Zurich failed to evaluate his particular job responsibilities in determining his disability status as the plan explained that Zurich would “look at [the employee’s] occupation as it is normally performed in the national economy, instead of how the work tasks are performed for a specific employer or at a specific location.” Zurich’s Physical Requirements and Job Demand Analysis concluded that Mr. Geiger’s writer/editor position was sedentary and required minimal physical exertion. The Court also rejected Mr. Geiger’s argument that Zurich should have performed a vocational review or consulted the DOL’s DOT because, under the plan, it was Mr. Geiger’s burden, not Zurich’s, to provide “written proof of [his] claim for disability benefits.” Finally, the court found that Zurich was not required to consider the amount of stress involved in Mr. Geiger’s job and how that stress might have impacted his cardiac conditions. The court looked to the plan’s definition of “disabled” and nowhere in the records did Dr. Cole, Dr. Izzo, or any other physician opine that Mr. Geiger could not perform the duties of his prior job because of the stress associated with doing so. Although the court acknowledged that an administrator might conclude that a claimant is entitled to LTD benefits because stress is an inherent factor, that does not mean that Zurich’s reliance on the stated reasons for Mr. Geiger’s disability, rather than allegedly implied problems from returning to work, was unreasonable. Accordingly, the court held that Zurich’s claim decision was the result of a deliberate, principled reasoning process and was supported by substantial evidence.Scott Trager is a Partner at Funk & Bolton PA. His practice covers a broad spectrum of general litigation matters in the state and federal courts of Maryland and the District of Columbia, as well as the Maryland Insurance Administration and Maryland Office of Administrative Hearings. He focuses his practice on the defense of life, health and disability insurance claims (ERISA and non-ERISA), as well as administrative claims before insurance regulators. He also has extensive experience with policy rescissions and interpleaders. He is the Immediate Past Chair of DRI's Life, Health and Disability Committee, and previously served as Committee Vice-Chair (2018-2020) and Program Chair of the 2017 DRI Life, Health, Disability & ERISA Seminar.
Fourth Circuit Finds That Selling Investment Services Does Not Constitute Investment Advice and, Therefore, ERISA’s Duty of Loyalty Does Not Attach, and That ERISA’s Duty of Prudence Is Satisfied Where a Fiduciary Engages in a Reasoned Decision-Making Process, Regardless of Results
By Scott Trager
In Reetz v. Aon Hewitt Inv. Consulting, Inc., - - - F.4th - - -. No. 21-2267, 2023 WL 4552593 (4th Cir. July 17, 2023), appellant, Benjamin Reetz (“Mr. Reetz”), appealed a judgment entered in favor of appellee, Aon Hewitt Investment Consulting (“Aon”), by the United States District Court for the Western District of North Carolina. The district court found that Aon, in its capacity as an investment consultant for the Lowe’s Home Improvement (“Lowe’s”) retirement plan, did not breach the fiduciary duties of loyalty and prudence under the Employee Retirement Income Security Act (“ERISA”). The United States Court of Appeals for the Fourth Circuit, in a 2-1 decision, affirmed the district court and concluded that Aon owed no duty of loyalty as its sales efforts to obtain the delegated fiduciary work were not investment advice and it further did not violate the duty of prudence as it engaged in a reasoned decision-making process and sufficiently monitored the fund’s performance regardless of the results.
Mr. Reetz, a former employee of Lowe’s, on behalf of a class, filed a class action against Aon in district court for investment advice given by Aon to Lowe’s to help manage Lowe’s employees’ retirement plan and alleged Aon’s conduct violated ERISA’s duties of loyalty and prudence. As to the duty of loyalty, Mr. Reetz argued that Aon’s “cross-selling” sales efforts in pitching its delegated-fiduciary services to Lowe’s were self-motivated and constituted investment advice and thus violated the duty of loyalty. Mr. Reetz claimed that Aon was not solely motivated by the plan’s best interest, but acted disloyally in its desire to land the deal and increase its annual fees. Mr. Reetz asserted that Aon further violated its duty of loyalty by advising Lowe’s to change the structure of its retirement plan. As to the duty of prudence, Mr. Reetz alleged Aon did not seriously consider alternative funds when it invested the plan assets in the fund and did not properly monitor the fund, which lagged the returns of comparable funds, once it was chosen. After the district court denied the parties’ cross-motions for summary judgment and following a bench trial, the district court entered judgment in favor of Aon. Mr. Reetz thereafter appealed to the Fourth Circuit. The circuit court affirmed the district court and, although it found that Aon owed fiduciary duties to the plan under ERISA, including the duties of loyalty and prudence, it did not violate those duties.
With regard to the duty of loyalty, the court held that selling services is not investment advice; therefore, Aon did not fail to discharge the duty. The court stated that the threshold question was whether the fiduciary was performing a fiduciary function when taking the action subject to complaint, which includes rendering investment advice for a fee or other compensation. See 29 U.S.C. § 1002(21)(A). The duty of loyalty requires that a fiduciary act solely in the plan’s interest. See id. § 1104(1)(A). The court found that Aon performed an “arms-length negotiation” that did not constitute a fiduciary function. It further found that although Aon’s interest may have incidentally benefitted by its recommendation to streamline the plan’s investment menu, that interest did not motivate Aon’s recommendation. Thus, Aon did not violate the duty of loyalty.
With regard to the duty of prudence, ERISA requires a fiduciary to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1). This duty, however, is not results-oriented and does not demand the optimal investment; rather, it looks for a reasoned decision-making process and requires a fiduciary to appropriately investigate the merits of an investment decision prior to acting. The circuit court agreed with the district court that Aon acted prudently as it considered other potential investment funds and strategies in creating the fund. Specifically, Aon continued to monitor the fund’s performance through a committee and periodically made changes and alterations to asset allocation and swapped out underlying managers. Aon exercised its expertise to keep apprised of alternate investments in the market and, therefore, it did not breach the duty of prudence.
Scott Trager is a Partner at Funk & Bolton PA. His practice covers a broad spectrum of general litigation matters in the state and federal courts of Maryland and the District of Columbia, as well as the Maryland Insurance Administration and Maryland Office of Administrative Hearings. He focuses his practice on the defense of life, health and disability insurance claims (ERISA and non-ERISA), as well as administrative claims before insurance regulators. He also has extensive experience with policy rescissions and interpleaders. He is the Immediate Past Chair of DRI's Life, Health and Disability Committee, and previously served as Committee Vice-Chair (2018-2020) and Program Chair of the 2017 DRI Life, Health, Disability & ERISA Seminar.
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Young Lawyers: Raising the Bar
Defending Against Employee Defection: The Intersectionality of Cybersecurity and Trade Secret Protections in the Digital Age
By Corey Bauer
Cybersecurity and data protection often involve the protection of data and intellectual property (“IP”), such as trade secrets, from outside threats, but is your company prepared to defend against threats from the inside? The trending hybrid and remote work models in the wake of the COVID-19 pandemic have revealed that corporations have sub-par data protection and cybersecurity protections to defend their IP from inside the building (or their employees’ living rooms). In fact, the cyber security company Code42 published its Annual Data Exposure Report for 2022, finding a 1 in 3 chance that a company will lose IP when an employee quits.
The tumultuous job market has only accelerated the effects of this. Companies need to be prepared with adequate legal protections to protect their trade secrets before an employee leaves the company voluntarily or otherwise. As this article will discuss, protecting trade secrets requires a proactive and conscious risk assessment approach anticipating the inappropriate acquisition, dissemination, or disclosure of trade secrets and other information, such as personally identifiable information (PII) of customers.
Cybersecurity Risks for Company Trade Secrets and How to Defend Against Them
Many factors may lead to an employee leaving a company with company data or IP, and it may not only be to assist a competitor. For example, employees sometimes feel ownership of the IP they helped to create and may leverage it to obtain a higher-paid position with a competitor. It is not unheard of for an employee to sell company IP or log-in credentials on a dark web retailer for financial gain or merely out of revenge. Crowdstrike, an international cybersecurity firm, recently published in their 2023 Global Threat Report that 2022 saw a 112% increase in data broker ads on the dark web. These brokers sell access information to company servers. Regardless of how it may occur, measures must be taken from a cybersecurity perspective to help protect company trade secrets. Ensuring that the company is protected and that employees understand company IP protection protocols is crucial, particularly when protecting trade secrets.
Code42’s report revealed the most glaring corporate deficiencies in data and IP protection while an employee is working at the company. For example, the most commonly used means of data theft by employees is using USB devices and smartphones. The more portable data is, the more difficult it is for the company to control. Companies should forbid unauthorized USB devices, as they not only carry company information out of the building but also can carry potential malware into it. The rise of work-from-home policies has complicated this, considering that employees at home can insert a USB device into their company device at will. This can be countered by data outflow tracking software.
According to Cloud42, the use of cloud-based storage services, such as Google Chrome and DropBox, accounts for over half of all data exposures outside of USB and other types of portable device disclosures. Crowdstrike’s 2023 Global Threat Report that cloud-based storage exploitations rose 95% year over year. Unregulated access to these programs and the use of them with company materials should be forbidden. Additionally, properly managing and monitoring email accounts is extremely important. Former employees sometimes email themselves company trade secrets before a departure. Companies should work with their Information Technology departments to have email activity records dating back further than the default seven days of most email service providers and review employee emails, including deleted emails, after their departure. Some companies may utilize a keystroke or data outflow logger, as mentioned above, which can more closely trace employee behavior on company devices.
The more invasive protections may be more advisable for the employees chosen to have access to information the company believes is a trade secret. It is essential to consider that the protections a company can take must be balanced against the need to create a working environment where employees feel comfortable and productive. Having a clear policy for the personal use of company devices and a work-from-home policy can set expectations for employees while furthering the protection of confidential information.
One general and effective rule is restricting access and keeping current employees on a “need to know” policy concerning trade secret information. This does not mean a company should keep employees in the dark. For example, many employees may need to know that new software is being developed to enhance a business process, but not many need to know how that software is programmed. The critical consideration is ensuring that every employee has the information they need to work effectively without disclosing trade secret information unless disclosure is necessary for job function.
Even after an employee leaves, he or she can wreak havoc on their previous employer if the proper safeguards are not met. A surprisingly often overlooked measure companies must take is removing employee access to all company systems on the day of departure. The company may instead remove employee access to the most sensitive data when notice is given that the employee is leaving, which may be advisable under the circumstances.
An exit interview is another critically important step in protecting trade secrets. The exit interview should be conducted with the employee’s supervisor and company legal staff or outside counsel. The supervisor can provide details of the protected information and lessen the risk that the company counsel will one day become a witness should the matter later go to trial. This should not be a cross-examination, but rather a conversation with three goals: First, remind the employee of confidentiality responsibilities and obtain an agreement to honor them. The company should identify examples of confidential information for the employee to avoid any doubt about what the company considers confidential. Second, obtain all confidential documents in the employee’s possession. The method for doing so varies but often involves disclosing on- and off-premises materials. Third, the company needs to get information to assess whether its trade secrets are in jeopardy. Questions should be asked of the employee to determine their new employer and what they believe their role will be there.
It is important to acknowledge that not all information identified for trade secret protection requires the same forms of protection. And although this article focuses on digitally stored information and cybersecurity, various efforts can be utilized to protect said information and those protections can vary company-to-company. For example, a baking recipe stored in a digital file will be protected differently from computer code distributed within software.
Federal Trade Secret Law and its Protections
Federal and state laws can provide companies with a private cause of action to defend their trade secrets. Since 2016, the Defend Trade Secrets Act (DTSA) has provided a pathway for trade secret defense through the federal court system. Further, all but two states, New York and North Carolina, have adopted the Uniform Trade Secret Act (UTSA), although they have other laws designed to protect trade secrets at common law and elsewhere. Circuit Courts across the country have consistently held that the DTSA and state statutes aligned with the UTSA are substantially similar from a legal analysis standpoint. Thus, for this article, the focus will be on the DTSA.
A trade secret is defined in the DTSA as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” However, the DTSA also requires that the purported trade secret derives “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person” or company who can obtain economic value from the disclosure or use of the information (e.g., a competitor). 18 U.S.C. § 1839.
Critical to the article here, the DTSA additionally requires that the purported trade secret owner establish that it “t[ook] reasonable measures to keep such information secret.” 18 U.S.C. § 1839(3)(b). Protective measures such as those discussed above, along with non-disclosure, non-compete, and non-solicitation agreements (should state law permit said agreements), are currently common ways to complete this necessary step to establishing trade secret protection under the law. However, the US National Labor Relations Board's general counsel issued guidance on May 30, 2023, announcing that noncompete provisions contained in many employment agreements violate the National Labor Relations Act unless narrowly tailored to special circumstances justifying the restrictions.
Importantly, courts have noted that “a company need not monitor its employees like a police state to garner trade secret protection for its confidential information.” See, Vendavo, Inc. v. Long, 397 F. Supp. 3d 1115, 1136-37 (N.D. Ill. 2019). This is the trend across all Circuits, as “reasonable measures” are all that are required under the DTSA. However, as the digital age evolves, so too does the definition of “reasonable,” and one errant disclosure by a company without adequate protections can waive trade secret rights.
Vigilance against trade secret theft is an ongoing process that requires a company to have comprehensive monitoring and cybersecurity measures. As the digital age progresses, additional cybersecurity safeguards will be expected of trade secret holders. Although different secrets require different methods of protection, an IP protection program with policies that address the above concerns, among others, is the first step to protecting your digitally stored IP from disgruntled employees and ensuring you have remedies at law when your trade secrets are misappropriated. With the tools listed above, any company can be well on its way to establishing adequate protections for its trade secrets under the law.
Corey Bauer practices in the Intellectual Property Litigation, Commercial Litigation, and Cybersecurity and Data Privacy groups at Houston Harbaugh, P.C. in Pittsburgh, Pennsylvania. He is a team lead for the firm in trade secret and employment-related litigation matters in federal courts across the U.S. He can be reached at firstname.lastname@example.org.
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Product Liability: An Update from the PLC
Seventh Circuit Finds the Duty to Warn Can Extend to Packaging Manufactured by Another Company
By Greg Heinen
Edited by Kate Mercer-Lawson
Can a company be found liable for failure to warn about hazards of another company’s product used in packaging for its own product? What about when the company wasn’t warned that the other company’s packaging could contain anything potentially hazardous? According to the Seventh Circuit Court of Appeals in Johnson v. Edward Orton, Jr. Ceramic Foundation, 71 F.4th 601 (7th Cir. 2023), the answer to both questions may be yes. There, the court applied a heightened duty-to-warn standard to find the defendant product manufacturer potentially liable for failing to warn even though it had not manufactured the potentially hazardous materials at issue.
The Seventh Circuit Reverses Summary Judgment for the Defendant on Failure-to-Warn Claim
In Johnson, the defendant, a manufacturer and seller of pyrometric cones used for ceramics, shipped its cones using packaging material including a mineral called vermiculite. Starting in 1975, the cone manufacturer purchased its packaging material from a separate company, which had allegedly extracted the vermiculite from mining sites that could also contain asbestos. But the cone manufacturer apparently was not told that the mineral could contain asbestos until 1981 – more than five years later after the manufacturer initially shipped products to the plaintiff – when the packaging company provided a material safety data sheet (“MSDS”) noting that the vermiculite “contained less than 0.1% by weight of asbestos.” 71 F.4th at 606. It’s not clear whether even at that time, there was any specific warning provided about the potential hazards of asbestos.
Decades later, the cone manufacturer was sued by the plaintiff, acting as a representative of her husband’s estate after he passed away from mesothelioma. The decedent, a ceramics teacher, had frequently used the manufacturer’s cones and testified that the packaging material would “always create some dust” that would regularly be “in [his] face.” Id.
The district court granted the defendant’s motion for summary judgment on the plaintiff’s claim of failure to warn. But the Seventh Circuit, applying Illinois law, reversed and found the cone manufacturer potentially liable for failure to warn even though it did not mine or create the material and did not expressly know the contents of the packaging materials until years later.
The Seventh Circuit made clear that a manufacturer has a duty to warn when the manufacturer either (1) actually knows of a reasonable risk of harm relating to the product or (2) reasonably should know of a reasonable risk of harm relating to the product. The court held that duty to warn, whether rooted in strict liability or negligence, is considered in light of the “present state of human knowledge” at the time of the alleged failure to warn. Id. at 615. And even a manufacturer that does not create the product or incorporate the hazardous part as a component, but instead uses it as packaging, is still held to this heightened standard.
The Court Finds That “Present State of Human Knowledge” in 1975 Provided “Constructive Knowledge” of Potential Asbestos Hazards
The Seventh Circuit first considered whether the cone manufacturer had a duty to warn through actual knowledge. The court determined that only after the manufacturer received the MSDS, which specifically listed asbestos, did it have actual knowledge such that a duty to warn attached. So far, so good.
But the court went on to consider whether the manufacturer nonetheless possessed constructive knowledge of hazards sufficient to establish a duty to warn. The court warned that manufacturers are held to an expert degree of knowledge and should exhaust all available resources to stay abreast of any scientific developments related to their product – even when the developments relate to ancillary or accompanying products. At the time the manufacturer distributed the cones, multiple articles detailing the packaging company’s vermiculite mining operations, including the presence of asbestos, were available in the public domain. There was no evidence that the cone manufacturer was aware of these articles (and certainly couldn’t find them online, as early as 1963). Nevertheless, based on their mere existence, the court reasoned that the cone manufacturer reasonably should have known of the potential exposure to asbestos.
Ultimately, this constructive knowledge gave the cone manufacturer a potential affirmative duty to warn consumers despite not having received a direct warning of the potential hazards until years later, and despite the “present state of human knowledge” dating as far back as 1975 ( when asbestos litigation was in its infancy).
Key Takeaways from the Seventh Circuit’s Decision
Johnson provides at least two key takeaways regarding potential liability for failing to warn consumers.
First, a company could be found liable for failure to warn with regard to a product it does not manufacture and does not incorporate into its product. The duty to warn may encompass all materials that may accompany the product when it reaches consumers.
Second, the knowledge standard for the failure-to-warn cases, at least under Illinois law, is the same whether the claims sound in negligence or strict liability: if the manufacturer knows or reasonably should know of the harm, there is an affirmative duty to warn. In Johnson, the manufacturer was held to a high standard of care requiring an “expert” degree of knowledge that, in effect, requires manufacturers to warn of all dangers understood by the “present state of human knowledge.” Id.
Best Practices for Manufacturers to Protect Against Failure-to-Warn Claims
Johnson is a good reminder to product manufacturers to be sure to consider potential risks inherent in all material aspects of any product being delivered to consumers – including packaging and other elements that are not part of the product itself. This will likely entail requesting information from any companies whose products will accompany the manufacturer’s products to the consumer, whether such a product is a component of the manufacturer’s product or not.
Product manufacturers should also retain experienced counsel to advise them on the relevant standard of care in the jurisdictions in which they operate, with particular attention to states like Illinois that have a heightened, expert-level standard of care. Effective and up-to-date compliance programs are also key to monitoring new developments relating to any products or materials being incorporated into manufacturers’ products.
Gregory Heinen is a senior counsel and business litigation attorney with Foley & Lardner LLP. He has a broad general litigation background but focuses on the areas of product liability, mass torts, and toxic torts. Gregory has years of experience working as national counsel to handle mass litigation matters in state and federal courts around the country at every stage, from filing the complaint through trial and beyond. This includes matters in multi-district litigation (MDLs), and other coordinated proceedings involving hundreds of plaintiffs, as well as serving as National Coordinating Counsel, regional and local counsel for asbestos matters for clients in many industries. Gregory also has handled contract disputes, real estate matters, and antitrust litigation matters. In addition to many commercial disputes, Gregory has experience both conducting internal investigations and providing antitrust-related compliance counseling.
Dealing with Field Failure of Plastic Building Products
By Jack Huang, Ph.D, Senior Scientist, Material Science, Envista Forensics and Andrew Schmit, PE, Assistant Technical Director, Mechanical, Envista Forensics
Plastic is all around us. It’s in the clothes we wear, the electronic devices we use, the vehicles we drive, and even the concrete we walk on. Given the abundance of use, it shouldn’t be surprising that plastics are also used in building products, including pipes and fittings used for potable and process water.
When it comes to the failure of plastic components, especially those carrying water, the resultant damages require the need to identify the exact cause of the failure as the root of the failure will be critical to multiple parties, e.g., the building owner, insurance companies, the manufacturer, and the installer. In any of these cases, there are a number of potential causes that must be considered.
First of all, the material choice likely comes to mind as the most intuitive suspect for the source of the problem. Subsequently if informed that a failed product is made with plastics, the idea of plastics being a lower quality substitute to their metallic counterparts is a common misconception held by the non-technical public, including juries. The fact is, contrary to conventional wisdom, plastics can and might be the right/best candidate for many engineering applications. After all, plastics far outperform metal in a variety of harsh service environments. They are also more lightweight and can be easily manufactured into highly complicated geometries.
Plastics, or technically polymers, are conglomerates of organic chains consisting of large numbers of repeating hydrocarbon subunits; imagine long chains made with ball-and-socket links. Therefore, understandably, the chemical makeup of the subunits (choice of ball-and-socket links), the number of repeating units (length of chain), and the way the chains are packed together (random or ordered) will all influence the observable properties of the resultant polymer chain conglomerates, e.g., mechanical strength, chemical resistance, processing ease, etc. The continued trend of increased use of plastics in many engineering and structural applications is the result of availability of many choices of the repeating unit (versatility) and the abundance of hydrocarbons from petroleum refinery process for raw materials (cost).
To elucidate the richness of plastics and its utility, here are some of the most frequently utilized plastics in building products:
PEX stands for cross-linked polyethylene. Polyethylene is the simplest hydrocarbon available and consists of just carbon and hydrogen atoms. It is flexible and is normally used for articles such as grocery bags. When cross-links are introduced into the structure, it is equivalent to introducing cross-stitches between straight yarns, and the restriction in movements makes PEX both structurally stronger and more chemically resistant. Over the past two decades, PEX has gained tremendous popularity as a residential water supply piping material. However, the increased use has not come without downsides. When PEX is used in aggressive environments, like supply lines for chlorinated water, negatively charged chloride ions act as an oxidizing agent and can cause degradation of the PE polymer chains. To extend their life, PEX pipes require the addition of antioxidants to help stabilize the PEX material. Continuous exposure to chlorinated water will ultimately lead to degradation of the PEX supply lines until eventual rupture.
PVC/CPVC are the chlorinated version of PE, meaning chlorine atoms are now incorporated onto the main carbon chains to replace some of the hydrogen atoms. With the addition of chlorine atoms on the main chain, it adds stability to the polymer chain due to the extra electrons that chlorine atoms carry. Additionally, the chlorine atoms surrounding the carbon main chains are larger atoms than the hydrogen atoms and therefore offer better protection of the chains from attack. This makes PVC and CPVC excellent choices for sanitary sewer applications and water supply piping, whether buried or above ground. However, in some service environments, problems still do occur.
PVC/CPVC is generally not recommended for use with most solvents (soluble or insoluble) including ketones, ethers, furans, esters, alcohols, and aromatics. The solvents can be absorbed into the CPVC substrate and lead to softening of the CPVC pipe. Cases of CPVC pipes used for fire suppression systems have been reported to fail due to accidental contact with drywall sealant or an anti-freeze agent that contains esters. Polyolester (POE) oils are another contaminant that can result in the degradation of CPVC pipe. While POE oils are not a typical constituent of domestic water supplies, remnants of the oil can sometimes be found within iron pipes or heat exchangers. It has been observed that, even at low levels, POE oil can lead to progressive cracking failures within CPVC pipes (Photograph 1)
Photograph 1: Interior cracking on CPVC joint exposed to POE oil
Polyoxymethylene (POM), also known as acetal, polyacetal, and polyformaldehyde, is an engineering thermoplastic due to its high crystallinity. It is therefore commonly used in precision parts requiring high stiffness, low friction, and excellent dimensional stability, such as supply line nuts and complexly shaped fittings. However, acetal resins are sensitive to acid hydrolysis and oxidation agents such as mineral acid and chlorine. Low levels of chlorine in potable water supplies (1–3 ppm) can be sufficient to cause environmental stress cracking, a problem experienced in both domestic and commercial water supply systems. Refrigerator filters, pipe/tube connectors, and faucet components are also common POM parts that have exhibited ESC due to exposure to chlorinated water.
Thermoplastic elastomers (TPE), sometimes referred to as thermoplastic rubbers, are a class of copolymers or a physical mix of polymers that consist of materials with both thermoplastic and elastomeric properties. While most elastomers are thermosets (plastics that don’t soften upon heating) and can’t be processed by injection molding, thermoplastic elastomers are relatively easy to manufacture by injection molding and other thermal processing techniques. TPE thus shows advantages typical of both rubbery materials and plastic materials and is frequently used where conventional elastomers cannot provide the range of physical properties needed in the product. Flexible thin-walled tubing and rubber roofing material are a couple of examples.
Field Failure Analysis of Plastics
Now that you have some introduction to commonly used plastic materials for building products under the belt, let’s look at how a field failure is approached next. In the world of failure analysis, when it comes to component failure, regardless of the material, metallic or non-metallic, four relevant factors are to be considered before any verdict can be derived, i.e., material selection, part design, manufacturing processes, and installation errors.
Material selection is without a doubt the number one task when it comes to developing any commercial products. On top of structural integrity requirements, application environment (likelihood of exposure to detrimental chemicals or not), expected life span, and overall cost target are the first level of considerations that will help define the probable material candidates. However, it is not unusual to see cases where cost target overrides the structural integrity and application environment requirements. Certainly, a landmine to watch out for when dealing with field failure cases.
Once the proper material is selected, then comes the part design. Achieving desired structural integrity in a component requires not only inherent material strength but also structural stiffness, which is geometry dependent like wall thickness. On top of wall thickness, sharp corners can cause stress concentration and lead to failure at lower than target nominal applied stress. Consequently, proper radiuses to avoid sharp corners and proper bottom thread design for effective thread engagement are some of the seemingly trivial yet critical factors to look out for in a failed part.
After proper selection of material and appropriate design considerations, plastic parts then get fabricated commonly via injection molding (with 3D geometry) or extrusion (tubing). Not surprisingly, proper fabrication process parameters will also impact the quality and end performance of the components.
Some of the critical processing parameters for injection molding are adequate raw material drying, molding temperatures, injection speed, mold design for efficient material flow path and mold cavity air venting, and lastly cooling speed to minimize residual stress. For extrusion, temperatures for different process zones, proper screw elements configuration for material to be processed, and extrusion speed are some of the important parameters to pay attention to. Localized stress concentration due to air entrapment associated with inadequate raw material drying and/or poor injection mold cavity air venting are regular issues encountered in injection molding. For extrusion, premature material degradation frequently happens due to improper processing temperatures and/or excessive mechanical shearing imposed on the material by incorrect configuration of the screw elements. Therefore, signs of air bubbles, localized defects, and lower-than-projected material properties are always something to keep in mind when processing mistakes are suspected.
Lastly, even if everything associated with producing the parts has been handled correctly, installation errors could wipe out all the good efforts leading up to the final step of the project. Overtightening (over-torquing) is the most common mistake encountered in field failure of plastic parts. Installers who are accustomed to installing metal fittings have the tendency to apply the same rules in connecting plastic fittings, especially if the installation involves a male metal component threaded into a plastic female component. Failure at thread bases of the plastic components is the most observed field occurrence. Another installation error involves accidental unintended exposure of plastic parts to detrimental chemicals. CPVC pipes coming into contact with anti-freeze agent containing polyester or POE oil from heat exchangers are good examples of this category.
So, it is always good practice to consider the four factors before rendering any conclusion. But, sometimes, even after taking into account all of the factors, exceptions can still occur. One good example entails PEX water supply pipes. ASTM (American Society for Testing and Materials) Standard F876 establishes the performance requirements for PEX pipes. PEX manufacturers whose products pass the F876 requirements normally warranty their products for at least 25 years of field life. Yet, periodic chlorine spikes in potable water and local water quality could still lead to premature failure of the PEX supply lines. Photograph 2 and Photograph 3 show a PEX pipe degrading over time in a chlorinated water environment. One can see the initiation and propagation of longitudinal cracks due to environmental stress cracking. The hydrostatic water pressure intermittently applied on the pipe, coupled with the chlorine attack, has then caused the inner surface to develop surface and through-thickness propagating longitudinal cracks on the pipe. The sad reality is the pipe has been in the field for less than 10 years.
Photograph 2 - Longitudinal cracks on inner surface of PEX pipe
Photograph 3 – Opened longitudinal cracks
Finally, to sum it all up, failures of building products, plastics or not, contribute to billions of dollars in losses every year. Even though something like a failed pipe causing a water leak may seem like a simple investigation on the surface, the actual underlying cause of the failure may be complex and involve many contributing causal factors. Therefore, it is important for you to have the right forensic experts on your team with the right testing capabilities to ensure an accurate investigation so you can understand and be able to cover all facets of the failure in your case.
Dr. Jack Huang is a Senior Scientist at Envista Forensics with over 20 years of experience in product liability, failure analysis, and process/application development for new polymer materials and composites in the automotive and building products industries.
Mr. Andrew Schmit came to Envista in 2014 with a bachelor’s and a master’s degree in mechanical engineering. While with Envista, Mr. Schmit has become experienced in providing analysis of mechanical failures involving property loss, personal injury, and product liability. He also has experience evaluating mechanical equipment post-loss to determine the extent of damage and scope of repairs, as well as conducting materials analyses to determine the origin and cause of component failures.
Voir Diring For Dollars
By Edward R. Hugo and Bina Ghanaat
DRI published our article, The Big Problems With Mini-Openings, in the July/August 2023 edition of The Brief Case. The article was originally published by HarrisMartin in the April 2023 edition of COLUMNS – Asbestos. The article focused on the problems presented by mini-opening statements and included an example where asbestos plaintiffs’ counsel sought to ask potential jurors in voir dire if they were open to awarding non-economic damages of “over 34 million dollars” to the adult heirs of a sixty-seven-year-old man who “had various medical issues such as being severely obese and having two heart attacks” prior to his death. (Wennerholm v DAP Products Inc., JCCP4674, Los Angeles Superior Court, Case No. 19STCV15874 [1/31/23].)
In response, counsel for plaintiffs in the Wennerholm case defended their claimed right to mention particular dollar amounts in voir dire in a commentary entitled The Right to Liberal and Probing Examination of Jurors for Bias Against Large Verdicts, published by HarrisMartin in the June 2023 edition of COLUMNS – Asbestos. Therein, the authors state:
Plaintiffs in California courts have been granted the right, on request, to mention particular dollar amounts in voir dire for the purpose of identifying biased jurors and empaneling an impartial jury. The Wennerholm case . . . is one example of Plaintiffs’ counsel having been granted such a request.
Glaringly, plaintiffs’ counsel omitted any mention of the results of their “liberal and probing examination of jurors for bias against large verdicts.” So, what happened? Did plaintiffs’ counsel swear a jury that was “open to” awarding large verdicts? Again, in their own words:
When Plaintiffs’ counsel engaged in voir dire...The venire commenced a series of disrespectful comments, including profanities, directed at Plaintiffs, their counsel, and the Plaintiffs’ case in general. Several potential jurors engaged in these dismissive and disrespectful comments. A polite word would be bull-feathers, but more profane words were used. These comments were uttered behind counsel’s table, within the hearing of counsel and other members of the venire. (Frost Decl P21-28). Plaintiffs’ Motion for Mistrial, Wennerholm vs. DAP Products, Inc., JCCP 4674, Los Angeles Superior Court, Case No. 19STCV15874 (1/30/23).
Plaintiffs’ counsel moved for a mistrial in Wennerholm as a result of the venire’s response to their own voir dire. That motion was granted before voir dire was completed, and their trial date was lost.
Their Commentary also completely fails to address the reality that there can be a limit to damages. Per Civil Code section 3359, “[d]amages must, in all cases, be reasonable, and where an obligation of any kind appears to create a right to unconscionable and grossly oppressive damages, contrary to substantial justice, no more than reasonable damages can be recovered.” To quote from Austin Powers: International Man of Mystery (1997):
Dr. Evil: [...] Here's the plan. We get the warhead and we hold the world ransom for... ONE MILLION DOLLARS!
Number Two: Don’t you think we should ask for more than a million dollars? A million dollars isn’t exactly a lot of money these days. Virtucon alone makes over 9 billion dollars a year!
Dr. Evil: Really? That’s a lot of money.
Dr. Evil: Okay then, we hold the world ransom for... One... Hundred... BILLION DOLLARS!
(See, e.g., Postal Instant Press v. Sealy (1996) 43 Cal.App.4th 1704, 1723 [award to franchisor of lost future royalty and advertising fees after termination of franchise agreement for franchisee’s failure to timely pay past royalty and advertising fees would result in unreasonable, unconscionable, and oppressive damages]; Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541, 555 [a plaintiff’s medical expenses must be both incurred and reasonable].)
Not only are the arguments of counsel not evidence of damages (CACI 3925), but, per the notes to CACI 3925, “[c]ourts have held that ‘attempts to suggest matters of an evidentiary nature to a jury other than by the legitimate introduction into evidence is misconduct whether by questions on cross-examination, argument or other means.’” (CACI 3925 (citing Smith v. Covell (1980) 100 Cal.App.3d 947, 960).) Federal courts have recognized the danger of an attorney seeking astronomical damages untethered to the evidence: “A jury is likely to infer that counsel’s choice of a particular number is backed by some authority or legal precedent. Specific proposals have a real potential to sway the jury unduly.” (Consorti v. Armstrong World Indus., Inc., 72 F.3d 1003, 1016 (2d Cir. 1995) (judgment vacated on other grounds by Consorti v. Owens-Corning Fiberglas Corp. (1996) 518 U.S. 1031).) Indeed, such improper tactics by plaintiffs’ counsel were held in the federal case of Waldorf v. Shuta to constitute reversible error:
The question whether plaintiff’s counsel may request a specific dollar amount for pain and suffering in his closing remarks is a matter governed by federal law, and we now hold that he may not make such a request . . . . In the final analysis, a jury trial should be an appeal to the rational instincts of a jury rather than a masked attempt to ‘import into the trial elements of sheer speculation on a matter which by universal understanding is not susceptible to evaluation on any such basis . . . .’ We hold that the references by plaintiff’s counsel in his closing remarks to a minimum dollar amount that plaintiff should be awarded for his pain and suffering could have irrationally inflated the damages award and, under the facts of this case, constituted reversible error.
(Waldorf v. Shuta (1990) 896 F.2d 723, 744 (citation omitted).)
Plaintiffs’ counsel’s Commentary failed to address any of the numerous studies regarding the psychological effects of anchoring on jurors. Hugo, Edward R. & Ghanaat, Bina, “The Big Problem With Mini-Openings,” HarrisMartin COLUMNS-Asbestos (April 2023) (citing J. Campbell et al., Countering the Plaintiff’s Anchor: Jury Simulations to Evaluate Damages Arguments, 101 Iowa L. Rev. (2016); see also Mollie W. Marti & Roselle L. Wissler, Be Careful What You Ask For: Anchoring Effects in Personal Injury Damage Awards, 6 J. EXPERIMENTAL PSYCHOL. APPLIED 91, 91–103 (2000); Gretchen B. Chapman & Brian H. Bornstein, The More You Ask For, the More You Get: Anchoring in Personal Injury Verdicts, 10 APPLIED COGNITIVE PSYCHOL. 519 (1996); Verlin B. Hinsz & Kristin E. Indahl, Assimilating to Anchors for Damage Awards in a Mock Civil Trial, 25 J. APPLIED SOC. PSYCHOL. 991 (1995); John Malouff & Nicola A. Schutte, Shaping Juror Attitudes: Effects of Requesting Different Damage Amounts in Personal Injury Trials, 129 J. SOC. PSYCHOL. 491 (1989); Edward (Ted) L. Sanders, et al., Reptiles, Picassos, and Stealth Bombers: Combating Inflated Non-Economic Tort Damages, MUNICIPAL LAWYER: THE JOURNAL OF LOCAL GOVERNMENT LAW, pp. 19-23 (Vol. 60, No. 6, Nov./Dec. 2019).) Instead, they renamed anchoring “preconditioning” and attempted to sweep the associated science under the rug.
Rather than engaging in anchoring, Plaintiffs can conduct their “liberal and probing examination” guaranteed by Code of Civil Procedure section 222.5(b)(1) by (1) asking jurors if there is a certain dollar amount that the jurors feel would be too high to award even if the plaintiffs prove their case, or (2) using ballpark figures such as “millions” rather than a precise number to gauge the prospective jurors’ reactions. Defendants, on the other hand, can inquire of jurors if they would be comfortable returning a defense verdict (i.e., awarding nothing) if plaintiffs do not prove their case.
By remaining alert against attempts at anchoring, counsel can seek to avoid situations like the one in Wennerholm where the venire was provoked to the extent of becoming “uncontrolled,” using “unrestrained profanity,” and “tainting all within earshot.” Plaintiffs’ Motion for Mistrial, Wennerholm vs. DAP Products, Inc., JCCP 4674, Los Angeles Superior Court, Case No. 19STCV15874 (1/30/23).
Edward R. Hugo is a trial attorney, appellate lawyer, litigator and litigation manager for cases involving products and premises liability, toxic torts, environmental claims, construction defect, personal injury, wrongful death, insurance, professional negligence, sexual molestation and criminal law. He has also been retained as an expert witness and testified in trial, arbitration and deposition regarding: the duties of defense counsel, the effectiveness of defense strategies, the reasonableness of settlement values and defense costs, and insurance coverage issues.
Bina Ghanaat is a Partner with experience in toxic torts, insurance coverage, bad faith, habitability, and personal injury cases. She manages her cases from inception to resolution, handling discovery, depositions, law and motion, and trial preparation in state and federal courts. Ms. Ghanaat has defended a wide range of clients, including manufacturers, suppliers, contractors, insurance carriers, building owners, and trucking companies. She has drafted numerous motions for summary judgment that have resulted in dismissals of her clients or significantly reduced demands. She has also drafted and argued successful motions for summary adjudication as to punitive damages and various causes of action in asbestos matters venued in San Francisco and Alameda. For those cases in which a dispositive motion has not been viable, Ms. Ghanaat has prepared them for trial in an efficient manner with an emphasis on achieving optimal results for her clients. In Fall 2020, Ms. Ghanaat was co-counsel in one of the first “virtual” trials in Alameda County.
Interested in joining the Product Liability Committee? Click here for more information.
Insurance Law: Covered Events
Insurance Law Committee Leadership Note
By Jonathan L. Schwartz
Greetings fellow DRI members! I hope you are enjoying your Summer.
The Insurance Law Committee proudly and eagerly encourages you to sign up for the 2023 Insurance Coverage Practice Symposium in New York City, November 29 – December 1, 2023. We are lining up exceptional speakers on cutting-edge topics, but perhaps as important, we are bringing back the magic that is DRI in NYC during the holiday season. It’s the Tree at Rockefeller Center, the Rockettes at Radio City Music Hall, and Midtown Manhattan at its finest. We are excited to host you and offer the best insurance CLE around. What’s more, we are planning social and charitable events that will make for a truly memorable experience. Please join us in New York City for the Insurance Law Committee’s annual flagship conference – an event too special to miss.
In addition, between now and November, if you have ideas for an article, webinar, podcast, or seminar presentation (we’ll soon start planning for the 2024 Insurance Coverage and Claims Institute), please do reach out to me and share. We’d love to hear what’s on your mind and firmly on your radar. Plus, publishing and presenting for DRI and the Insurance Law Committee offers an exceptional opportunity to develop your personal brand among the tens of thousands we count as DRI members and friends.
Jonathan L. Schwartz is a partner at Freeman Mathis & Gary LLP. He is the chair of the Insurance Law Committee.
Construction Subcommittee Leadership Note
By Kimberly Ramey, Esq.
The ILC’s Construction Law subcommittee focuses on coverage issues impacting the construction industry. Our members include attorneys and claims professionals with extensive experience handling the unique claims faced by contractors, design professionals and their insurers. If this is your area of expertise, of if you would just like to learn more about this expanding area of insurance law, we invite you to join our subcommittee. All of our members are encouraged to collaborate, network and share information about their experiences handing complex construction coverage issues. Members are also afforded opportunities to write for DRI publications and speak at DRI seminars. If you are interested in joining the Construction Law subcommittee, please contact me at email@example.com.
Kimberly Ramey is a Partner with Butler Weihmuller Katz Craig, LLP in Tampa, Florida. She is chair of the ILC’s Construction Law subcommittee.
Transportation Law Committee Leadership Note
By William A. Bulfer
Greetings from the Transportation SLG. It’s been a busy year! SLG member Jennifer Eubanks presented at this summer’s Bad Faith Conference in Charlotte, North Carolina, and provided valuable insight on key discovery issues in bad faith cases. The SLG continues to be comprised largely of “in-house” members of various trucking and transportation insurers. These members are vital to the group’s understanding of key issues of importance to the industry; including the value in retaining qualified and experienced defense and coverage counsel, the continued impact of social inflation, and concerns relating to the creation of bad faith claims through various bankruptcy and receivership statutes. By discussing these issues with members in private practice, members of the Transportation SLG are in the best position to meet existing and emerging issues facing the transportation insurance industry.
In addition to the group’s focus on industry specific concerns, members routinely serve as a source of referrals, whether between those in private practice or as a resource to in-house participants. The Transportation SLG can trace referrals from California to Florida, with multiple states in between!
Our focus as we enter the closing months of 2023 will be on membership and thought leadership. The Transportation SLG has been “small but mighty” for some time, but it holds tremendous opportunity for those who are interested greater engagement. With regular publication opportunities and industry professionals craving additional insight, our SLG is a great way to contribute. Please reach out to me directly or look for members at an upcoming DRI conference if you’d like to get involved!
William A. Bulfer is a partner at Teague Campbell Dennis & Gorham LLP. He is co-chair of the Transportation Law SLG.
Interested in joining the Insurance Law Committee? Click here for more information.
Employment and Labor Law: The Job Description
Employment Discrimination Via Artificial Intelligence
By Christy C. Dunn
Thought leaders opine that advanced artificial intelligence (AI) is the most transformative event in human history. Experts extol the benefits of combining human intelligence with machine learning to increase productivity in every facet of society. Businesses are rapidly harnessing the power of AI in the workplace to increase efficiency, productivity, customer service, quality control, and employee safety, and to decrease costs of human labor.
85% of large employers currently use AI for employment-related tasks and decisions, from recruiting and hiring to performance measurement and promotion. AI can help create job descriptions, predict likelihood of applicants’ success, recommend jobs and roles for applicants, identify potential job candidates (by analyzing resumes, applications, and social media), select among applicants for hiring, conduct initial interviews through chatbots, onboard and train new employees, measure employee productivity and performance, select among employees for promotion, and improve communication between employees and management.
But experts also warn about the challenges and risks of AI. One of the biggest challenges is bias, which lurks in the data humans choose to input into proprietary algorithms, in publicly available information we allow generative AI to curate when harvesting data, and in outcomes that may be predicated on wrong assumptions.
One reason employers use employment AI is to eliminate both conscious and unconscious bias and, in turn, increase diversity and inclusion. But employee advocates and policymakers caution employers to beware. While AI, when carefully used, can reduce or eliminate inherent human bias, decision making based on algorithms can also perpetuate bias.
After all, AI is only as good as the data it relies on. If selection criteria input into AI models favor candidates who are not in protected classes (or, consistent with the U.S. Supreme Court’s rationale in its recent decision in Students for Fair Admissions v. Harvard, if selection criteria favor candidates in protected classes), then AI becomes a discriminatory screening tool. AI chatbots used in hiring might also make biased inferences about candidates from publicly available information on the internet and social media.
Because AI can preserve and multiply bias in employment decision making, employers must understand how their AI tools work and implement policies and procedures to avoid running afoul of anti-discrimination laws.
Enforcement in the News: The EEOC’s First Lawsuit Over Discrimination Via AI
In August, the Equal Employment Opportunity Commission (EEOC) settled its first lawsuit alleging employment discrimination through use of AI. The lawsuit alleged that iTutorGroup, a company providing tutoring services, violated the Age Discrimination in Employment Act (ADEA) by programming software used in the employment application process to automatically reject male applicants over 60 years old and female applicants over 55. The lawsuit alleged that iTutorGroup rejected more than 200 qualified applicants over 55 because of their age. The charging party alleged that she applied using her real birthdate, was immediately rejected, applied the next day using a more recent birthdate, and was offered an interview. The consent decree (a) requires iTutorGroup to pay $365,000 to applicants allegedly rejected because of their age; (b) enjoins iTutorGroup from (1) requesting applicants’ birthdates before job offers are made, (2) rejecting or screening any applicants over 40 because of age or sex, and (3) retaliating against employees; and (c) requires iTutorGroup to (1) adopt antidiscrimination policies for screening and hiring applicants and supervising tutors, (2) notify all employees involved in these HR tasks of the federal antidiscrimination laws, (3) provide 4-hour training programs by EEOC-approved third parties for all employees and contractors involved in these HR tasks, (4) provide relevant training to new employees followed by annual training, (5) implement complaint procedures, and (6) provide written notice to the EEOC of complaints. The employer must also contact all applicants who were allegedly rejected because of age, invite them to reapply, offer interviews for all renewed applications, and provide a written explanation to the EEOC of the outcome of each application and interview – and an explanation if an offer was not extended.
Lawsuit Follows in Lockstep with Recent EEOC Guidance
The EEOC has alerted employers about the risk of unlawful discrimination through use of AI. In May 2023, it released guidance warning that AI may cause disparate impact discrimination, prohibited by Title VII. The guidance recommends that employers verify that their AI selection tools do not result in substantially lower selection rates for individuals with protected characteristics. In May 2022, the EEOC released guidance warning that AI may violate the Americans with Disabilities Act (ADA) – for example, when an employer uses video interviews recorded by applicants with speech disorders but fails to give them opportunities to request accommodations. In January 2023, the EEOC issued its draft strategic enforcement plan for 2023 through 2027, which demonstrates the EEOC’s focus on potentially discriminatory use of AI throughout the employment life cycle, beginning with recruitment and including employee performance management. EEOC guidance makes clear that employers’ AI tools, even those outsourced through third-party vendors, must comply with federal antidiscrimination laws.
In addition, some states have passed laws limiting use of AI in human resource functions, including Illinois (video interviews) and New York City (automated employment decision tools).
Tips for “Intelligent” Use of AI in the Workplace
- Instead of relying completely on AI software vendors’ representations regarding their employment AI tools, understand how your AI tools operate.
- Ensure that your employment AI tools comply with antidiscrimination laws, and regularly audit outcomes for compliance.
- Train all employees on proper use of employment AI tools and on how to avoid adding bias through their interactions with them.
- Never enter protected characteristics or proxies for protected characteristics as selection criteria in AI algorithms.
- Conduct audits for disparate impact by looking for correlations between data and protected characteristics and implement measures to eliminate problematic selection criteria.
- Be transparent with applicants and employees about how you are using AI and identify the specific information you are measuring.
- Give applicants opportunities to request accommodations.
- Document how your decisions are made – by both humans and AI – so you can explain those decisions if they are called into question, particularly in litigation.
- Good mantra: Involve a human in every employment decision.
- Best mantra: A human should always make the ultimate employment decision.
Considerations and Tips for Other Uses of AI in the Workplace
Monitoring employees through electronic surveillance of internet activity, email, chat, social media, and wearable devices may be useful in analyzing employee data, managing schedules, and increasing productivity. AI can also be useful in identifying behavioral and other workforce trends, predicting behavior, and improving employee retention and satisfaction. However, employers should carefully balance the competing interest of employee privacy. Employee rights to engage in concerted activity protected by the National Labor Relations Act (NLRA) must also be considered, as electronic surveillance can discourage employees from discussing wages and workplace conditions. It is generally best to be transparent with employees about what data you use and why.
Employers must also verify that when they collect and process applicant and employee data, they comply with any applicable privacy laws such as GDPR.
Employers should consider implementing policies that limit employee use of generative AI. Consider to what extent permitting employee use of generative AI might inadvertently sanction violation of confidentiality policies protecting your proprietary information and confidential customer and vendor information. Also consider how your company might risk dissemination or publication of inaccurate information created by generative AI, or even violation of intellectual property laws. To mitigate these risks, consider implementing policies to verify accuracy of content created by AI chatbots, to require citations to AI chatbots, and to limit use of generative AI to internal use only, as opposed to allowing the content to be posted on the company’s website or otherwise distributed or published.
Christy C. Dunn is an attorney at Young Moore and Henderson, P.A. in Raleigh, North Carolina. Christy represents employers, electric membership corporations, and long-term care facilities in civil litigation and employment law matters. She also practices insurance law, representing insurance companies in bad faith and coverage litigation and advising them on first-party and third-party coverage matters.
Interested in joining the Employment and Labor Law Committee? Click here for more information.