The traditional rule in American law is that

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1 Employment Alert October 1999 Third Circuit Takes Hard Line on Waiver of Attorneys Fees When Settling Civil Rights Claims * * * An Unexpected Hurdle Confronts Employers Conducting Workplace Harassment Investigations Lowenstein Sander s Employment Law Practice Group has prepared this series of Employment Alerts to advise you both of a recent decision by the Third Circuit pertaining to the payment of attorneys fees when settling civil rights claims, and an unexpected hurdle facing employers conducting workplace harassment investigations. Third Circuit Takes Hard Line on Waiver of Attorneys Fees When Settling Civil Rights Claims By Martha L. Lester, Esq. and David M. Wissert, Esq. The traditional rule in American law is that each side must bear its own legal costs. However, in an effort not to discourage plaintiffs from bringing claims, some statutes, such as Title VII of the Civil Rights Act of 1964, allow for fee shifting. In other words, the loser in the litigation pays the winner s attorney s fees. Under some statutes, a "winner" need not receive a judgment from a court, but instead need only receive a favorable settlement. Typically, non-prevailing parties attempt to mitigate this loss by including a clause in the settlement agreement releasing them from further liability. But, in Torres v. Metropolitan Life Insurance Co., 1999 U.S. Dist. LEXIS (3d Cir. 1999), the United States Court of Appeals for the Third Circuit 1 held that when a matter is brought under a statute that provides for fee-shifting and the settlement agreement is silent as to attorney s fees, the non-prevailing party may still be liable for fees even if the settlement agreement contains a general release of all further liability. In Torres, the plaintiff filed suit in the United States District Court for the District of New Jersey against Metropolitan Life Insurance Company under Title VII claiming that Metlife had discriminated against him because he is...the non-prevailing party may still be liable for fees even if the settlement agreement contains a general release of all further liability. Hispanic. In the District Court, Metlife made a motion for summary judgment. A motion for summary judgment is a pre-trial motion in which the moving party claims that even when all inferences, doubts, and issues of credibility before the court are viewed as favorably as possible for the non-moving party, there are no material issues of fact, and the moving party is entitled to a judgment as a matter of law. Such was the case in Torres. The District Court held that Torres did not qualify as an employee within the meaning of Title VII and therefore he could not seek relief under the statute. The District Court granted Metlife s motion for summary judgment and dismissed the case. Instead of appealing the District Court s decision, Torres entered into settlement negotiations with Metlife and the case was eventually settled for $45,000. The settlement agreement and release signed in connection with the settlement made no mention of attorney s fees. In fact, noth- 1 The Court of Appeals for the Third Circuit has jurisdiction over Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands. This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L 65 Livingston Avenue Roseland, New Jersey Telephone Fax

2 ing in the record before the court made reference to attorney s fees. Subsequently, the firm representing Torres, filed for $30, in attorney s fees in the Court of Appeals for the Third Circuit, the court above the District Court, pursuant to the fee-shifting provisions of Title VII. The Court of Appeals awarded the fees holding that "A suit for recovery of attorney s fees is foreclosed only upon express stipulation in the settlement agreement." A general release, such as the one signed in Torres, is insufficient. The release in Torres provided as follows: Without limitation, Plaintiff specifically releases all claims, charges, or demands asserted or assertable in the Pending Lawsuit, and all claims, charges, or demands arising from or relating to Plaintiff s relationship of any kind with the Released Parties, including without limitation any right or claims Plaintiff may have under Title VII of the Civil Rights Act of The Court of Appeals held that this broad language, which does not specifically mention attorney s fees, but appears to extinguish every possible claim against MetLife, was insufficient to waive the fee-shifting provisions of Title VII. The Court of Appeals intends to have its ruling construed strictly and will not admit any evidence regarding settlement negotiations or prior communications. "A settlement agreement that is silent as to attorney s fees will not be deemed to constitute a waiver, regardless of the course of negotiations." The Court of Appeals went so far as to declare that at least one prior lower court ruling was "wrongly decided" in holding that the prevailing party was unable to recover attorney s fees where the settlement agreement lacked a specific waiver of statutory fees. In 1996, the United States District Court for the District of New Jersey held in Conrad v. Bergen Community College, 1996 U.S. Dist. LEXIS (D.N.J. 1996) that even though the settlement agreement did not contain an express waiver of attorney s fees, the extrinsic evidence demonstrated that the defendant s counsel relied upon a reasonable expectation that the plaintiff s counsel would not claim any fees. The Court of Appeals in Torres, however, ruled that discussion of the waiver of attorneys fees between the parties, without express waiver in the settlement documents, is never enough. "All that matters is whether the settlement agreement expressly stipulates that the prevailing party s claim for fees is waived. If it does not, then the claim survives." The Court of Appeals partially based its ruling on policy considerations. District courts should not investigate the circumstances or events surrounding negotiations to determine who said what to whom and when. The Court of Appeals reasoned that a bright line rule clearly and unambiguously settles the issue and therefore will save both time and effort. The message of the Third Circuit is now clear: a waiver of attorney s fees should be negotiated as part of the settlement of civil rights claims and that waiver must be stated explicitly in the settlement documents. The Court of Appeals cited other cases which strongly support the ruling in Torres. In both Ashley v. Atlantic Richfield Co., 794 F.2d 128 (3d Cir. 1986) and El Club Del Barrio, Inc. v. United Community Corporations, Inc. 735 F.2d 98 (3d Cir. 1984) the Court of Appeals held that statutory fee awards are not waived by the prevailing party unless an express and explicit stipulation to that effect appears in the settlement agreement. In Ashley, the court held that even when the amount of the underlying settlement may be a "nuisance settlement," the prevailing attorney may seek statutory fee awards unless there is an express stipulation waiving them in the agreement. The court reiterated in El Club Del Barrio that "If the parties cannot agree on counsel fees and the losing party wishes to foreclose a suit it must insist that a stipulation to that effect be placed in the settlement agreement."

3 The message of the Third Circuit is now clear: a waiver of attorney s fees should be negotiated as part of the settlement of civil rights claims and that waiver must be stated explicitly in the settlement documents. It is imperative that employers include an express waiver of all statutory attorney s fees to prevent settling plaintiffs from seeking to recover such fees after the fact. An employer should include such a clause in all releases signed by its departing employees, regardless of whether there is litigation pending. As is evident from the above, crafting a comprehensive and binding release or settlement agreement can be tricky. For example, as we have discussed in prior Client Alerts, it is imperative that the Older Workers Benefit Protection Act be complied with strictly when seeking a release from an age discrimination claim. This means that the disclaimer must be clear, knowingly given and include statutorily mandated time frames for consideration and revocation. A termination involving two or more employees will require an enhanced review period. In New Jersey, recent case law suggests that the Conscientious Employee Protection Act also requires that the individual giving the release do so knowingly and that an appropriate amount of time for review with independent counsel is afforded. We frequently suggest that the names of the specific statutes from which the employer is seeking release or waiver be mentioned by name. Also, employers will want to remember to retain the benefit of any non-disclosure or restrictive covenant agreement which is in place and is intended to survive termination of employment and the execution of any settlement or release agreement. To be safe, employers should be certain to review their forms of settlement, severance or release agreements with counsel so that the appropriate statutory language is included in the release and relevant state and federal statutes have been referenced specifically. As we point out in this Alert, even if the appropriate statutory language were used, the employer who has obtained an executed agreement may be subjected to liability for attorneys fees, unless appropriate release language is included. Please feel free to contact either Martha L. Lester, Chair of the Employment Law Practice Group, or David M. Wissert, member of the Employment Law Practice Group, at if you have any questions with regard to the topics raised in this article. An Unexpected Hurdle Confronts Employers Conducting Workplace Harassment Investigations By Martha L. Lester, Esq. and Nicole Bearce Albano, Esq. An unexpected obstacle has emerged that potentially impacts any employer who conducts a workplace harassment investigation. As most employers are already painfully aware, in order to minimize liability under Title VII of the Civil Rights Act of 1964 or New Jersey s Law Against Discrimination, they are required to conduct prompt and thorough investigations when confronted with claims of sexual and other...if an employer turns to an outside agency, the employer may be subject to the significant notice and disclosure requirements of the Fair Credit Reporting Act... harassment in the workplace and, if warranted, take appropriate remedial action to ensure that the inappropriate behavior ceases. An employer is also required to take preventative action to thwart its occurrence. Typically, employers have turned to outside agencies and employment attorneys to assist in or conduct these investigations. However, an opinion letter issued by the Federal Trade Commission ("FTC") indicates that if an employer turns to an outside agency, the employer may be subject to the significant notice and disclosure requirements of the Fair Credit Reporting Act, 15 U.S.C et. seq. (the "FCRA").

4 In its staff opinion letter the FTC concluded that "once an employer turns to an outside organization for assistance in investigation of harassment claims... the assisting entity is a CRA [consumer reporting agency]" -- subjecting it to the requirements of the FCRA. The FTC staff attorney continued in the opinion: "it would appear that the reports prepared by outside organizations performing harassment investigations for employers are most likely investigative consumer reports within the meaning of the FCRA.... [and] employers who utilize consumer reports or investigative consumer reports have certain obligations under the FCRA to notify employees and/or supply a copy of the report to the employee." Defining the FCRA To understand the broad interpretation of the FCRA reflected in the FTC staff opinion letter, it is necessary to review the statute s basic definitions. The FCRA states that a consumer report "means any written, oral, or other communication of any information by a consumer reporting agency." A consumer reporting agency is defined as: any person which for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports. The FCRA defines an "investigative consumer report" as a consumer report: in which information on a consumer s character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer reported on or with others with whom he is acquainted or who may have knowledge concerning any such items of information. Based on the definitions outlined above, the FTC s opinion letter indicates that an employer s hiring of an outside consultant, counsel, agency, or other organization for assistance in conducting workplace harassment investigations triggers the requirements of the FCRA. Specifically, an employer must first notify any affected employee (referred to in the FCRA as a "consumer") in writing of its intent to obtain the consumer report (i.e., the investigative report). The opinion letter was issued as an advisory opinion in response to a question concerning sexual harassment investigations and is not binding authority in court. However, the opinion raises serious implications that may place employers at risk if they hire outside agencies, including employment lawyers, to investigate their employees in a variety of circumstances (such as investigations for employee theft, worker s compensation fraud, embezzlement, and the like) and do not comply with the FCRA s requirements. This client alert limits its focus to the obligations that are imposed on the employer (not the credit reporting agency "CRA") by the FCRA. Disclosure Under the FCRA Given the nature of harassment investigations, particularly sexual harassment investigations, it is likely that an employer would be required to notify the alleged harasser and victim as well as witnesses involved in the investigation whose "character, general reputation, [or] personal characteristics" would be discussed. In addition, an employer must obtain the written consent of all affected employees before requesting a copy of the investigative consumer report from the CRA. The employer must also disclose to the employee, not later than three days after the report is requested, that the report will include information concerning the employee s character, general reputation, personal characteristics and mode of living. The FTC further indicates in its

5 opinion letter that information cannot be redacted from an investigative report when a copy is supplied to the affected employee. This element may be particularly problematic since the inability to redact witness names from a harassment report may implicate privacy and safety concerns for those who are interviewed as part of an ongoing investigation. Moreover, the employer must fulfill its obligation to certify to the outside investigator that it will comply with the FCRA s disclosure requirements. Employee Rights Under the FCRA Once the employer has received a copy of the report and before any adverse action is taken on the basis of the report, the employer must provide the employee with a disclosure that includes a copy of the report and a written summary of the consumer s rights under the FCRA. Certain of those rights include (i) the removal of any adverse information that antedates the report by more than seven years; (ii) the right to challenge any inaccurate listing in the report; (iii) the right to a reinvestigation by the CRA once the consumer disputes an item from the report; and (iv) the entitlement to obtain all of the information possessed by the CRA on the consumer as well as the sources of that information. Although the FCRA is silent with regard to the amount of time that an employer must wait after supplying the required information to the affected employee before taking adverse action, in the context of obtaining a credit report, an FTC opinion letter indicates that allowing five days after supplying the report is reasonable. Notably, the FTC s opinion letter does not implicate internal investigations conducted by employers without outside assistance. However, employers confronted with allegations of sexual or other harassment in the workplace should not be hampered from obtaining the valuable resources and experience available from outside attorneys and investigators. Employers must also confront the possibility that an employee will withhold consent for an outside agency or attorney to conduct an investigation. In such a situation, the employer may have no choice but to conduct the investigation on its own. The employer may also choose this course of action in order to respond as quickly as possible to reports of harassment by an employee. In addition, there may be times when an employer decides that initiating an investigation before notifying the accused may be the preferred course of action. Requiring employers as well as their attorneys to comply with the FCRA s disclosure requirements may impede an employer s ability to respond to workplace complaints in a timely fashion. Furthermore, there are occasions when an employer would prefer to turn to an outside agency or attorney to conduct a harassment investigation to ensure that the investigator is unbiased and is not too close to the situation. In sum, the FTC opinion letter raises more questions than answers and its impact on harassment investigations remains to be seen. Preventative Action There are some steps that employers may take to reduce the negative ramifications of the application of the FCRA to harassment investigations without internalizing all of their investigations. One possibility may be for employers to add language to stand alone acknowledgements and employment applications that they currently use for prospective candidates to authorize an employer to obtain consumer reports at any time during employment, including for purposes of conducting workplace investigations. Updated acknowledgements would also need to be signed by current employees since it is doubtful that an employer could rely on initial documents previously signed by employees authorizing an employer to obtain credit reports during the pre-employment stage when seeking to obtain a subsequent investigative report during the time of employment.

6 Another approach may be to have internal investigators contact outside counsel to seek advice during an investigation such communications likely fall under the attorney-client privilege without implicating the FTC opinion letter. Employers should note that a negligent violation of the FCRA may lead to civil penalties, including an award of compensatory damages plus attorneys fees. An award of compensatory damages may also include damages for emotional distress. A willful violation may trigger an award of punitive damages in addition to compensatory damages, plus attorneys fees. Thus, employers who are unsure of FCRA disclosure requirements in light of this recent development should consult with counsel before retaining outside assistance for the investigation of harassment allegations. If you wish to use an outside agency to conduct a workplace harassment investigation and you are unsure of FCRA disclosure requirements or implications, please call Martha L. Lester, Chair of the Employment Law Practice Group, at (973) , or Nicole Bearce Albano, a member of the Employment Law Practice Group, at (973) We regularly work with clients in assisting them through the investigation process and preparing FCRA disclosures. We can also customize the appropriate forms and disclosures for your needs. Of course, we would be pleased to provide you with any other advice you may require respecting your other employment practices and workplace compliance issues.