No Board Liability In Executive Sexual Harassment Case At McDonald’s

A judge in Delaware’s Court of Chancery has held that the McDonald’s Board of Directors was not liable for alleged breach of duty in connection with claims of widespread sexual harassment at the company. The same judge back in January had refused to dismiss the case, and some at the time saw that as a wake up call for company officers and an occasion to look carefully at their company’s D&O insurance coverage. That no doubt remains good advice, but the alarm based on the potential outcome of this case has proved to be a false one.

In his commentary about the opinion, UCLA School of Law Professor Stephen Bainbridge (who acknowledges he was flattered by seeing his law review article quoted in the judge’s opinion) explains why he finds it justified. In his gloss on the case, Bainbridge cites a key passage in the opinion. To state a claim under the theory the plaintiffs evoke, the judge wrote, they must “allege facts supporting an inference that the directors knew about a problem – epitomized by the proverbial red flag – yet consciously ignored it. The plaintiffs must do more than plead that the directors responded in a weak, inadequate, or even grossly negligent manner. The pled facts must indicate a serious failure of oversight sufficient to support an inference of bad faith.” The case was indeed made that the directors knew about the sexual harassment problem, the judge acknowledged. However, he said, “What the complaint does not support is an inference that the Director Defendants failed to respond.” Thus, Bainbridge explains, there is no valid claim against them for breach of the duty of oversight.