Supreme Court Eases Standard For Recovery Of Punitive Damages Under Title VII

In a 7-2 ruling issued on June 22, 1999, the United States Supreme Court held that victims of intentional employment discrimination need not prove that their employer engaged in "egregious or outrageous" conduct in order to recover punitive damages under Title VII of the Civil Rights Act of 1964. However, in the same case, Kolstad v. American Dental Association, the high court also voted by a narrow 5-4 margin that employers may not be held vicariously liable for punitive damages where a manager's discriminatory conduct runs counter to the employer's good-faith efforts to maintain a bias-free workplace.

Congress amended Title VII in 1991 to allow victims of intentional employment discrimination to collect up to $300,000 in punitive damages if they prove that their employer engaged in a discriminatory practice "with malice or reckless indifference" to the employee's federally protected rights. The plaintiff in Kolstad sued her employer under Title VII for sex discrimination after she was passed over for a promotion in favor of a male co-worker who, she claimed, had been pre-selected for the job. The jury found for Ms. Kolstad and awarded her $52,718 in back pay. At trial, however, the district court refused to submit the punitive damages issue to the jury, finding that the employer's conduct did not warrant punitive damages. On appeal, the full U.S. Circuit Court of Appeals for the District of Columbia agreed, holding that Congress intended to limit the availability of punitive damages to exceptional cases in which the employer has been shown to have engaged in some "egregious" misconduct.

In the majority opinion authored by Justice O'Connor, the Supreme Court set aside the D.C. Circuit's ruling and remanded the case to the trial court for further proceedings. Justice O'Connor acknowledged that when Congress amended the statute in 1991, it clearly intended to impose two standards of liability - one for establishing a right to recover compensatory damages and another, higher, standard to qualify for a punitive award. However, she said, Congress did not require "a showing of egregious or outrageous discrimination independent of the employer's state of mind." Rather, Justice O'Connor reasoned, the terms "malice" or "reckless indifference" in the statute refer to the employer's knowledge that it may be acting in violation of federal law. Thus, to recover punitive damages, a plaintiff need only show that the employer "discriminat[ed] in the face of a perceived risk that its actions [would] violate federal law."

Under the standard articulated by the Court, which it compared to a "subjective consciousness of risk" test, intentional discrimination would not give rise to liability for punitive damages where the employer is unaware of the federal prohibition against its conduct or engages in conduct with the distinct belief that the conduct is lawful. For example, Justice O'Connor noted, the theory of discrimination put forward by the plaintiff may be novel or otherwise poorly recognized, or an employer may believe that its discriminatory conduct satisfies a bona fide occupational qualification defense or other statutory exception to liability.

Even assuming that a plaintiff could establish that a manager acted with the requisite malice or reckless indifference, the next question, said the Court, is whether liability for punitive damages may be imputed to the corporate employer. Writing for a narrow 5-4 majority, Justice O'Connor said that an employer may not be held vicariously liable for punitive damages based upon the discriminatory employment decisions of managerial employees if the employer has undertaken good faith efforts to eliminate bias from the workplace. Justice O'Connor explained that imposing vicarious liability where an employer has endeavored to comply with the law would run counter to the traditional common law rule that it is improper to award punitive damages against a person who is personally innocent of misconduct. The majority also observed that a shield against punitive damages for companies that implement procedures to prevent discrimination in the workplace accomplishes Title VII's objective of motivating employers to detect and deter discriminatory conduct.

The Kolstad decision will have the most significant impact in jurisdictions, such as the D.C. Circuit, which previously required a showing of "egregious" misconduct as a prerequisite to recovery of punitive damages. In those jurisdictions, it will now be significantly easier for plaintiffs to establish preliminary entitlement to punitive damages under Title VII in cases involving claims of intentional discrimination. The good news is that the decision also provides employers with a powerful defense against ultimate liability for punitive damages. Employers who have taken proactive measures to devise, implement and enforce policies against workplace discrimination will now have a strong basis for moving to dismiss punitive damages counts before or at trial. The big losers in the case are individual defendants in Title VII actions. Such defendants will now be subject to liability for punitive damages under a lesser standard of proof, without the "good faith" defense available to employers.