Corporate America discovers that activists can judge-shop too | USAEMALL.com

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The success of conservative legal challenges to the way US companies do business has become something of a repeat surprise these days. Corporate America should stop being so nonplussed.

In December, US district judge Reed O’Connor rejected Boeing’s effort to settle the probe into twin crashes of its Max jets. The Texas-based judge objected to the use of diversity, equity and inclusion considerations in selecting a monitor to oversee compliance with the plea deal.

That same month in Florida, federal judge John Badalamenti ordered retailer Target to face shareholder claims that it failed to warn them of risks associated with DEI and environmental, social and governance initiatives. The lawsuit focuses on the 2023 backlash sparked by a “Pride” marketing campaign involving gay and transgender-friendly merchandise.

Then in January, O’Connor ruled that American Airlines failed workers by including BlackRock index funds in its pension scheme because the $11.5tn asset manager has said that climate risk affects company profits. The airline “turned a blind eye to BlackRock’s ESG activism”, O’Connor wrote. BlackRock, which was not a party to the lawsuit, insists that its “only agenda is maximising returns”.

In the highly-polarised society that the US has become, politically-tinged lawsuits are common, with both liberals and conservatives seeking to punish companies for taking positions on hot button issues such as gay rights and climate change. This will if anything increase as the Trump administration takes controversial stances of its own.

Lululemon shareholders recently sued the athletic wear company alleging it failed to live up to its diversity promises. And New York City recently went after ExxonMobil, BP and Shell, claiming they had misled its residents about their commitments to sustainability.

“It’s a culture war in a very specific way. There is political cachet in showing that your preferred policies are profitable . . . because if it is profitable, it is popular,” says Tulane University law professor Ann Lipton. “I don’t think companies are prepared.”

What distinguishes the Target, American Airlines and Boeing plaintiffs from the run of the mill is that they have convinced judges to agree with them.

Up to now, most jurists tended to give companies and pension funds the benefit of the doubt on lawsuits about DEI and sustainability policies. The Delaware courts, for example, rejected a 2023 effort by Disney shareholders to get hold of company records about its fight with Florida over that state’s “don’t say gay” law. And the New York courts were unsympathetic to a challenge to New York City pension funds’ divestment from fossil fuel companies.

But O’Connor and Badalamenti took a different view, one that some lawyers find disturbing. “A judge that buys the false premise of conservative politicians that considering climate risk is about social policy and not about financial results is simply ignoring the evidence,” says Rob Skinner, securities litigation partner at Ropes & Gray. “Such a one-sided view . . . is a very concerning trend if other judges follow suit.”

It is not clear that these rulings will stand. When another federal judge in Texas called into question the entire US procedure for approving medicines as part of a 2023 anti-abortion ruling, the Supreme Court intervened. The justices also heard a case this week about limits on the practice of seeking out friendly judges for favourable decisions.

But unless the high court completely cracks down on such “forum-shopping”, doing business in the US is set to become much more complicated. Now that activists have found judicial allies, corporates should expect more challenges to daily activities. The American Airlines pensions suit is likely to inspire imitators because so many companies use BlackRock’s low-fee index funds, while Target is in settlement talks which could embolden more lawsuits when marketing campaigns go awry.

Judge-shopping has precedents. Business groups have been only too happy to seek out conservative judges to challenge Biden administration regulations they disliked, including O’Connor and the Fifth Circuit which hears appeals from Texas. Between the two, they have upheld challenges to the Securities and Exchange Commission’s efforts to tighten rules for the Treasury market and for private fund managers, and tossed out the Nasdaq stock market’s attempt to impose diversity requirements on listed companies.

Now conservative activists are turning the tables, and Trump is likely to appoint more judges who will give them a sympathetic ear. American business has only itself to blame.

brooke.masters@ft.com

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