By Jennifer Henricks
On September 11, 2023, a district court judge in the Eastern District of Washington entered an order dismissing a lawsuit brought by a conservative advocacy group, which challenged Starbucks’s Diversity, Equity, and Inclusion (DEI) policies. The advocacy group owns 56 shares of Starbucks stock and brought the lawsuit as a shareholder derivative action — a mechanism through which shareholders can seek to challenge a company’s conduct and protect the company’s interests.
Before filing the lawsuit, the Plaintiff first sent a demand letter to the Starbucks Board, challenging several sets of DEI Initiatives announced by Starbucks in 2020 and 2022 and demanding that Starbucks retract these initiatives. Starbucks determined it was in the best interest of the company to maintain its DEI initiatives, and therefore rejected this demand. The Plaintiff then filed a lawsuit challenging the DEI initiatives, alleging that Starbucks’ directors and employees breached their fiduciary duties by adopting the DEI initiatives, and seeking a declaration from the court that the DEI initiatives violated state and federal law.
In dismissing the Plaintiff’s claims, the Court found it obvious that the “Plaintiff did not file this action to enforce the interests of Starbucks, but to advance its own political and public policy agendas.” Nat’l Ctr. For Pub. Policy Rsch. V. Schultz, No. 2:22-CV-00267, *10 (E.D. Wash. Sept. 11, 2023). The Court found the Plaintiff showed “obvious vindictiveness toward Starbucks,” and the Plaintiff’s interests lacked the support of the majority of Starbucks shareholders. The more appropriate solution for the Plaintiff’s grievances is to simply get their coffee elsewhere. As the Court wrote, “[i]f Plaintiff remains so concerned with Starbucks’ DEI and ESG initiatives and programs,” the Court wrote, “the American version of capitalism allows them to freely reallocate their capital elsewhere.” Id. at 12-13.
What lessons can my company learn from the Starbucks lawsuit?
A key part of the Court’s decision was that Starbucks’s Board engaged in an appropriate process to investigate the Plaintiff’s demand letter. Rather than reject the demand letter outright as baseless, inconsistent with Starbucks’ company values, or clearly advancing a political agenda, Starbucks’s board engaged outside counsel and subject matter experts to thoroughly evaluate the demand
If facing similar situations, companies should follow their standard procedures — even when a shareholder makes demands that are wholly inconsistent with the companies’ values. In the event the matter ends up in litigation, making sure to carefully deliberate the demands made by a shareholder will help establish that your company took the action it believed to be in the company’s best interest.
Should my company keep pursuing DEI initiatives?
Resoundingly, yes. Investing in DEI efforts boosts company culture, can increase retention and even boost your company’s overall performance. A recent study commissioned by Amazon Web Services and conducted by TechTarget’s Enterprise Strategy Group found that companies’ DEI efforts improved their business outcomes; the longer a company’s DEI program has been in place, the more positive business outcomes that company reported.
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