A former employee sued his employer under Title VII of the Civil Rights Act of 1964 after he was subjected to ongoing sexual harassment at the hands of a colleague, and his managers responded inadequately to reports of the harassment. The employee recovered significant compensatory damages. But the Fourth Circuit ruled that the employer was not liable for punitive damages. The decision emphasizes the high standard an employee must satisfy to hold an employer liable for punitive damages.

Title VII protects employees against sex discrimination, including sexual harassment, at the hands of employers. A plaintiff may recover compensatory damages for financial losses and other injuries suffered as a result of an employer's Title VII violation. But punitive damages are not automatically available for Title VII violations. As the Fourth Circuit explained in Ward v. AutoZoners, a plaintiff may obtain punitive damages only if he shows not only intentional discrimination, but also malice or reckless indifference to the plaintiff's legal rights. The plaintiff must also demonstrate a link between the discrimination and the employer, such as that the employer authorized or approved the conduct, or that a managerial employee committed the act while acting in the scope of her employment. The Ward decision shows the difficulty of surmounting these hurdles and obtaining punitive damages.

Background to Ward v. AutoZoners

AutoZoners, LLC, better known as AutoZone, is a well-known auto parts retailer. The plaintiff, Keith Ward, worked at an AutoZone store in North Carolina. A new employee, Christina Atkinson, started work six months after Ward. Shortly after the two became colleagues, Atkinson started sexually harassing Ward. Over the course of several months, she repeatedly made sexually offensive remarks and groped him. She physically harassed him at least 20 times. Unsurprisingly, her conduct violated AutoZone's written sexual harassment policy.

Following AutoZone's reporting procedure for sexual harassment, Ward reported the issue to the sales manager who supervised both Atkinson and himself. The supervisor was dismissive and took no action to stop the harassment, even though she personally witnessed Atkinson touching Ward. So, Ward reported the issue to the overall store manager. The store manager and district manager took some steps to prevent the harassment: relaying Ward's reports up the chain of command, telling Atkinson to stop, and directing that Atkinson and Ward not work alongside one another. But their actions did not put a complete stop to the harassment, and some of their reactions to Ward's complaints seemed dismissive.

Ward left AutoZone. He suffered a variety of medical problems: anxiety, stress, and chest pains.  At one point, he suffered heart problems that required an emergency medical procedure.

Ward sued AutoZone in federal court. He brought a range of claims under Title VII and state law. Ward claimed that AutoZone's managers—his direct supervisor, the store manager, and the district managers—engaged in intentional discrimination in their response to Atkinson's conduct.

Most of Ward's claims went to a jury trial, and the jury found AutoZone liable for sexual harassment under Title VII, and for intentional infliction of emotional distress under state law. For the Title VII claim, Ward was awarded $100,000 in compensatory damages and $200,000 in punitive damages.

Both parties appealed various issues to the Fourth Circuit. As relevant here, AutoZone argued that Ward should not have received any punitive damages.

Background on Punitive Damages and Title VII

A plaintiff is entitled to compensatory damages for injuries suffered as a result of the defendant's wrongful conduct. Punitive damages, however, are an extraordinary remedy. They are awarded on top of compensatory damages in order to punish the defendant and deter future misconduct. The U.S. Constitution limits punitive damages awards in all state and federal courts: punitive damages are permissible only to the extent they are proportionate, reasonably related to the harm the plaintiff suffered, and in response to reprehensible conduct. Specific federal and state laws may further restrict the availability of punitive damages.

Title VII imposes various limits on punitive damages for sex discrimination, including in sexual harassment cases. As relevant here, Title VII provides that punitive damages may not be awarded at all unless the plaintiff meets certain requirements. First, the plaintiff must show that the employer engaged in unlawful discrimination that was intentional. Second, the plaintiff must show that the employer discriminated with malice or reckless indifference to the plaintiff's federally protected rights. In other words, the plaintiff must be aware of—or recklessly ignore—the risk that its actions violate federal law.

In the Ward case, as in many cases, the plaintiff did not claim that the employer itself took these discriminatory acts. Rather, Ward claimed that AutoZone should be held liable for the actions of another AutoZone employee. To successfully hold an employer responsible for an employee's conduct under Title VII, through a theory known as "vicarious liability," the plaintiff must show that:

• The employer authorized the offending employee's conduct;
• The offending employee was unfit for the job, and the employer was reckless in employing her;
• The offending employee served in a managerial capacity and was acting within the scope of employment; or
• The employer or a person in a managerial role for the employer ratified or approved the conduct.

The plaintiff in the Ward case relied on the third criterion.

The Fourth Circuit's Decision

To determine whether an employee served in a managerial capacity, the Fourth Circuit looked closely at the authority the employee exercised. The court considered "the type of authority that the employer has given to the employee, the amount of discretion that the employee has in what is done and how it is accomplished." Because the issue depends on a close analysis of the facts of the case, the Fourth Circuit deferred to the jury's determination of whether an employee served in a managerial capacity, provided there is sufficient evidence to support the jury's decision.

The Fourth Circuit upheld the jury's determination that the district manager and store manager served in managerial capacities. Both had significant authority and discretion. They were responsible for enforcing AutoZone's policies, and for hiring, firing, and disciplining employees.

The court decided that Ward's direct supervisor, however, did not have the requisite authority and discretion. As a sales manager, the supervisor was primarily responsible for taking care of customers. Ward argued that the employee's supervisory role qualified her as a managerial employee. But, as the court explained: "[I]f occasionally supervising two people creates sufficient managerial capacity, virtually all employees except those at the lowest levels of a company's hierarchy would qualify." Ward's supervisor had no power to make independent decisions on personnel or policy, and thus did not have sufficient managerial capacity for punitive damages purposes.

Focusing on the district manager and store manager—the two employees with managerial capacity—the Fourth Circuit next considered whether their conduct rose to the severe level required to award punitive damages. Punitive damages would be permissible only if the employees intentionally discriminated with malice or reckless indifference to Ward's right to be free from sex discrimination.

The managers' actions did not rise to that level. Crucially, the managers themselves must have engaged in intentional discrimination. Atkinson did so by sexually harassing Ward. But she was not a manager. The managers made some efforts to stop the harassment. The jury certainly could have found that they responded inadequately. This would support an award of compensatory damages. But nothing showed that they intentionally acted to reach a result they knew violated Ward's protected rights under Title VII.

Takeaways from the Ward Decision

As the Fourth Circuit emphasized, punitive damages are an extraordinary remedy under Title VII. Not every instance of sexual harassment establishes a right to punitive damages. A plaintiff must satisfy a higher standard of misconduct to obtain punitive damages. And this higher standard requires more than negligence by manager-level employees.

Nonetheless, the threat of substantial punitive damages under Title VII should put employers on alert. And even the type of managerial negligence that occurred in the Ward case can give rise to significant compensatory damages awards, along with reputational harms. Employers should have robust policies prohibiting all forms of sex discrimination and facilitating reporting. But, as Ward shows, these policies may not be sufficient alone to protect the employer from liability. Employers should implement rigorous managerial training and oversight protocols to minimize the risk of liability.

Michael W. Mitchell is an attorney with Smith Anderson in Raleigh, North Carolina. He is co-chair of the firm's Business Litigation team, as well as the Intellectual Property Litigation practice. Edward Roche is an attorney at the firm, focusing his practice on general business litigation.