Rethinking the Business Judgment Rule in Discrimination Cases

An employer must continually make judgments about current and prospective employees in order to effectively run a business. Such judgments may involve reviewing a prospective employee's qualifications for assuming a position, evaluating a current employee's level of performance to assure continued productivity, examining performance history to assess an employee's suitability for promotion, or examining performance to determine the need to demote and even terminate employment. Critical to this ability to judge employees is the preservation of the employer's autonomy to choose those criteria and standards by which such judgments of company personnel will be made.

Nonetheless, inherent in this ability to judge is the same potential for abuse that exist in judgments made outside of the business context. Specifically, as with any judgment made concerning another individual, there is the ever-present potential that prejudicial and biased beliefs will play an influential role. The resulting impact when this occurs, particularly in the workplace, is that certain employees are treated less favorably than others because of prejudicial views concerning such qualities as their age, gender, disability, race, religious preference, sexual orientation, or ethnic origin.

Recognizing the existence of discriminatory judgments in the workplace, legislative protection has been erected in the form of such provision as Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 (ADEA) and the Americans with Disabilities Act of 1990 (ADA).

It is well established, however, that the employee-plaintiff must prove that the discrimination was intentional. (See Texas Dep't of Comm. Affairs v. Burdine, 450 U.S. 248, 253 (1981), plaintiff at all times bears the ultimate burden of persuading the trier of fact that the defendant intentionally discriminated against him.)

Understanding the difficulty in setting forth direct evidence of intent, an element that exist in the mind of the employer or decision-maker, the Supreme Court intervened early on in the history of discrimination-related legislation with its decision in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973).

Under the uniformly applied burden-shifting analysis set forth in that case (applicable to disparate treatment cases in which direct evidence is lacking), plaintiff must first establish a prima facie case of discrimination. Id. The burden of production then shifts to the employer to articulate a legitimate, nondiscriminatory reason for its employment action, which operates to rebut the employee's prima facie case. Id., 411 U.S. at 802-03. Once the employer has satisfied its burden, in the stage that follows plaintiff must come forward with evidence that the employer's explanation for the alleged discriminatory decision - a product of an employer's discriminatory judgment -- is a pretext or falsehood masking an otherwise discriminatory animus. (Texas Department of Community Affairs v. Burdine, 450 U.S. 248, 256,(1981) plaintiff raises evidence " . . .showing that the employer's proffered explanation is unworthy of credence.") This evidence, combined with the prima facie showing, operates to raise an inference of discriminatory intent. (See Hicks, 509 U.S. at 507 (1993)).

While recognizing the need to use such methods of proof to enable the employee-plaintiff to prove discrimination, various lower court opinions have also acknowledged the need to preserve an employer's independence in setting its own standards in rendering those judgments deemed necessary to operate its business - the mark of free enterprise. This deference to employers has been given through application of the business judgment rule.

This rule has been stated in many ways: "The trier of fact is not at liberty to review the soundness or reasonableness of an employer's business judgment." Dept. of Correction v. Gibson, 308 N.C. 131, at 140, 301 S.E.2d 78 at 82, 84 (1983); "Furthermore, as we have stated repeatedly, we do not assume the role of a "super personnel department," assessing the merits or even the rationality of employers' nondiscriminatory business decisions." Mesnick v. General Elec. Co., 950 F.2d 816, 825 (1st Cir. 1991).[1]

Unfortunately, however, many courts have used this rule as a limitation on the type of evidence plaintiff can raise to establish pretext. In holding that certain aspects of an employer's decisions are beyond review by the trier of fact, some opinions are, invariably, denying plaintiff a full and fair opportunity to present evidence at the second stage of McDonnell Douglass that would have a tendency to cast doubt on or discredit the employer's proffered explanation behind an otherwise discriminatory action.

Moreover, in so applying such limitations, plaintiff-employees are being denied the benefit of all favorable inferences at Summary Judgment. (See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), "In deciding a motion for summary judgment, the court must view the factual evidence in the light most favorable to the non-moving party."); (Conkwright v. Westinghouse Elec. Corp., 933 F.2d 231, 233 (4th Cir. 1991) "On summary judgment "the non-moving party is entitled to have his evidence as forecast assumed, his version of that in dispute accepted, and the benefit of all favorable inferences.")

The objective of this article is not to revisit the McDonnell Douglass decision or to review the inner workings of its uniformly applied method for analyzing discrimination cases. There is already an overabundance of writings comprehensively detailing that subject matter. Nor does this writing endeavor to reexamine the definition of pretext.

Instead, it has the far more narrowed objective of examining how well the balance has been maintained, if at all, between the efforts to preserve an employer's ability to freely exercise its business related judgments while, at the same time, allowing plaintiff a full and fair opportunity to present all evidence tending to discredit the employer's explanation for the alleged discriminatory decisions.

Even more specific, rather than conducting an all encompassing review of cases addressing the business judgment rule, the article will focus instead on exploring those issues that make this balancing effort difficult and that render efforts to apply a business judgment rule unworkable and uncertain.

Has the judiciary succeeded in crafting a uniform method for protecting an employer's business judgment?

In St. Mary's Honor Ctr. v. Hicks, 509 U.S. 502, 507 (1993), the Supreme Court explained the role of pretext in the following manner:

The factfinder's disbelief of the reasons put forward by the defendant (particularly if disbelief is accompanied by a suspicion of mendacity) may, together with the elements of the prima facie case, suffice to show intentional discrimination. Thus, rejection of the defendant's proffered reasons will permit the trier of fact to infer the ultimate fact of intentional discrimination..."

Hicks, 509 U.S. at 511.

Notably, this decision makes no reference to the business judgment rule. In fact, the decision does not contain any language that would impose any type of limitation on the realm of evidence plaintiff can introduce to discredit the employer's explanation. Instead, the Court simply makes clear that evidence establishing some disbelief in the employer's reason (although it does not specify what type of evidence would have such a tendency to do so) would be sufficient to establish an inference of discriminatory intent. The only implication that can be drawn from this passage is that plaintiff's evidence should (1) establish disbelief of the employer's reasons, and (2) satisfy the non mandatory element that it create a suspicion of mendacity.[2]

Many lower courts, however, have ventured well beyond the parameters of Hicks and have used the business judgment rule to construct parameters around the extent to which a plaintiff can set forth evidence challenging the credibility of the employer's reasons for the adverse action. One group of opinions focuses on the reasonableness of the employer's decisions. As one Court emphasizing this view has noted,

"The trier of fact is not at liberty to review the soundness or reasonableness of an employer's business judgment when it considers whether alleged disparate treatment is a pretext for discrimination. . . . The reasonableness of the employer's reasons may of course be probative of whether they are pretexts. The more idiosyncratic or questionable the employer's reason, the easier it will be to expose it as a pretext, if indeed it is one. The jury must understand that its focus is to be on the employer's motivation, however, and not on its business judgment."

In Dept. of Correction v. Gibson, 308 N.C. 131, at 140, 301 S.E.2d 78 at 82, 84 (1983).[3]

Although this is an instructive opinion, it does reflect the source of some of the confusion on this issue. In the outset of the passage, the Court provides a mandatory prohibition that the trier of fact is not to "review the soundness or reasonableness of an employer's business judgment." Id. Then, towards the ending of the passage, it states, "the reasonableness of the employer' reasons may of course be probative of whether they are pretexts." Id.

Does this mean that a distinction is being drawn between the employer's judgment and the employer's reasons for the adverse action? Most likely not. The Court probably means one in the same when it states "employer's reasons" and "employer's business judgment." After all, the reason behind an employer's decision is the same as and a reflection of the business judgment underlying that decision.

The problem here is that although the Court has recognized that there are aspects of a business decision that cannot be challenged by evidence of pretext (and, in turn, reviewed by the trier of fact), the Court has declined to identify where the lines that shield such decisions are drawn. In other words, the question must be asked, at what point is an employer's proffered reasons for alleged discrimination considered so "idiosyncratic" and "questionable" that plaintiff's evidence discrediting those reasons can be reviewed and accepted as evidence of pretext?

Is this language really necessary? Isn't evidence tending to expose an employer's reasons as being "idiosyncratic" and "questionable" serving the same purpose as -using the language from Hicks -- evidence creating disbelief of the employer's reasons (or particularly if disbelief is accompanied by a suspicion of mendacity)? Perhaps, the decision in Hicks recognized the redundancy of such additional explanations. Finally, does the opinion really serve to provide a clear, discernable line between the evidence that Plaintiff can raise to establish pretext, and the evidence that remains outside the scope of review by the trier of facts because it reflects those protected aspects of an employer's business judgment.

Such additional explanations are reflected in many other lower court opinions, none of which really provide any clear guidance as to what extent a business decision should be shielded from review. As one court provides, "[f]urthermore, as we have stated repeatedly, we do not assume the role of a "super personnel department, assessing the merits or even the rationality of employers' nondiscriminatory business decisions." Mesnick v. General Elec. Co., 950 F.2d 816, 825 (1st Cir. 1991). (Also see Smith v. Stratus Computer, Inc., 40 F.3d 11, 16 (1st Cir. 1994), cert. denied, --- U.S. ---, 115 S. Ct. 1958, 131 L.Ed.2d 850 (1995), providing, in relevant part, that relief will not be granted "to a plaintiff who has been discharged unfairly, even by the most irrational of managers, unless the facts and circumstances indicate that discriminatory animus was the reason for the decision.")

Again, in reading such opinions, it must be reiterated that the purpose of the McDonnell Douglas analysis is to enable those plaintiff's who lack direct evidence of discriminatory animus to rely on circumstantial evidence of intent; the circumstantial inference of discriminatory intent is established by the evidence discrediting the employer's explanation or reason, along with the threshold prima facie showing.

Another extreme has been taken by those courts that have adopted such holdings as the following: "It is not sufficient to prove that the (employer's) reason was doubtful or mistaken." See Russell v. Acme-Evans Co., 51 F.3d 64, 68 (7th Cir. 1995)(Russell, 51 F.3d at 68, interpreting pretext as being "a lie, specifically a phony reason for some action") Or, as other opinions have noted, "[W]hen, as here, the employer has articulated a presumptively legitimate reason for discharging an employee, the latter must elucidate specific facts which would enable a jury to find that the reason given was not only a sham, but a sham intended to cover up the employer's real motive: age discrimination.") Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 9 (1st Cir. 1988); "Because a Title VII claim requires intentional discrimination, the pretext inquiry focuses on whether the employer's stated reason was honest, not whether it was accurate." Helland v. South Bend Community Sch. Corp., 93 F.3d 327, 330 (7th Cir. 1996), cert. denied, 117 S. Ct. 769 (1997) The problem with some of these varying perspectives on the business judgment rule stems from distorted interpretations of pretext.

More noteworthy, however, is the fact these holdings not only go beyond the basic showing of pretext (evidence tending to discredit the employer's reading), but add an additional component or element to intentional discrimination that doesn't even exist in McDonnell Douglass. Specifically, under some of these interpretations, plaintiff must not only prove intentional discrimination, but also go further and establish that the employer has taken deliberate and intentional measures to manufacture a pretextual basis for the adverse action taken against the employee. This is similar to the requirements imposed in other decisions that the employee set forth evidence showing that the employer acted in bad faith. (See Montana v. First Fed. Sav. and Loan Ass'n , 869 F.2d 100, 106 (2d Cir. 1989), "Absent a showing by the plaintiff that the employer's demands were made in bad faith, an employer who is sued on allegations of age discrimination is not compelled to submit the reasonableness of its employment criteria to the assessment of either judge or jury.")

These decisions fail to recognize that Title VII also guards against stereotypes perpetuated in the workplace. For example, some employers make decisions adverse to certain categories of employees, such as female and older workers, based on stereotypical beliefs that individuals within these groups cannot perform in certain areas as well as younger workers; or, in the case of female stereotypes, their male counterparts.

The motivation behind such stereotypical employment decisions does not necessarily stem from insincerity or bad faith. Nor can these decision be said to follow from some effort on the part of an employer to perpetrate a sham on the employee. On the contrary, many stereotypical beliefs are sincerely held by the employer. The employer may honestly and sincerely believe that older workers lack the motivation and drive that younger workers are purported to innately posses. Likewise, the employer may have the distorted perception that female workers who are highly self-motivated and driven - attributes commendable in men - have overbearing personalities. [4] The only problem is that an employer, with what he or she believes to be good intentions, may be improperly basing employment decisions on stereotypical views concerning certain employees.

Conclusion: Are courts saying what juries already know?

Not all of the cases leave such ambiguity in the explanation of what evidence would be considered acceptable in challenging an employer's reasons as pretextual.
As an earlier opinion explains,

"The distinction lies between a poor business decision and a reason manufactured to avoid liability. Thus, facts may exist from which a reasonable jury could conclude that the employer's `business decision' was so lacking in merit as to call into question its genuineness."

Dister v. Continental Group, Inc., 859 F.2d 1108, 1116 (2d Cir. 1988).

One Third Circuit opinion provides even more useful insight stating,

"To discredit the employer's proffered reason ... the plaintiff cannot simply show that the employer's decision was wrong or mistaken, since the factual dispute at issue is whether discriminatory animus motivated the employer, not whether the employer is wise, shrewd, prudent, or competent. Rather, the nonmoving plaintiff must demonstrate such weaknesses, implausibility's, inconsistencies, incoherencies, or contradictions in the employer's proffered legitimate reasons for its actions that a reasonable fact finder could rationally find them "unworthy of credence, and hence infer " that the employer did not act for [the asserted] nondiscrimnatory reasons."

Fuentes v. Perskie, 32 F. 3d 759, 764-765 (3rd Cir. 1994).

Allowing employee-plaintiffs the latitude to demonstrate, as the opinion above states, "... such weaknesses, implausibility's, inconsistencies, incoherencies, or contradictions in the employer's proffered legitimate reasons . . ." Perskie, id. , ultimately means entrusting the trier of fact to determine whether this evidence is sufficient to create a level of suspicion regarding the credibility of an employer's reasons so as to draw the requisite inference of discriminatory intent.

Blindly applying the business judgment rule, however, a limitation on plaintiff's evidence, operates merely to remove otherwise material evidence from the jury. In so doing, this rule undermines the sophistication of the jury. After all, juries, in large part, are comprised of members of the workforce. Accordingly, jury members recognize the need for a business to maintain its autonomy in rendering those judgments it deems necessary to advance the interest of its business, even where those judgments are considered by others as irrational.

At the same time, by virtue of their experience, juries are also competent to discern whether those judgments are made under a set of circumstances that raise doubts as to whether they advance legitimate business objectives or operate instead to discriminate against an individual employee or employees because of their protected status (age, race, gender, etc.).

The ultimate question the jury should be entrusted to resolve is simply whether an employer's judgment is worthy of credence in lieu of the surrounding evidence of that particular case?


  1. Also see St. Mary's Honor Ctr. v. Hicks, 509 U.S. 502, 507 (1993) Once the prima facie case is made, a defendant may offer any legitimate, non-discriminatory reason for the employment action, which the plaintiff may rebut by evidence of pretext; however, the burden of proof always remains with the plaintiff.
  2. The language of the passage does not suggest that the Court has established a mandatory element in stating, "particularly if disbelief is accompanied by a suspicion of mendacity." This merely leaves open the possibility that evidence may be sufficient to raise an inference of intentional discrimination, even absent evidence raising a suspicion of mendacity.
  3. Federal and State Court decisions follow the same McDonnell Douglas framework. Therefore, the discussion below refers to both state and federal cases.
  4. See Price Waterhouse v. Hopkins, 490 U.S. 228, 252 (1989), a case that acknowledges the existence of stereotypical image of women in the workplaces.
Copyright © 2000 William R. Hopkins, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Nov 3, 2014.