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Now, The Dirty Laundry Gets Washed In Public


Legal Affairs: CORPORATE DISCLOSURE

NOW, THE DIRTY LAUNDRY GETS WASHED IN PUBLIC

An appeals court rules that ombudsmen can't keep their records secret

In 1992, Frank J. Carman, a midlevel manager at McDonnell Douglas Corp., began to clash frequently with his boss. So he called the corporate ombudsman--an in-house mediator who, among other things, helps employees resolve interpersonal disputes.

The ombudsman concluded that Carman was, indeed, treated unfairly, Carman claims. But before the ombudsman could smooth things over, McDonnell Douglas fired Carman, who was 56 at the time. So he slapped the company with an age-discrimination lawsuit. When Carman tried to bolster his case by getting the ombudsman's records, however, the company refused to turn them over. Citing a string of lower-court decisions, it claimed that they were protected by "ombudsman's privilege," which gave the company the power to shield the documents.

NASTY SECRETS. But in June, a St. Louis federal appeals court, the highest-ranking tribunal ever to consider the issue, disagreed with McDonnell Douglas and struck down ombudsman's privilege. While the ruling isn't binding on most federal and state judges, it was written by highly regarded Eighth Circuit Chief Judge Richard S. Arnold and is likely to be followed by other courts. (Arnold didn't rule on the merits of the Carman case, and the company denies his allegations.) The little-publicized decision comes as a shock to many of the large companies with ombudsmen. Suddenly, many of the nasty secrets they may have in their files--which can include allegations of everything from sexual harassment to bribery to safety violations--could now be available to plaintiffs' lawyers and regulators.

"Any big company with one of these programs is almost certain to have some information that could be used against it," says Jeffrey M. Kaplan, a defense attorney in Manhattan who heads the Conference Board's business-ethics program. To take just one example, United Technologies Corp. is now facing a sexual-harassment suit in Florida from a former employee who is seeking an ombudsman's records. UTC declined to comment on the suit.

Ombudsmen, meanwhile, are concerned that the decision could cause some companies to shut down their departments. Not only is management becoming worried about litigation, but workers may be less likely to come forward with complaints if there is a chance their words will become public. "Without the privilege, it will be very hard for us to tell employees that there would never be retaliation against them," says Polaroid Corp. ombudsman Thomas Zgambo.

MILDER PENALTIES. The Carman decision troubles the many executives and corporate ethicists who have come to view ombudsmen as a valuable management tool. At a time when many companies are beset with employment litigation, ombudsmen can help head off potential harassment and discrimination suits, says Harvey Hinman, vice-president and general counsel at Chevron Corp. They also give employees a safe mechanism for blowing the whistle on violations from cheating customers to illegal waste disposal. "We want to give employees every opportunity to tell us about problems before they fester and possibly become legal in nature," Hinman says.

Ombudsmen are common in universities, hospitals, and government agencies but still relatively rare in Corporate America. But their growth has been fueled by the 1991 federal-sentencing guidelines, which give milder penalties to companies with antifraud programs. Since 1991, the number of corporate ombudsmen in the nonprofit Ombudsman Assn. has more than doubled to about 165, says Executive Director Carole Trocchio. They are concentrated primarily in large companies--such as American Express, Royal Dutch/Shell, Kodak, McDonald's, and Pharmacia & Upjohn--with thousands of potential employee problems.

Confidentiality has always been a core concern for ombudsmen. "The offices are typically located where people can come and go without being seen," says Sharan Levine, a Kalamazoo (Mich.) attorney who has represented the Ombudsman Assn. in the past. "Ombudsmen have separate phone and fax systems. Their files are under separate lock and key and cannot be entered by management. And their computer systems are encrypted so that people can't get into the files."

"POWERFUL STUFF." But none of these protections matters much without the ombudsman's privilege. The Carman opinion clears the way for regulators, employees, and management to interview ombudsmen and review their records--if the information is relevant to the case at hand. While the court recognized the value of permitting ombudsmen to keep their information secret, it wrote that this was outweighed by "the normally predominant principle of utilizing all rational means for ascertaining truth."

Plaintiffs' lawyers, unsurprisingly, are thrilled about the decision. Access to ombudsman records "can make or break some cases," says Lawrence Markowitz, former chair of the American Trial Lawyer Assn.'s employment-rights section. Many suits, for example, turn on how quickly a company responded to a problem. "The company says, `We didn't know about the issue until the person filed charges,"' Markowitz explains. "But then, say you get the ombudsman's notes and they prove that the company knew about it two years ago. That's pretty powerful stuff."

Many corporate ethicists and attorneys complain, however, that the Carman decision gives companies the wrong incentive. Rather than encouraging them to seek out internal problems and fix them, it punishes them for doing so. Indeed, the companies with the best ombudsman programs are likely to be the ones with the most dirt in their files. Instead of avoiding legal problems, as they intended, these companies could be facing scary new ones.By Mike France in New YorkReturn to top


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