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Coverup At Boeing?


More than a decade ago, Boeing Co. (BA) quietly began investigating an explosive internal issue: whether female employees were paid less than men. Several sophisticated salary studies concluded that the answer was yes. One 1998 report said "men are more likely to be hired into the high paying positions." A statistical analysis completed the same year noted that the pay gap for entry-level managers was $3,741.04.

Although she knew nothing of these sensitive analyses, Carol Jensen would not have found them surprising. The 64-year-old technical drafter had long complained that women were underpaid. "We were treated with little respect," recalls the mother of nine, who started working at Boeing in 1967 and was laid off in 2000. "The men believed that the only work for women at Boeing was behind a desk as a secretary."

In 2000, 38 women filed a class action in Seattle against the company for pay discrimination. The potential cost to Boeing exceeded $100 million. All of those salary studies Boeing had done through the years, of course, would have been dynamite evidence for the aggrieved women. But when their lawyers made routine pretrial requests for any statistical data the company might have compiled on gender pay differentials, the aerospace giant said it had no obligation to turn the studies over. Why? Because they had allegedly been prepared at the direction of Boeing's lawyers and were therefore protected by attorney-client privilege. That's a legal doctrine that shields confidential communications between executives and their attorneys from public disclosure. It's intended to allow managers to be candid with their legal counselors.

Behind the scenes, meanwhile, Boeing employees removed payroll-planning documents about pay discrimination from the company's files. In an e-mail dated Aug. 27, 2001, compensation manager Paul A. Wells advised colleagues to get rid of drafts of these types of documents on the Salary Administration server because "that which is retained can potentially be subpoenaed and...those with access [to] the files can be called on to testify about the content." Wells declined to comment.

SYSTEMATIC CAMPAIGN

It's a classic scenario -- the type of confrontation that has served as dramatic fodder for countless movies: A big, powerful company bullies small, weak individuals. Erin Brockovich, A Civil Action, and many other legal thrillers tell this tale from the point of view of the victims. But BusinessWeek has obtained a rare view of the other side of the story: what takes place at the company. The federal judge overseeing the class action, Marsha J. Pechman, agreed to unseal more than 12,000 pages of internal Boeing documents on Feb. 11 after BusinessWeek attorneys argued that they should be disclosed. This hidden corporate history raises questions as to whether the company and its lawyers engaged in a systematic campaign to hide evidence and take advantage of attorney-client privilege.

Having witnessed Boeing's intransigence for more than four years, highlighted by a ferocious battle to avoid disclosure of its salary studies, Judge Pechman dropped an even bigger bombshell on the company on May 11. Citing "an evolving awareness, as more facts came to light, of how Boeing had inappropriately tried to shield [the documents] from discovery," she ordered Boeing to hand over the series of salary analyses it had fought hardest to withhold -- ones that left little room for doubting the company's knowledge of its pay disparities. That was only one of several rebukes Boeing received from the judge, as well as from a special master assigned to referee discovery disputes, during the course of the lawsuit. Though many questions remain about the company's conduct during the case, and a complete picture of the role played by Boeing's various managers and lawyers is still unavailable, Judge Pechman's rulings suggest that the company went beyond standard aggressive legal defense tactics.

Now that Boeing was faced with the prospect of telling jurors why its own internal documents seemingly contradicted its legal theory, the company suddenly became accommodating. Two days before the case was scheduled to go to trial, on May 17, Boeing made a settlement offer. While the two teams hammer out the details of the deal, which neither side will discuss, the case has been postponed.

No matter how much money Boeing spends to settle the class action, management may be getting off easy if the only repercussions are financial. Punishments for thwarting the legal system are on the increase. Convicted corporate criminal Frank P. Quattrone could go to jail for obstruction of justice. Arthur Andersen LLP is out of business because of one short e-mail that one of its lawyers sent an exec advising him on how to whitewash an Enron Corp. document.

Though Boeing, unlike Quattrone and Arthur Andersen, has been charged with no crimes, the documents reviewed by BusinessWeek suggest that its efforts to suppress evidence were far more elaborate. And the outrage expressed by Judge Pechman and the special master is rare. So far, however, there is no indication that the company's managers and lawyers will be facing any punishment. Judge Pechman hasn't said one word about sanctioning any of the attorneys, and the Washington State Bar Assn. generally does not investigate allegations of litigation misconduct until cases are concluded.

The company's tactics in the pay-discrimination lawsuit, Beck v. Boeing, also raise broader questions about the health of Boeing's corporate culture. Last year, the U.S. Air Force penalized the company for possessing 37,000 pages of sensitive competitive documents some of its employees had stolen from archrival Lockheed Martin Corp. Before Boeing eventually acknowledged the theft, it denied any wrongdoing, then misled Lockheed for nearly a year about the amount of material stolen, according to the Air Force.

Separately, in November, Boeing fired Chief Financial Officer Michael M. Sears for improperly offering a job to an Air Force procurement official while she was still negotiating Boeing's $23 billion refueling-tanker contract. Together, the two scandals forced the resignation of Chairman and CEO Philip M. Condit in early December, 2003. "We have felt extremely uneasy about the scandals that have plagued Boeing and led to the departure of its CEO," wrote Lehman Brothers Inc. analyst Joseph Campbell Jr. in a June 7 report. "We have felt there has been a pattern of less than frank communication with the investment community, and more importantly with itself."

Spokesman Kenneth B. Mercer says Boeing is committed to honest business practices and equal opportunity. Because settlement talks in the Beck lawsuit aren't complete, he refused to discuss the underlying facts of the case, the conduct of the company's attorneys, or any of the individual documents obtained by BusinessWeek -- beyond saying Boeing thinks its hiring and promotion practices are fair. Mercer adds that the statistical studies Judge Pechman forced the company to turn over were intended to help eliminate pay disparities and that they "can't capture all of the critical factors that go into pay or promotion decisions."

Boeing's Mercer also noted that federal judges have tossed out three similar gender-discrimination class actions filed against Boeing in Southern California, Kansas, and Missouri. A fourth suit, in Oklahoma, has been granted class-action status. The company says its high batting average against female pay-discrimination suits is proof that its compensation practices were legal. But plaintiffs' attorneys claim Boeing won mainly because it successfully suppressed the evidence that ultimately entered the Beck case.

RECORD OUTPUT OF JETS

Troubling headlines are a comparatively new problem for Boeing. A company dominated by engineers, it traditionally focused on innovation and design. Executives believed that profits would naturally follow. During the Pentagon overbilling scandals of the late 1980s, Boeing was the least tarnished of the major contractors. But the culture started changing after its merger with the more aggressive McDonnell Douglas in 1997. That deal, along with tougher competition for government dollars in the Clinton years, shifted Boeing's emphasis to the bottom line.

Women first entered Boeing's workforce in large numbers during World War II -- and they enabled the company to roll out record fleets of B-17 bombers. But when the war ended, Boeing's male-dominated culture returned in full force. When Carol Jensen joined in 1967, she was one of the first females to draw technical blueprints. "Men were getting the plum designing assignments," recalls Jensen. "It was out-and-out discrimination, and a woman couldn't do anything about it."

Despite the anger of Jensen and others, female pay didn't become a serious concern at Boeing until 1996, when the Labor Dept.'s Office of Federal Contract Compliance Programs (OFCCP) ran a routine investigation of Boeing's mammoth Philadelphia plant. Under government contracting rules, the OFCCP has the right to audit whether federal contractors are complying with anti-discrimination laws. The agency does this by using a statistical method known as "median analysis." In broad terms, it compares the relationship between the median pay of male and female employees and their median job experience.

After informing Boeing that the OFCCP had discovered "a prima facie case of systemic discrimination concerning compensation of females and minorities" in Philadelphia, the agency audited nine other plants nationwide. The stakes for Boeing, the country's No. 2 federal contractor, were huge. With defense and space representing nearly half of its revenues and growing, the loss of federal contracts would be devastating.

Recognizing the seriousness of the inquiry, Boeing wasted no time launching a counterattack. It hired Jon A. Geier, a partner in the Washington (D.C.) office of Paul, Hastings, Janofsky & Walker LLP. One of his top priorities, he said in a declaration submitted in the Beck case, was developing a "legally defensible" statistical analysis of Boeing's pay practices to counter the one OFCCP used to evaluate pay discrimination. But there was one big problem: The findings of Geier's own Diversity Salary Analysis project, or DSA, also found pay disparities. Its 1997 report determined that females "are paid less." The next year's report noted that "gender differences in starting salaries generally continue and often increase as a result of salary planning decisions." Geier did not respond to requests for comment.

One 1998 memorandum prepared for Boeing's managers by the DSA team indicates they were worried about potential liability. It warned that "Our compensation data could be interpreted to support unbelievably large financial damages by an Agency or plaintiffs." The memo then went on to say that "The magnitude of our exposure could be substantially reduced with cleaner data."

This type of material obviously would have been gold to government investigators. But it was unavailable to them because lawyers ran the DSA project -- a typical precaution in cases such as this. Attorneys also advised participating Boeing managers to "minimize any notes taken," according to an e-mail sent by compensation manager Wells to execs before a meeting of Boeing's Salary Administration Team. If they did take notes, the e-mail continued, they should turn them over to a Boeing lawyer "for his review and retention."

There's nothing necessarily wrong with lawyers preparing statistical studies to help defend a client against a suit and then claiming the results are covered by attorney-client privilege. That's what lawyers do. But it is not appropriate for nonlegal executives to prepare salary studies for their own business-related purposes and then attach an attorney to the project solely to claim privilege. That's what appears to have happened with a Boeing memo penned in October, 1999. It concluded that it would take $75 million to meet the OFCCP's requirement to eliminate all salary disparities "between all classes of employee groups" in 2000. Mervin E. Langland, the Boeing manager who prepared the analysis, told colleagues he would send a copy of the draft memo to then-senior counsel Ted Collins "in order to maintain the rights of protection under a subpoena." Langland says he doesn't "recall any such e-mail." Because he had no further comment, it is not clear why the document was created or who asked him to prepare it.

"THERE WAS A LOT MORE"

Despite Boeing's "extensive efforts," in the words of one in-house lawyer, not to forfeit the attorney-client privilege, the company did do a few things to jeopardize its eligibility for that legal protection. Its attorneys, for instance, gave DSA documents to managers outside their tightly guarded legal team. These execs used the information not just to fight the OFCCP inquiry but also to make broader salary decisions.

The OFCCP settled with Boeing for $4.5 million in November, 1999. Boeing did not admit liability. On Dec. 1, relieved human-resource execs and attorneys gathered to discuss their victory over the federal government, according to a meeting transcription obtained by BusinessWeek. Boeing's former director for employee relations, Marcella Fleming, declared that the company got off easy. "We thought that there was a lot more potential financial liability out there," Fleming told her colleagues. "And so, what we're paying for this deal in the long run is a lot less than we think we could have potentially paid." Fleming declined to comment for this story.

Boeing officials had little time to dwell on their triumph. On Feb. 25, 2000, Seattle attorney Michael D. Helgren filed the Beck v. Boeing class action after some female employees told him their stories. The company enlisted the help of its chief outside law firm, Seattle-based Perkins Coie LLP. The relationship between the two goes back to Boeing's origins. In 1916, Perkins attorneys drew up the articles of incorporation for William E. Boeing's nascent aviation outfit. Boeing tapped partner Lawrence B. Hannah, a former CIA analyst, to head its defense.

Almost immediately, the company resumed the aggressive strategies that had worked so well in the OFCCP investigation. After being deposed by attorney Helgren in September, 2000, Boeing compensation manager Jeffrey K. Janders told colleagues in a memo that he wanted the Salary Planning Team to "delete the concept of target salaries" -- the hypothetical pay increases Boeing executives believed would be necessary to create salary parity -- "to prevent an audit trail where a substantial difference exists between target and planned salaries." Because Janders could not be reached for comment, BusinessWeek does not know the full context of the e-mail.

Helgren did not find out about these maneuvers until years later, but from the start he suspected that the company was not turning over all of the salary information it had. After Boeing's Hannah claimed that many of the pay-related documents his rival wanted were covered by attorney-client privilege, Helgren requested a so-called privilege log -- a list containing a brief description of every document the company was withholding. A common tool in U.S. courts, these logs are intended to give plaintiffs' attorneys an idea of what material the defendant is holding back and why it is privileged without revealing any sensitive secrets.

Boeing's privilege log, Helgren says, was all but incomprehensible. Although it covered thousands of documents -- 41,000 pages of material in all -- many were lumped together under cryptic headings. Item No. 38, for example, described an unknown quantity of documents produced on "various" dates by "various" authors "regarding the Demographic/Diversity Salary Analysis (DSA) created at the direction of legal counsel."

Suspecting that many of these documents did not deserve attorney-client privilege, Helgren asked for a judicial review of those covered by the privilege log. Judge Pechman assigned retired state court judge George Finkle the job of managing pretrial discovery disputes. After studying a 1,400-page sample of Boeing's DSA documents, Finkle rejected the claim that the studies were protected simply because attorneys were involved in producing them. The documents "served business purposes extending well beyond providing assistance in...anticipation of litigation," Finkle ruled on Oct. 25, 2000. "Legal departments are not citadels in which public business or technical information may be placed to defeat discovery and thereby ensure confidentiality."

That should have been the end of Helgren's quest. Still, Boeing dragged its feet. The documents Judge Finkle ordered Boeing to give to plaintiffs' attorneys came slowly and in small batches. It wasn't until early 2004 that Boeing attorneys handed over some damning internal statistical salary studies that execs had not even previously acknowledged. For Helgren, these late-released documents proved Boeing not only knew about the pay discrimination but refused to take serious steps to eliminate it. "These pay disparities were caused by their own practices," Helgren says. "None of this was by chance. And they continued for years and years to avoid the problem."

SUDDENLY AMENABLE

In a last-ditch effort to prevent a jury from seeing these potential smoking guns, Boeing attorneys appealed Finkle's discovery order. They claimed that disclosing these documents would "materially and unfairly" bias the case. On Mar. 11, Pechman denied Boeing's appeal. It was a huge boost for Helgren, who started gearing up for the trial, scheduled to begin on May 17. But on May 13, he got an unexpected call. A third party representing Boeing phoned to say the company was willing to talk settlement. Negotiations proceeded almost continuously until the next day at noon, when the two sides reached a tentative settlement.

While she is happy about the potential deal, plaintiff Jensen is reserving judgment about the company. Among her nine children are six adult daughters, and she currently "wouldn't let any of them work at Boeing." The pay gap there may disappear one day. But one thing Boeing will never be able to erase is its long history of underpaying women.

By Stanley Holmes in Seattle and Mike France in New York


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