The Lawyers Who Ate California: Part I

Part One: The Feds. A small group of regulators out West tests out a new theory of corporate enforcement, with disastrous consequences.

A while ago I got a tip, suggesting a look into a high-profile lawsuit. You likely know the case: video game titan Activision, makers of Call of Duty and World of Warcraft, sued by the state of California for discrimination and harassment. The firm was acquired by Microsoft earlier this year for a staggering $68 billion, and with regulators in countries around the world awaiting resolution of California’s action before approving or denying that mega-deal, Department of Fair Employment and Housing (DFEH) vs. Activision Blizzard Inc. now becomes perhaps the most portentous lawsuit in the world.

The company filed a lengthy motion in its defense last Friday, detailing its side of a sordid-sounding case it believes should be wrapped up in its favor. However, the self-defense pleas of a leading current corporate Nosferatu received little bounce in popular press, which in the moral mania era isn’t much for “maybe they didn’t” stories. 

At first, this sounded like a straightforward story in which the only question was whether Activision is run by misogynist dinosaurs who deserve their brutal public fragging, or whether they’re merely a bunch of rich gamers blindsided by unproven allegations in the latest example of social justice politics run amok. Not the kind of dispute where a disinterested party would have an obvious rooting interest. Someone would find the storyline fascinating, but that person, I guessed, was unlikely to be me. 

Sometimes in journalism, however, a story you think is about one thing, turns out really to be about something very different. The tale is barely about Activision. The real protagonists are the regulators.

In the spirit of California, long the cradle of American innovation, a small group of government litigators spent nearly a decade dreaming up an aggressive new vision of corporate regulation, one that’s seen agencies like California’s DFEH act like high-end plaintiffs’ firms. They laugh off mediation, jump quick as you can to litigation they may be mandated to avoid, then couple blunt public accusations with eye-catching damage demands that open at ten or fifteen times the size of previous record awards. Also in the California spirit there are ruthless box-outs of other regulatory agencies, private attorneys, and even the agency’s own in-house lawyers for the sole rights to be claimants in each of the target firms’ stories, told by media pals who act more like production partners than journalists.

Few noticed, because this is California, where every fourth-rate character actor breaking wind makes the front pages but the inner workings of the state governing the world’s 5th most powerful economy are left to a handful of overworked reporters at the Sacramento Bee. “With all due respect to your profession,” one source unconnected to Activision quipped, “it’s kind of amazing none of you have looked under the hood here.”

Sexual harassment and pay discrimination of the type not just condoned but mandated in the highest corporate boardrooms have no place in modern America. Whether the offender is a senior executive who spent years overdue for a personal appearance on the dock (à la Harvey Weinstein), or a leftover from a bygone era who never got the memo about “compliments,” “banter,” “unwanted physical touching,” and inappropriate “jokes,” few dispute the issue needs dealing with, whether at Activision or anywhere else.

What follows is not about whether or not harassment and discrimination should be punished. This is a complex legal story of a debate within the regulatory community about, first, how such offenses should be proved, and second, how they should be remedied. An Obama-era initiative designed to make issues like pay inequity easier to address ironically ended a string of humiliating defeats for government investigators and would-be discrimination claimants. Meanwhile, disputes between federal employment regulators and their opposite numbers in states like California over whether to sanction individuals for alleged abuse, or to aim higher up the company directory for harder-to-define cultural offenses like the “failure to prevent” it, led to some of the bitterest bureaucratic turf wars this country has seen.

The story also turns out to be in part about why California, which had a growth streak dating back to the gold rush, saw it broken in 2020, when the population shrank by 182,000 and caused a first-ever loss of a congressional seat. More tellingly, over 265 companies moved their headquarters out between 2018 and 2021, with the rate of flight doubling just during those years.

Bear with me, for I fell way down the rabbit hole on this one. Based on interviews with current and former executives, congressional and legislative sources from both parties, past and present employment regulators, a handful of public and private litigators with knowledge of the relevant cases, and review of thousands of excruciating pages of court records, here’s the background to sensational cases like Riot Games, Activision, and Tesla that no one told you about — the story of the Lawyers Who Ate California: 

Part One: The Feds

Toward the end of Barack Obama’s administration, the West regional office of an investigatory arm of the Department of Labor called the Office of Federal Contract Compliance Programs, or OFCCP, got word to conduct a routine compliance review of Oracle, employer to over 130,000 and the second-largest software company in the world.

The OFCCP’s mandate among other things is to promote diversity and bar federal contractors from discrimination, and Obama had a vision for the agency which involved using it aggressively to correct the pay gap. “You are in a unique position to fix this problem,” Obama reportedly told DOL officials early in his term. “Why are you not fixing this problem?”

In 2013, the agency rolled out a new approach that more than ever before would stress using statistical analyses to identify actionable pay gap issues. This led to some controversial results, including a settlement with Tyson foods that ended in a confusing settlement for $1.6 million for underpaid workers that among other things “revealed discrimination against black and white applicants when compared to Hispanic applicants.” Cases in the years that followed would accuse various companies of discriminating both for and against Asians, for and against Hispanics, even for and against white women.

In a case involving Palantir, the tech firm run by the Trump-supporting executive Peter Thiel, the firm was accused of discrimination against Asians because although 85% of the firm’s applicants were Asian, the company in one hiring round only brought on 11 Asians versus 14 non-Asians. The agency said this development had just a 1 in 3.4 million chance of occurring naturally. Palantir soon after settled for $1.7 million but also announced it was leaving Palo Alto for Denver, part of what would become a conspicuous pattern.

Companies ranging from hospitals to utilities to dairy farms to tool companies soon began entering into agreements with the agency, which in many cases didn’t allege discrimination, but rather failure to keep records that would allow the company to judge whether or not it had a discrimination problem. The OFCCP to conservatives especially was fast becoming a “widely disliked and widely despised agency… kind of like the IRS,” as John Fox, a former agency official now in private practice, told the Cleveland Plain-Dealer at the time.

When the OFCCP went after Oracle, the agency’s West Regional Director was a new hire named Janette Wipper. A former managing partner at a California “powerhouse plaintiff’s firm” called Sanford Heisler, she’d worked on a series of storied class action suits, against firms like Valero Energy Corporation, AT&T, and especially Novartis, where she helped the firm to a record $250 million award. That led to her being named a “Rising Star” in 2013 by Law360, and her appointment soon after to the powerful DOL post. Then-director Patricia Shiu’s letter welcoming Wipper to the OFCCP gives a sense of what was then considered large-scale action at the OFCCP (emphasis mine):

Janette will oversee more than 100 staff working 12 offices and responsible for enforcement across 11 states and territories. The Pacific is one of the largest and most diverse regions in our agency, and, over the past year, staff in the region were responsible for negotiating more than $2.2 million in back wages and 933 job offers on behalf of 3,685 workers affected by discrimination – the largest remedies in the nation.

The days of government boasting about collecting a few million bucks were about to end. The lead in the investigation of Oracle, regional solicitor Janet Herold, was a former general counsel for the Service Employees International Union (SEIU). Under Wipper’s leadership, and armed with the new statistics-based approach, they were about to enter a new era of thinking bigger. They took on not just Oracle but another huge California-based firm, Google, both of which were blasted in headlines at the outset of the actions and, in Oracle’s case anyway, told they would have to pay historically enormous bills to make amends. (Repeat requests for comment to the attorney for both Herold and Wipper went unanswered).

The action involving Oracle was incredibly poisonous even by the usual vituperative standards of corporate litigation. In early 2017, two days before Barack Obama was set to turn over the federal government to Donald Trump, the OFCCP filed an administrative complaint against Oracle. (The company’s co-CEO Safra Catz, like Thiel, was a Trump supporter who’d served on the Orange One’s Transition team). Oracle was accused of “systemic compensation discrimination,” the government reportedly having found a “pattern and practice of hiring discrimination” involving “gross disparities in pay,” not just paying men more but this time “favoring Asians.”

This resulted in sweeping headlines about Oracle’s bad behavior, often in conjunction with a record new financial demand and hints at proof to come. “Oracle allegedly underpaid women and minorities by $400 million. Now the details are set to come out in court,” read the Washington Post. “Oracle’s Pay Practices Cost Women, Minorities $400 Million, Feds Say,” read the San Francisco Chronicle. “Oracle Underpaid women and minority workers by $401 million, the Labor Department says,” read The Business Insider. Among major news outlets, only the Wall Street Journal pointed out that the OFCCP’s all-time record settlement was $14 million and its all-time biggest litigated award at the time was $7 million. In that year of 2019 the agency recovered a total of $40 million, then also a record. (The Journal’s lonely take on this would soon look ironic given its future coverage). In other words, the Western office of the OFCCP was seeking ten times the agency’s entire record yearly haul just from Oracle.

Moreover, the $400 million was just a starting point. The OFCCP complaint against Oracle also sought “an order canceling all of Oracle’s federal contracts or subcontracts” as well as “debarment of Oracle from holding federal contracts or subcontracts until OFCCP is satisfied that it has come into compliance.” According to media reports that could have meant an additional $100 million loss per year, or more.

A detail few reporters bothered to explain was that the OFCCP “lawsuits” were filed before Administrative Law Judges, who are not members of an independent judiciary but technically Department of Labor employees. While regulators still have to prove their cases, these “administrative complaints” are filed under the mother of home court advantages, i.e. they were Department of Labor litigators arguing before Department of Labor “judges.” These judges don’t issue final rulings on their cases, but rather make recommendations that can then be appealed before another body within the Department of Labor called an Administrative Review Board.

In the rare instances in which companies choose to fight to the death against DOL actions, they typically wait until the case actually gets out of the executive branch. Return blows usually come after the ruling of the Administrative Law Judge, and after a loss before the Administrative Review Board, at which point companies might try their luck by pleading cases in federal court.

I mention this only because it underscores the sweeping nature of the rebuke these litigators soon after received in these huge cases. The OFCCP ultimately lost the Oracle case outright at the first stage of the process, castigated at length by their own Administrative Law Judge — grade point average zero point zero for that lawyering — while Google in 2021 ended up settling for $2.59 million, or 1/12239th of the company’s profits that year, for the aforementioned “quite extreme” discrimination.

In both of these cases, as well as a third case involving a Massachusetts firm called Analogics, Administrative Law Judges went to great lengths to deconstruct and criticize the OFCCP cases. All three judges reached the bench before Trump and each sounded variations of themes that would come up in later cases like Activision: OFCCP litigators deployed high-handed tactics in seeming rushes to litigate, made inflammatory pre-judgments to media, and relied perhaps too much on dubious statistical analyses.

By this time the Pacific office especially was developing a reputation among lawyers used to dealing with the DOL. “The Pacific region,” says Denver-based lawyer Michael Silberman, “is almost a federal agency unto itself in its aggressiveness in approach.”

A former OFCCP official named Lawrence Lorber was critical of the decision-making that led to the OFCCP’s moves. “They’re making policy,” he told Bloomberg Law, “and calling it law.”

Google filed a motion to stop further federal requests for documentation from the company on the grounds that public statements by Herold about “extreme” discrimination showed the agency had already made up its mind and “completed” its investigation. Judge Steven Berlin didn’t grant Google’s request to shut the whole thing down, but he did have a lot to say about litigators who make early conclusive statements to media:

I question any extrajudicial statement that a Department attorney makes to the press while the matter is pending, if the statement goes beyond the public record in the pleadings and evidence adduced… Conciliation is a cornerstone of the regulatory scheme… Public statements such as those here could create obstacles to conciliation…

Google was initially asked to provide a “snapshot” of its current employment picture, so regulators could look at who was being paid what. Wipper soon after asked for records for all employees dating back to 1998 because “research shows that women don’t negotiate as well as men, and if starting salaries are negotiated, female employees remain behind the better negotiators for their entire career,” a phenomenon she described as “anchoring.”

A judge’s footnote later claimed that “OFCCP offered no academic literature or other research to support Wipper’s contention about… women’s negotiating skills.” Only “in its closing brief” did OFCCP cite “an article at slate.com and a Washington Post article.” Berlin noted there that had the information been offered upfront, it “would have allowed Google to submit opposing material and to object to OFCCP’s offers.” In other words, a titanic battle over hundreds of thousands of documents that took up thousands of lawyer-hours might have been averted.

Episodes like this led Berlin to conclude that Wipper was only “generally — though not uniformly — credible,” and that there were times when she was “evasive, as though she was advocating.” The judge ended up comparing the credibility of Wipper and deputy regional director Jane Suhr with the credibility of Google’s Vice President of Compensation, Frank Wagner, saying, “To the extent there is any inconsistency between the testimony of Wagner on one hand and the testimony of either Wipper or Suhr on the other, I give greater weight to Wagner’s testimony.” Again, for someone who was not a Trump-appointee but a long-serving Labor Department official to go to the trouble of saying publicly he trusted a Google executive more than two senior Labor investigators was beyond damning.

The ruling in the Oracle case, by the San Francisco-based Administrative Law judge Richard M. Clark, is even more remarkable. At a heated 278 pages, it reads like the diary of a man reduced to his last nerve cell of patience, kept going only out of determination to record every detail of his journey toward madness before perhaps jumping out an office window or going limp in front of a BART train. More than one source I spoke to laughed about the ruling, with one attorney cracking, “Drink at least two highballs before you read the whole thing. It’s painful. Dude suffered.”

The lawyer Silberman emphasized the unusual nature of such a definitive ruling in favor of a company by an Administrative Law Judge. “For the ALJ to annihilate OFCCP’s case,” he said, “is pretty extraordinary.”

In Clark’s telling the Oracle case comes off as a historically noteworthy waste of human energy. Both sides spent years battling over every conceivable issue in what the judge ripped as “continual, voluminous discovery disputes,” concluding, “My role is to decide cases, which does not require adjudicating every quibble and quarrel.”

More importantly, however, he led the reader on a tour through the OFCCP’s case, the hostile nature of which clearly bothered him, given the OFCCP’s extensive history of settling with relative efficiency under both blue and red presidents. “The process at [the outset] between OFCCP and the contractor is meant to be collaborative, not adversarial,” he wrote. “The aim is to not litigate.”

It should be noted that not every judge feels pushing settlement — either to alleviate court clog or to avoid ugly public throwdowns — is in the public interest. Storied federal Justice Jed Rakoff, for instance, tries to avoid pushing regulators toward settlement, which he believes “tends to cut the baby in half,” especially when “the merits really favor one side or the other.” As Rakoff puts it, “My view is the judge should not put pressure on the parties to settle.”

However, in some cases there are laws or procedures that mandate attempts at settlement, and judges on both sides of the debate tend to look with disfavor on litigants that act like they want conciliation when they’re really holding it out to try to push defendants into missteps that might trigger early litigation. Clark’s ruling hints at this, citing a long list of instances where the OFCCP claimed to want to talk things out while issuing convoluted discovery requests with short-to-impossible deadlines, all the while apparently refusing to explain what they were looking for.

“On November 19, 2014, OFCCP sought a broad array of additional information, giving Oracle only until November 26, 2014, to comply,” Clark wrote. Next: “OFCCP requested Oracle policies on February 17, 2015, with only two days to comply.” Then: “At the end of May 2015, OFCCP demanded the personal contact information of all Oracle employees, giving Oracle one week to gather the information.” The OFCCP continually offered conciliation in return for more and more outlandish conditions, a pattern that would soon appear in other litigations.

In the end, the record-smashing $400 million discrimination claim came down, essentially, to two pieces of evidence: statistical analysis by one paid expert with a history of testifying for the OFCCP, and a single line of testimony.

In their initial complaint, OFCCP promised to show evidence of a senior Oracle HR executive “admitting to a strategy of hiring women ‘because they can pay them less.’” This turned out to be a recollection from one female executive of another female executive describing a vaguely remembered “chitchat” from roughly 15 years earlier, in which she’d observed to a colleague that “if you hire a woman, she’ll work harder for less money.” This, Clark wrote, “is the most direct anecdotal evidence presented.” While it’s true the executive in question went on to be director of HR at Oracle, she denied making the remark at all, and moreover at the time it was supposedly made, she did “not make pay decisions for the thousands of employees at issue” in the suit, per the judge.

That was it. The whole case, in which enough paper was filed that a stack would surely have escaped the earth’s atmosphere, came down to a memory of one distant remark made by a person without the ability to affect the discrimination alleged. The judge, who seemed irritated by everything about the case, recommended dismissal, chiding the OFCCP for “reaching its results by making powerful, but unwarranted assumptions” instead of finding “good reason” to conclude discrimination.

A few months after the feds lost the Oracle case, the Department of Labor issued new rules. These came in the wake of yet another loss in a discrimination case, struck down this time by Administrative Law Judge Colleen Geraghty, who in a 43-page ruling bluntly ruled in favor of a Massachusetts firm called Analogics. The new rule would require OFCCP “to provide qualitative evidence supporting a finding of discriminatory intent for all cases proceeding under a disparate treatment theory.” According to multiple sources, this new rule was meant to prevent the filing of massive discrimination cases based mostly or entirely on statistical analyses.

The litigators in the Oracle disaster didn’t go down without a fight. Reports came out that the lead attorney clashed with Trump’s Secretary of Labor Eugene Scalia over the matter, with places like the New York Times writing that the much-loathed Supreme Court offspring had tried to settle Oracle’s case for “less than $40 million.” News reports alleged that Scalia might have “abused his authority” by stepping in to try to secure a lower settlement.

This coverage obscured a pair of unlikely statistics. First, the OFCCP’s other settlements in the four-year period between Fiscal Year 2017 and Fiscal Year 2020 totaled $117 million, which reportedly exceeded the total recoveries during the nine years covered by the Obama administration. Second, the OFCCP brought in $40 million in settlements total during 2019, which was $16 million more than the previous record set in 2017. If Scalia had stepped in and managed, say, a $40 million settlement with Oracle, it would have meant more for Oracle employees than the zero dollars the agency’s own judge recommended be paid out.

“Instead of getting some number of millions of dollars to distribute to individuals who may have gotten discriminated against,” Silberman says, “they got nothing to show for it.”

Scalia appeared angry enough about the faceplant in the Oracle case that he reassigned Herold out of California to a job overseeing OSHA complaints in Chicago. One source I spoke with compared this to comedian John Larroquette’s feckless Captain Stillman character being dispatched to a polar outpost at the end of the Bill Murray movie Stripes:

Amid all this, a fascinating nugget emerged. Herold reportedly sent a letter at one point to the Solicitor General, explaining and defending the OFCCP’s legal strategy with Oracle. Oracle’s “real vulnerability,” it turned out, would be if the trial was made public. This, Herold wrote, would “damage Oracle’s reputation in the industry and hinder their ability to retain top talent.”

She went on to write, “I remain convinced that predicting how [judge] Clark will rule is beside the point in this particular enforcement action. The most critical part of this enforcement action is the public airing and discussion of common industry pay practices which depress the wages of women and people of color.” This was only made public when an outgoing Trump labor official, Joe Wheeler, sent a letter to House Labor Committee chair Rose DeLauro arguing against further investigation of her “whistleblower” complaint.

Ultimately, Biden turned right around after entering the White House and reinstalled Herold as the Western region’s chief legal officer for the Department of Labor at the outset of 2021. Moreover, he soon after undid the rule requiring “qualitative” evidence in discrimination cases, seemingly bringing the whole affair full circle. Except: Herold just months later left the DOL for the second time in less than a year, stepping down from the prestigious post to take a job at Justice Catalyst Law, an outside firm that “focuses on social justice issues.” She would soon have high-profile company in private practice.

Several attorneys familiar with the case described Oracle as a “colossal loss” that rattled the entire cabinet-level department and ought to have inspired a major strategic re-think. This makes it all the more surprising that one of the Biden administration’s first moves was to undo much of the post-Oracle damage control at DOL, as if Google, Oracle, and Analogics had been anomalies. More to the point, the state of California was about to adopt an even more aggressive version of the Oracle strategy at home, launching a series of campaigns that would soon have even its own governor on the defensive.

Next: Bloodbath at Activision