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Equal Employment Opportunity Commission v. Vucitech

decided: March 16, 1988.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division, No. 84 C 4413 -- Marvin E. Aspen, Judge.

Posner and Flaum, Circuit Judges, and Eschbach, Senior Circuit Judge.

Author: Posner

POSNER, Circuit Judge.

These appeals present a variety of interesting questions arising out of a protracted effort by the Equal Employment Opportunity Commission to fix personal liability on an employer's officers for a practice not authoritatively determined to be discriminatory until years after they committed it, and on a successor of the employer.

The three individual defendants, whom we shall refer to as the "Vucitech group," were (together with a fourth person, now dead) the officers and shareholders of MTC Gear Corporation, a closely held corporation engaged in the manufacture of gears and other mechanical devices used in motor vehicles. MTC employed between 75 and 100 workers, who were represented by a union. In 1979 the Vucitech group negotiated on behalf of MTC a new collective bargaining agreement with the union. After counsel advised that the recently enacted Pregnancy Discrimination Act of 1978, 42 U.S.C. § 2000e(k) (amending Title VII of the Civil Rights Act of 1964), did not require the payment of maternity benefits as part of the fringe benefits for employees' dependents (as opposed to the employees themselves), the Vucitech group offered the union, in lieu of dependents' maternity benefits, a "baby bonus" plan. Under the plan every male employee would receive a lump sum of $750 for every baby that his wife gave birth to while he was employed by the corporation. The union agreed, and agreed again in the 1982 collective bargaining negotiations with the Vucitech group, when the baby bonus was raised to $1,000. In between the two negotiations a district court held that the Pregnancy Discrimination Act did not require the payment of maternity benefits to employees' wives. We affirmed that decision in 1983, in EEOC v. Joslyn Mfg. & Supply Co., 706 F.2d 1469 (7th Cir. 1983), but, for reasons to appear presently, we soon vacated our opinion, see 724 F.2d 52 (7th Cir. 1983) (per curiam).

As early as 1981, male employees of MTC had complained to the EEOC about the denial of maternity benefits for their wives. At first glance the complaint may seem an odd one. The baby bonus is a maternity benefit, though denominated as being in lieu of a maternity benefit; and people are not usually held to violate the law merely because they use confusing verbiage. It is true that $750 surely, and $1,000 probably, was too little in the years in question to cover the full medical costs of an average pregnancy, but medical benefits often have deductibles, coinsurance, ceilings, or other conditions that operate to limit the employer's or insurer's liability for the full extent of the employee's (or dependent's) medical expenses. However, maybe because MTC's female employees, as distinct from the wives of its male employees, received maternity benefits that were both expressly so designated and larger than the baby bonuses received by male employees for their wives, the Vucitech group does not argue that the baby bonus was a maternity benefit--although the district court did deduct from its award the baby bonuses that had been paid. At all events, all of the parties assume, and so shall we, that once the Pregnancy Discrimination Act had been interpreted to apply to dependents' benefits, the baby bonus plan was unquestionably in violation of the Act. The plan may have violated Title VII even without the Pregnancy Discrimination Act, as we shall see.

The Commission notified MTC of the charges. Conciliation efforts, with the Vucitech group representing the company, followed, but they failed in March 1982. The Commission decided, however, to postpone formal action until the Supreme Court resolved the question of benefits for pregnant dependents, which it did a few months after our Joslyn decision, holding in Newport News Shipbuilding & Dry Dock Co. v. EEOC, 462 U.S. 669, 77 L. Ed. 2d 89, 103 S. Ct. 2622 (1983), that the Act forbids discrimination not only with respect to the wages and benefits of pregnant (necessarily female) employees but also with respect to benefits for pregnant dependents of male employees. We quickly vacated Joslyn, and in May 1984 the EEOC filed suit under Title VII against MTC, charging sex discrimination in the failure to pay maternity benefits for the wives of ten (later reduced to eight) employees of MTC but not naming any individuals as defendants.

MTC was a much different entity in 1984 from what it had been at the beginning of 1982. For shorty after the conciliation efforts had broken down, the Vucitech group, whose members were in their sixties and wanted to retire, had sold all their stock in MTC to Muzzamil Niazi, who as part of the deal assumed all of MTC's liabilities, expressly including any liability growing out of the charges of sex discrimination that had been filed with the EEOC. The Vucitech group retired, but their quiet life was soon interrupted. Niazi was a crook. He embezzled money from MTC on a grand scale, driving the company into the ground. In November 1983 the secured creditors seized all of MTC's assets and shut it down. Niazi exited, still owing the Vucitech group $2.8 million for the sale of their stock to him. As the members of the group had been counting on this money to finance their retirement, the Niazi fiasco forced them out of retirement. In December 1983, using the proceeds of a $2.8 million loan that they obtained from a bank in Chicago, they bought for $3 million all of MTC's machinery and equipment at public auction and placed these assets in a new corporation, Profile Gear Corporation, which they owned together with two former employees of MTC and which opened for business in January 1984. Except for the change in name and partial change in ownership, Profile was essentially the same entity (in nature of business, and in customers and employees, though naturally there was some turnover in both of these groups) as MTC, now defunct. So when the EEOC sued MTC in 1984 it named Profile as an additional defendant.

One year later the EEOC amended its complaint to add the members of the Vucitech group as defendants too. The case proceeded to trial. The district court held that the members of the group, having been personally involved in the discriminatory acts, should be held liable along with the employer itself, see 42 U.S.C. § 2000e(b); Musikiwamba v. ESSI, Inc., 760 F.2d 740, 753 (7th Cir. 1985), and refused to hold that Newport News, decided after the discriminatory acts committed by these defendants, should be applied only prospectively or that the EEOC had been guilty of laches for failing to sue the Vucitech group until 1985. The court also held that Profile was not liable as a successor company for discriminatory acts by MTC, and therefore entered judgment against the Vucitech group only, for a shade under $14,000. The Vucitech group appeals, and the EEOC cross-appeals.

Title VII is an equitable statute in the technical sense; and the Vucitech group makes a powerful if incomplete argument that it was horribly inequitable for the EEOC to haul them out of retirement to defend against practices that were lawful when committed and (they argue) in any event harmed no one; to reach into their depleted pockets and make them personally liable for what is really a corporate liability; and to delay the proceedings until MTC was broke so that the judgment would indeed come out of their personal assets. And they say that the principles that judicial decisions need not always be applied retroactively and that laches (delay, in prosecuting a claim, that is both unreasonable and prejudicial) is a defense to an equity suit provide between them all the authority we need to correct this exhibition of bureaucratic lassitude and injustice.

The situation is far more complex. In General Electric Co. v. Gilbert, 429 U.S. 125, 50 L. Ed. 2d 343, 97 S. Ct. 401 (1976), the Supreme Court had held that an employee benefit plan which excludes expenses related to pregnancy is not sex discrimination under Title VII, because the group discriminated against consists of pregnant persons, not women as such. Congress overruled this unpopular decision in the Pregnancy Discrimination Act of 1978, which amended Title VII by defining the terms "because of sex" and "on the basis of sex" to include "because of or on the basis of pregnancy," adding: "and women affected by pregnancy . . . shall be treated the same for all employment-related purposes, including receipt of benefits under fringe benefit programs, as other persons not so affected." 42 U.S.C. § 2000e(k). This language is ambiguous. The first clause could be read to cover employees with pregnant wives, because exclusion of maternity benefits from those employees' dependent coverage would be an exclusion because of sex; the second clause could not be so read (it protects pregnant employees). The Vucitech group was apprised of the new statute by MTC's counsel, who advised them that maternity benefits for employees' benefits were not covered but also noted that the EEOC disagreed. Thus the Vucitech group knowingly assumed a nontrivial risk that their counsel's interpretation would not prevail. No doubt they took the risk, in part at least, because of the small potential liability.

Years later this court, joined by some (but not all) other courts that considered the issue, agreed with the position that MTC's counsel had taken. But the relevance of this fact is obscure. Counsel could not have been relying on cases not yet decided in advising MTC that it could go ahead with the baby bonus plan without violating the law. Nor is the language of the Pregnancy Discrimination Act so pellucid that counsel could be confident of its meaning in the absence of authoritative interpretation. Dependent coverage could easily be thought embraced by the broadly worded first clause, and by the spirit of the Act. To deny maternity benefits for an employee's wife is in some sense to discriminate (that is, treat differently) on account of pregnancy, since if instead of being pregnant the wife had incurred the same medical expenses as a result of a broken leg she would have been covered. Moreover, if we treat the baby bonus as a de facto maternity benefit, MTC was paying higher benefits in regard to pregnancy to its female than to its male employees, and thus may have been violating Title VII without regard to the Pregnancy Discrimination Act. MTC was not excluding pregnancy from the class of medical conditions or disabilities covered by employer benefits; it was merely treating male and female employees differently with respect to pregnancy; and that is, or at least could be thought, sex discrimination, albeit discrimination against male rather than against female employees.

It is possible that no one was really hurt by the baby bonus plan. The union may have been trading maternity benefits (more precisely, the difference between those benefits and the baby bonus) for some other form of benefit (or wage) worth more to the employees, including married male employees; in that event there may have been no net discrimination in favor of the female employees, who, as we have just noted, received maternity benefits more generous than the baby bonuses. But this is not an equitable argument; it is an argument that the Pregnancy Discrimination Act, at least in the context of explicitly bargained-for wages and fringe benefits, is a gratuitous and perhaps idle interference with labor markets--which it may be, but that is not our business.

The argument that retroactive application of the Supreme Court's interpretation of the Act would be unjust is a separate argument, but also lacks merit. Judicial decisions normally are retroactive; that is, they apply to conduct that occurred before the decision was rendered. This result is due not to the myth that courts do not make, but only find, law, so that their decisions merely declare what was the law all the time, but to a sense that as between two surprised parties the burden of surprise should rest on the party who guessed wrong about the direction in which the law was moving; to recognition that retroactive application is an important check on courts' innovating too rapidly (they are made to consider the costs of discontinuity); and perhaps to a sense that since statutes themselves frequently upset ...

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