Why Canada Soccer scandal may be of interest to D&O insurers

Canada Soccer’s recent sports scandal is raising questions about general organizational liability, say two lawyers in a Mondaq blog.

In the wake of a Canadian soccer spying scandal at the Olympics, employment lawyers and directors and officers (D&O) insurance underwriters may want to caution clients about the strategy of throwing executives under the bus. Firing people may not save an organization from vicarious liability, they note.

Often, when a scandal hits, an organization wants to appear to be doing something to correct the problem quickly, Howard Levitt and Lavan Narenthiran of Levitt LLP write in their blog. So that organization may identify specific executives and terminates their employment — what might be called the “sacrificial lamb” approach to responding to a crisis.

For example, Bev Priestman, former coach of the women’s Olympic soccer team, was suspended from soccer activities for a year after it was discovered a team assistant sent a drone over New Zealand’s team practice to spy on them while preparing for a 2024 Olympics match between the two teams. (Prior to the incident, Canada’s woman’s soccer team had not lost to New Zealand since 1987.)

FIFA, which regulates soccer globally, is investigating whether Canadian soccer teams have spied on their opponents in previous years.

But this practice of scapegoating executives is not limited to sports, Levitt and Narenthiran write in their blog post.

“Across every industry, when scandal hits, a leader is almost always put on ice, terminated, or ‘encouraged’ to resign,” the authors write. “In any organization, high-ranking officials — executives, directors and managers — have a fiduciary duty to act in the best interests of the company.

“As the saying goes, with greater power comes greater responsibility, so when something goes wrong these fiduciaries often bear the brunt of the blame, whether deserved or not,” they write.

“However, executives and leaders like Bev Priestman seldom operate in a silo, and they usually do not have as much discretion as the public might think. It is quite unlikely that Priestman — or any leader caught up in a similar scandal — would have acted entirely on their own, without the knowledge or approval of their organization and its other key players.”

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The authors observe that often when organizations find themselves embroiled in controversy, they try to prove to the public and stakeholders they are taking decisive action. Reasons for ordering summary dismissals may include preventing lawsuits and falling stock prices, as well as minimizing further public outrage and reputational damage.

But if they knew what their executives were doing all along, then the scapegoat strategy may not save them from escaping liability, as Levitt and Narenthiran observe.

“If the employer had prior knowledge of the executive’s actions but only made them punishable once discovered, the executive could argue their actions were condoned by the organization,” they write. “If the executive was never warned or disciplined before the discovery, the employer would have an especially tough time defending the discipline in court.”

Enter the concept of vicarious liability. Vicarious liability is when one party is held responsible for the wrongful acts of another, even if the party held responsible did not commit the wrongful act.

In other words, it’s possible for an organization to be held responsible for the wrongful actions of their employees. The legal test is: 1) whether the wrongful actions occurred as part of the employee’s job duties, and 2) there is a connection between the wrongful act and the employment relationship.

If the employer knew about the wrongful actions of the employee, but perhaps it looked the other way or encouraged the acts, the organization could be held vicariously liable for the employee’s actions.

Every fact situation is specific, the lawyers note. It will depend on what the wrongful actions were and the connection between the employee and the employer.

 

Feature image courtesy of iStock.com/Rost-9D