Corporate Disobedience

Elizabeth Pollman is Professor of Law at Loyola Law School. This post is based on an article by Professor Pollman, forthcoming in the Duke Law Journal.

From Uber to “legalized” marijuana businesses, examples of companies pushing or even transgressing legal boundaries are ubiquitous. Corporate law takes a dim view of law breaking, enabling the chartering of corporations only for a lawful purpose and denying business judgment rule protection for knowing violations of the law. The legal literature has not been as uniformly opposed or clear in disaffirming unlawful activity, but it has focused primarily on two issues: whether corporations can use a cost-benefit approach to law breaking and how to fit intentional violations of law into the framework of fiduciary duties.

In a forthcoming article, I aim to enrich this account by examining varied instances in which corporations subvert, transgress, challenge, dissent from and refuse to comply with the law—all, broadly construed, as forms of disobedience.

Examining corporate disobedience reveals that there is a wide array, ranging from truly repugnant activity that has no redeeming social value to innovative entrepreneurship that arguably falls into a legal gray area or transgresses laws made in a different technological or social age. Unlawful conduct by corporations raises significant social and moral concerns. Yet, examining the spectrum of corporate disobedience also illuminates that it has been an important part of innovation and an engine for transforming various areas of law.

Examples abound, both historical and contemporary: nineteenth century liquor dealers and brewers blatantly defying prohibition; a cereal manufacturer flaunting regulations by putting health claims about fiber on its boxes; technology companies refusing to comply with government orders for assistance in light of user privacy concerns; electric scooter companies attracting the ire of city officials and sparking proposals for new permitting processes for vehicles that help solve public transit’s “last mile” problem; and the “legalized” marijuana industry that has grown to multi-billion dollar revenues in the shadow of federal law which makes such distribution illegal.

In sum, taking a broad look at corporate disobedience reveals that companies challenge, break, or subvert the law in connection with efforts at innovation and entrepreneurship, in battles of federalism, in taking moral stances or challenging moralistic laws, and in combination with general business lobbying. These various acts of corporate disobedience can cause great social harm and can spur valuable clarifications and changes to the law and other social good.

Turning back to corporate law, we might observe that the statutory requirement for lawful conduct serves an expressive function. Corporate statutes can further be interpreted as embedding society’s interests and conveying the principle that corporations should pursue legal change through established and lawful democratic processes.

But despite the apparent possibility of using corporate law to constrain unlawful conduct, the historic and existing mechanisms that have attempted this feat have largely failed. While society’s interest in obedience to the law is embedded in corporate statutes, the right to enforce this dictate is held by shareholders who may not be well-situated to monitor this activity and have an interest in maximizing profitability and financial performance. Fiduciary duty law is ultimately not a fine-tuned mechanism for policing corporate disobedience.

This leaves play in the joints for entrepreneurial opportunity, but it also increases the stakes for regulators, legislators, and enforcement officials who make decisions about how and when to react. Fiduciary duty doctrine itself distinguishes between intentional and unintentional violations of law. Bringing together a fuller range of corporate disobedient activity helps to frame additional relevant considerations for future debate, such as whether the corporation is proactively seeking clarification or change in the law or is instead reacting to enforcement action, whether the corporation openly or clandestinely violated the law, whether the corporation is for-profit or non-profit, and whether the corporation is public or private.

These considerations are not exclusive, nor do they specify a particular result or relieve any actor of liability. They instead reflect the beginning of a conceptual framework that could help guide more nuanced evaluation and understanding of the wide range of unlawful or disobedient activity.

The complete article is available for download here.

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One Comment

  1. Christian Liipfert
    Posted Wednesday, August 1, 2018 at 2:19 pm | Permalink

    Not sure that the mere absence of cases under the duty of obedience (see text around fn 221) means that there is no such duty and that there will not be in the future a case where shareholders sue directors derivatively for breaking the law. But this article certainly raises the issue. Palmiter at fn 42 looks like a must-read.