The Supreme Court and the Pro-Business Paradox

Elizabeth Pollman is Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on her recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

One of the most notable trends of the Roberts Court is expanding corporate rights and narrowing liability or access to justice against corporate defendants. Citizens United and Hobby Lobby are the most well-known cases in this vein, but they are not alone. In the last Term, the Court heard cases on important issues ranging from the constitutionality of nonprofit donor disclosure regulation to human rights in global supply chains.

In a Comment in the Harvard Law Review, I examine a variety of recent Supreme Court cases through the lens of corporations to highlight this “pro-business” pattern as well as its contradictory relationship with counter trends in corporate law and governance. Two cases deserve particular attention: Americans for Prosperity Foundation v. Bonta and Nestlé USA, Inc. v. Doe.

In Americans for Prosperity, the Court endorsed a robust understanding of the First Amendment right to freedom of association for nonprofit corporations and other charitable organizations. In a splintered majority opinion, the Court held that a California regulation unconstitutionally burdened associational rights by requiring organizations to disclose their Schedule B to Form 990, containing information about major donors, to the state’s Attorney General’s Office for potential investigation into fraud and other wrongdoing. Notably, the Court broadly invalidated the state regulation and did not provide an in-depth examination of the interests, associational dynamics, or evidence of threats or chilling effects on organizations besides the litigants.

The Court arrived at its ruling by applying a narrow tailoring requirement to the standard of “exacting scrutiny.” Instead of focusing on the range of nonprofit organizations and the potential significance of their burdens, the Court justified invalidating the law on a facial challenge because of its view of the regulation — that the state’s investigative goals were merely for “administrative convenience” and not narrowly tailored. The Court’s willingness to strike down the regulation and raise the bar on the exacting scrutiny standard suggests that campaign finance regulations and other compelled disclosure regimes may be threatened in the future.

Other recent cases such as Nestlé reflect how the Court can limit access to justice against corporate defendants or otherwise narrow sources of liability. The plaintiffs, originally from Mali, sued Nestlé USA and Cargill — U.S. corporations that bought cocoa from farms in Ivory Coast, where the plaintiffs claimed they were enslaved as children. Although the resource distribution and injuries occurred in Ivory Coast, the plaintiffs argued that the corporate defendants “made all major operational decisions within the United States” and “knew or should have known” that the farms were using enslaved child labor, and thus could be held liable for aiding and abetting child slavery under the Alien Tort Statute (ATS). By contrast, the corporate defendants argued that they were immune from suit under the ATS and, alternatively, it would be an improper extraterritorial application of the ATS in this case.

The Court ruled in favor of the corporate defendants on their latter argument, reasoning that “[n]early all the conduct [plaintiffs] say aided and abetted forced labor — providing training, fertilizer, tools, and cash to overseas farms — occurred in Ivory Coast” and only “allegations of general corporate activity — like decision making” occurred in the United States. The opinion dispensed with “generic allegations” of decision making as “general corporate activity” that is “common to most corporations” and insufficient for alleging a domestic application of the ATS.

The trend illustrated by these cases can be understood as favorable to business organizations in the broad sense. The Comment argues that deeper examination, however, also reveals that an enormous diversity of corporations exists and serves the interests of many different constituencies — many of whom do not benefit from, or welcome, this “pro-business” jurisprudence. Quite remarkably, as the Roberts Court has expanded corporate rights and narrowed pathways to liability, many shareholders and stakeholders have become vocal participants, putting pressure on corporations to rein in the use of their rights, to mitigate risks generated by their externalities, and to take account of environmental, social, and governance (ESG) concerns.

The Court’s expansion of corporate rights not only disserves many corporate participants and spurs them to action but also might fuel challenges to new disclosure rules about corporate political activity or other ESG-related concerns that investors seek for participation in corporate governance. From Citizens United to Americans for Prosperity, the Roberts Court’s jurisprudence could ironically lead to a situation in which it has protected corporate political spending based on a view of the corporation as an “association of citizens,” but allows constitutional scrutiny to limit or block participants from getting information about corporate social and political activity.

Further, as the Court has downplayed or ignored corporate decision making structures in recent human rights cases such as Nestlé, by contrast, state corporate law cases have heightened attention on the board’s role in providing oversight to ensure legal compliance throughout the corporation’s operations. Bringing these threads together leads to the larger observation that the Court’s “pro-business” jurisprudence may serve only a limited set of business interests and contribute to a dynamic that ultimately increases pressure on internal law and governance to create stronger constraints and processes to sort the various interests of its participants and stakeholders, as evidenced by growing calls for reform and the rising ESG movement.

The complete paper is available for download here.

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>