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Corporate Compliance with the Law in the Era of Efficiency Cynthia A NORTH CAROLINA LAW REVIEW Volume 76 | Number 4 Article 5 4-1-1998 Corporate Compliance with the Law in the Era of Efficiency Cynthia A. Williams Follow this and additional works at: http://scholarship.law.unc.edu/nclr Part of the Law Commons Recommended Citation Cynthia A. Williams, Corporate Compliance with the Law in the Era of Efficiency, 76 N.C. L. Rev. 1265 (1998). Available at: http://scholarship.law.unc.edu/nclr/vol76/iss4/5 This Article is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Law Review by an authorized administrator of Carolina Law Scholarship Repository. For more information, please contact [email protected]. CORPORATE COMPLIANCE WITH THE LAW IN THE ERA OF EFFICIENCY CYNTHIA A. WILLIAMS* In this Article, Professor Williams identifies and criticizes a theory of law (the "law-as-price theory") that suggests a corporationcan either conform to the law or violate it while accepting the known consequences (risking paying penalties), and that either choice is an acceptable means for a corporationto fulfill its obligations as a citizen, particularly with respect to regulatory law. Professor Williams identifies the growing influence of the law-as-price theory of law in legal writing, corporate law reform efforts and judicial decisions, including a decision by the Supreme Court,and criticizes its underlying assumptions and practical implications. The Article connects this criticism of the law-as-price theory of corporate law compliance to the corporate social responsibility debate, concluding that the theory is premised upon a view of the corporationthat fails adequately to consider the public obligations and responsibilitiesof public corporationsin today's society and economy. I. INTRODUCTION ................................................................................ 1266 II. THEORIES ABOUT THE MEANING OF LAW ................................ 1280 A . Law-as-Lim it .............................................................................. 1280 B. Law-as-Price............................................................................... 1285 C. Intermediate Theories ................................................................ 1295 III. EVIDENCE OF LAW-AS-PRICE THEORIES IN THE ALl PRINCIPLES AND IN THE REVISED MODEL BUSINESS CORPORATIONA cT ..................................................................... 1301 A . The ALl Principles .................................................................... 1301 * Assistant Professor, University of Illinois College of Law; B.A., University of California (Berkeley); J.D., New York University School of Law. I want to thank Ian Ayres, Jeffrey Gordon, Marcel Kahan, Faith Kahn, Donna Nagy, William Nelson, Julie North, Richard Painter, Paul Saunders, Jack Slain, and my colleagues at the University of Illinois (including, in particular, Carlos Ball, Betsy Cavendish, Ellen Deason, Andy Leipold, Phil McConnaughay, Steve Ross, and Tom Ulen) for their comments on this project in various stages of development. I also want to thank Sarah Bender, Charlotte Skroch, Barbara Kube, and Michael Strohmeier for their excellent research assistance. Research support was generously provided by the University of Illinois Summer Research Fund, for which I am grateful. 1266 NORTH CAROLINA LAW REVIEW [Vol. 76 1. Section 4.01: The Duty of Care ........................................1302 2. Section 7.18: Derivative Liability ....................................1307 3. Section 7.19: Exculpatory Clauses ...................................1310 B. The Revised Model Business CorporationAct .......................1315 IV. A DEVELOPING JURISPRUDENCE I: EFFICIENT BREACH IN THE LAW ........................................................................................1317 A. Discussionsin the Case Law .....................................................1317 B. The Law-as-PriceConcept Inherent in Efficient Breach of Public Law Is FundamentallyIronic ........................................ 1324 C. Society Is Not Indifferent ConcerningWhether Firms Choose Compliance with the Law Versus Risking Paying the Penalty................................................................................... 1327 1. Violations of Laws Regulating Economic Harm ............1333 2. Violations of Laws Regulating Non-Economic Harm...1336 V. A DEVELOPING JURISPRUDENCE II: EFFICIENT INVESTMENT IN COMPLANCE ....................................................1342 A. Landgraf v. USI Film Products ................................................1343 1. Section 102 in the Lower Courts .......................................1347 2. The Supreme Court Litigation ..........................................1352 3. The Court's D ecision .........................................................1356 4. LandgrafCompared to Prior Cases .................................1360 B. PracticalDifficulties with the Landgraf Theory of Efficient Compliance ................................................................................. 1364 C. ConceptualDifficulties with the Landgraf Theory of Efficient Compliance .................................................................1370 VI. THE CORPORATE SOCIAL RESPONSIBILITY DEBATE .............1373 V II. CONCLUSION ................................................................................1385 I. INTRODUCTION Fifteen years ago, Professor (now Judge) Frank Easterbrook and Professor Daniel Fischel set out the following proposition about corporate law compliance: "Managers have no general obligation to avoid violating regulatory laws, when violations are profitable to the firm ....We put to one side laws concerning violence or other acts thought to be malum in se."' That statement, asserted in a footnote, was elaborated upon only briefly, again in a footnote: [M]anagers do not have an ethical duty to obey economic regulatory laws just because the laws exist. They must 1. Frank H. Easterbrook & Daniel R. Fischel, Antitrust Suits by Targets of Tender Offers, 80 MICH. L. REV. 1155, 1168 n.36 (1982) (citations omitted). 1998] CORPORATE COMPLIANCE 1267 determine the importance of these laws. The penalties Congress names for disobedience are a measure of how much it wants firms to sacrifice in order to adhere to the rules; the idea of optimal sanctions is based on the not only may but also should supposition that managers 2 violate the rules when it is profitable to do so. Easterbrook and Fischel's view of corporate compliance with the law, which I call the "efficient breach" view, has obvious intellectual connections to some aspects of law and economics and to the theory of efficient breach of contract, expanded to include efficient breach of public law.3 While many people might view Easterbrook and Fischel's theory of "efficient breach of public law" as lacking a sound legal and political foundation, a more plausible view (but one that is also flawed) is that of "efficient investment in compliance." That view suggests the maximum amount of money a firm should invest in order to comply with the law is determined by the maximum penalty for violations of a particular law, since it would be economically inefficient to invest more in compliance than one risks in fines.4 In this Article, I argue that the conception of law underlying "efficient breach" is similar to the conception underlying "efficient compliance," and that both understate the significance of law in a similar way, treating vast realms of law as simply a pricing scheme or set of tariffs on behavior. I call the underlying conception of law, which I am criticizing in this Article, the "law-as-price" view of law, 2. Id. at 1177 n.57. 3. A rudimentary definition of the "efficient breach of contract" theory is that one party should breach a contract and pay damages if that party finds another economic opportunity so profitable that she will still profit after breaching, paying damages to the first promisee, and entering into a contract with the second promisee. See, e.g., Patton v. Mid-Continent Sys., Inc., 841 F.2d 742, 750 (7th Cir. 1988) (Posner, J.) ("Even if the breach is deliberate, it is not necessarily blameworthy. The promisor may simply have discovered that his performance is worth more to someone else. If so, efficiency is promoted by allowing him to break his promise, provided he makes good the promisee's actual losses."); RICHARD POSNER, THE ECONOMIC ANALYSIS OF LAW 118-20 (4th ed. 1992) (explaining that efficient breach of contract occurs when the breaching party will still profit after compensating the other party for its expectation interest). 4. See David L. Engel, An Approach to Corporate Social Responsibility, 32 STAN. L. REV. 1, 43-45 (1979). The efficient-compliance view sounds much more plausible than the efficient-breach view because corporate managers do need to make investment decisions about corporate law compliance, and one would expect them to be affected by the penalties risked by non-compliance in making these decisions. Still, I argue below, this notion of "efficient investment in compliance," while perhaps correct at the margins, is problematic over the vast range of regulatory law because in many instances such an approach may lead to substantial under-investment in compliance (as judged by the social costs of law violations when penalties are too low). See infra notes 380-87 and accompanying text. 1268 NORTH CAROLINA LAW REVIEW [Vol. 76 and I assert that both efficient breach and efficient compliance theories
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