A Critique of a Law and Economics Analysis of the Alien Tort Statute

A few days ago, I was interested to see a new draft paper out that discussed the law and economics perspective of corporate liability under the Alien Tort Statute. Corporate Liability for Extraterritorial Torts Under the Alien Tort Statute and Beyond: An Economic Analysis, by Alan O. Sykes, focuses on an important part of ATS litigation, and one which so far has been relatively neglected — the economic impact of ATS suits.

Unfortunately, I came away from the article a bit disappointed; although Sykes accurately summarizes some economic concerns that are theoretically raised by the ATS, there is close to no examination of actual corporate behavior. I was frustrated with its near total disconnect from any specific applications of the ATS, as only a single example from actual ATS litigation is used to illustrate the potential economic downsides of corporate liability: that of Talisman’s withdrawal from Sudan and replacement by Chinese corporations. Actual dollar figures associated with defending ATS suits, or total amounts of judgments or settlements that have been paid under ATS cases, are never brought up.

My major complaint would be that, because the article simply focuses on the theoretical costs caused by corporate liability under the ATS, with little or no evidence as to the actual costs that have been experienced in ATS suits, Sykes’ analysis is almost equally applicable to the question of multinational corporate liability in any situation, not just Alien Tort Statute case. In his article, Sykes identifies five general economic costs:

  1. Litigation is expensive
  2. This is a confusing area of the law, which means judges are likely to end up making decisions that are biased against big, faceless corporations
  3. Allowing multinational corporations to be sued for allegedly bad things they have done can piss off foreign governments, either where the MNC is headquartered or where the bad acts took place
  4. Allowing corporations with connections to the U.S. to be sued is harmful because it gives a competitive benefit to corporations that do not do business in the U.S., and so cannot be sued
  5. Allowing corporations with U.S. connections to be sued will cause them to engage in expensive restructuring to create subsidiaries that have the competitive benefit of not being able to be sued in the U.S.

These costs are not really unique to the ATS context. It is not that any of these costs aren’t real, but Sykes never discusses how each of these general economic concerns is particularly applicable in the context of the Alien Tort Statute. For instance, although the first point is an important consideration for any type of litigation, the article does not provide any evidence that the costs of ATS litigation are more concerning than the costs associated with, say, products liability, or Title VII cases. Plus, as Sykes himself admits, a large proportion of corporate ATS cases feature up to a dozen different claims in addition to any ATS -based claim for relief. If the ATS didn’t exist, it doesn’t mean these all the ATS cases would cease to exist as well — just that they woudn’t have brought ATS claims. And, other than in a handful of high profile exceptions, the ATS portions of those cases don’t cause any significant increase in the overall litigation costs. As Sykes also admits, U.S. Courts are already concerned with the potential costs of baseless litigation, and have implemented doctrines intended to curtail the expenses associated with such cases. I am all in favor of Twombly’s heightened pleading standard applying to ATS suits, but the record of ATS litigation thus far — with an overwhelming majority of ATS cases being dismissed — suggests that this is already occurring, and that litigation costs in ATS suits are no higher than for any other given type of litigation.

As for the second point, regarding the risk of judicial bias against corporations, there is zero evidence that this is a cost particularly likely to occur in the context of ATS litigation. Given the existence of a single plaintiff victory at trial in corporate ATS cases — and perhaps a dozen settlements, many of which heavily favored the corporations — the record would suggest that ATS suits do not feature any problematic bias against corporate defendants.

Although the third potential cost identified by Sykes, that of foreign sovereign backlash, is a real threat posed by ATS litigation, the problem is one that arises from a separation of powers perspective, and analysis under a law and economics framework is less useful. The problem with the risk of Foreign Sovereign Backlash (“FSB,” because I’m too lazy to keep typing it out) under the ATS is that it can place the judiciary in the role of FSB-gatekeeper, when that role is Constitutionally assigned to other branches. Yes, FSB can be expensive — but the problem is not the expense itself, but which branch of government is entitled to decide to cause it. Foreign relations are not a straight forward cost-minimization exercise, and the Executive is free to make a foreign relations decision that is more economically expensive if it believes other U.S goals are better served in doing so. The concern about the risk of FSB arising from ATS litigation is not an economic concern, but rather a Constitutional one.

Sykes’ argument also fails to spend more than a quick footnote considering the possibility that there may be a FSB benefit to ATS suits. ATS cases can potentially benefit the Executive by minimizing the U.S. government’s role in punishing corporations that engage in human rights abuses. It allows such corporations to be penalized, but without requiring the elected branches to themselves specifically decide who to prosecute or accuse of violating international law. Although allowing individual foreign plaintiffs to make the decision to bring an ATS suit can and does cause FSB, requiring that the U.S. government itself specifically choose to bring claims of, say, genocide against a foreign state (and corporation) is likely to cause even more offense still. If the Executive wants to punish extraterritorial corporate human rights abuses (and with Koh at the legal helm, I think we can assume it does), there is a definite benefit in allowing plaintiffs to bring ATS suits against bad corporate actors, rather than requiring that the State Department be the one to do all the dirty work.

The fourth economic cost Sykes identifies is that “corporations subject to suit in the United States thus face potentially discriminatory liability standards, imposing the costs of litigation and any resulting judgments on them for alleged conduct that actual and potential competitors can undertake without fear of liability.”

The problem with this argument is that it literally argues that, from an economics perspective, it is better if U.S. corporations should not be liable for any torts under U.S. law, because non-U.S. corporations are not liable for theirs. As a result of the ATS, Sykes writes,

business opportunities are diverted to competitors that are not subject to suit in the United States. Not only does the U.S. corporation lose business, but business opportunities are captured by competitors who are not subject to liability for violations of customary international law. The competitor thus faces no more incentive to guard against violations of customary international law than would the U.S. corporation if it did not bear discriminatory liability – the likely impact on compliance with international law is nil. The only thing that has changed is the displacement of the U.S. corporation by a higher cost and thus less efficient competitor. Global economic welfare declines.

Sykes does qualify this statement by acknowledging that global economic welfare can be assisted through the existence of corporate liability, by deterring inefficient distortions in where corporations choose to invest funds. Still, this caveat does not quite sufficiently cover the objections to his argument. I think that Judge Posner, in his recent opinion in Flomo, probably put it best:

One of the amicus curiae briefs argues, seemingly not tongue in cheek, that corporations shouldn’t be liable under the Alien Tort Statute because that would be bad for business. That may seem both irrelevant and obvious; it is irrelevant, but not obvious. Businesses in countries that have and enforce laws against child labor are hurt by competition from businesses that employ child labor in countries in which employing children is condoned.

Again, a law and economics approach alone is not particularly beneficial in this context. It is not that a law and economics analysis is useless here, or that these questions should never be asked. But asking simply “what is the economic cost of prohibiting child labor?”, or “what is the cost of prohibiting slavery?” only goes so far. Although there is not quite a unanimous opinion on the matter, in as much as the world has ever reached a global consensus on anything, there is now a fairly universal agreement that activities like slavery and genocide ought to be prohibited, no matter the economic cost caused by that prohibition. As such, the more useful question is what is the most efficient way of deterring these prohibited behaviors, not whether or not such activities should be deterred at all.

A related cost disadvantage Sykes identifies here is the reputation costs suffered by U.S. firms that are sued for foreign human rights abuses. True, this is a real cost suffered by corporations like Chiquita and Pfizer, but is it one that argues against a regime corporate liability under the ATS? If anything, it shows how ATS suits have the potential of benefiting shareholders, by giving them relevant information about a corporation’s foreign management practices. Sykes is essentially arguing here that, absent the ATS, U.S. consumers and shareholders would have less awareness of the fact that certain corporations may be assisting foreign regimes in carrying out genocide or other violations of international law, and therefore the ATS imposes a “cost” on these corporations by raising that awareness. It is true that companies suffer damage to their corporate reputations as a result of, say, enrolling marginalized children into drug trials without regard for their consent, but any “economic cost” from such reputation damage may very well be outweighed by the economic benefit of making it harder for corporations to deceive consumers and shareholders about information that is relevant to their consumption and investment choices.

[I’ve realized after finishing this post that I forgot to discuss the fifth cost identified by Sykes — the costs incurred by companies that have to spin off subsidiaries to try and immunize themselves from human rights abuses by their overseas operations. I may get back to edit this later, but to a large extent, while I agree with Sykes’ assessment of the costs imposed by the ATS here, I do have a problem with the framing. If corporations are engaging in inefficient restructuring in order to avoid liability for human rights abuses, that is an argument in favor of reforming corporate law to remove corporations’ incentives to restructure as a means of avoiding liability for their bad acts. It is not an argument in favor of simply permitting the bad acts.]

While the five potential costs of ATS identified by Sykes are real, there is very little consideration of whether or not these costs are outweighed by the accompanying benefits. In places, Sykes does in fact acknowledge that the real question is not whether prohibiting genocide or other violations of international law is bad for business, but whether the ATS is an efficient method for deterring such activities. However — with the exception of his discussion on aiding and abetting liability — Sykes never fully engages with this question; he does, for instances, explain why imposing aiding and abetting liability is not likely to be effective at encouraging foreign sovereigns not to randomly kill their own citizens, but there is never any comparison between the relatively costs of achieving this goal via aiding & abetting liability vs. alternative methods of deterrence. Yes, there may be costs to ATS litigation, but the fact that there are costs is not by itself a sufficient argument against corporate liability, as it would seem that the United States does in fact consider deterring corporate human rights abuses to be of at least some marginal utility. In which case, if it turns out to be the case the ATS’s deterrence value is not sufficiently high to offset the costs of its enforcement, what other schemes exist that are capable of advancing these goals in a more cost effective manner?

Just saying that the ATS imposes “economic costs” is meaningless; of course it imposes costs, and those costs are likely similar to the costs imposed by other corporate liability regimes. The relevant questions here are instead (1) what are the actual dollar figures of those costs? Not in the abstract; if the ATS is so damned expenses, surely someone can pull up some supportable figures demonstrating it; (2) what is gained in exchange? Looking at the costs of the ATS is only part of the equation, there needs to also be an examination of its benefits to compare against the costs; and, (3) are there methods of deterring corporate human rights abuses more efficient than the ATS?

If the answer to this is simply that “the cost of deterring corporate human rights abuses is outweighed by the benefit of allowing corporations to engage in human rights abuses,” then come out and say so. But all Sykes has given is some abstract reasons as to why the ATS may have certain economic costs — without attempting to quantify what those costs are in reality, and without any reference to alternative schemes that might be more efficient in achieving the goals that are promoted by ATS supporters.

As noted above, Sykes does a fair job of discussing these issues with respect to aiding & abetting liability under the ATS — and he is completely right. Aiding and abetting liability under the ATS is of a dubious pedigree both from a legal perspective and an economics one. I just wish he’d gone on to make a comparison of the relative efficiencies between a regime of aiding and abetting liability and other potential methods, however.

For instance, if the goal is to encourage companies to invest in regimes that abide by certain minimum human rights standards, this would probably be more effectively carried out through direct federal statute, something analogous to ITAR or the anti-terrorism statutes that Chiquita got nailed with. That would allow the U.S. government to more directly tailor the specific prohibitions to match its foreign relations goals, and (well, theoretically) reduce the litigation costs associated with enforcement via the ATS. Trying to regulate the allocation of foreign investment through a scheme enforced via private litigation is obviously clumsy; direct instructions from the fed as to what foreign investment is deemed problematic from a human rights perspective is a much cleaner and easier scheme to execute.

On the other hand, as discussed above, accomplishing the ATS’ objectives through direct federal regulation would eliminate one major advantage provided by the ATS scheme: the fact that the U.S. government is not required to take sides. If a scheme to prohibit corporations from engaging in human rights abuses abroad was established through federal laws, the U.S. government would be required to specifically choose to prosecute any violation that occurred, or specifically name foreign human rights abusers that companies were discouraged from investing in. Despite all the complaints about the ATS’s “foreign relations costs,” it cannot be assumed offhand that the U.S.’s foreign relations would be better served by a scheme that requires the U.S. executive and legislative branches to deliberately and intentionally accuse foreign sovereigns of humans rights abuses.

This post has pretty much definitely gone on for too long, but there are two final points I wanted to briefly discuss. Throughout his paper, I think that, to a large degree, Sykes underestimates both (1) the extent to which it is the nerve centers of corporations, and not the local actors, which initiate corporate human rights abuses abroad; and (2) the comparative power of the corporations against the local developing governments. To be fair, I too am only aware of anecdotal evidence with regard to these arguments, one way or another. And Talisman’s involvement in Sudan, for instance, might have been without its directors’ knowledge, and carried out by the government of Sudan rather than through any corporate initiative. But on the other hand, Chiquita’s payments to the AUC and Shell Nigeria’s collaboration with the government in regards to the Ogoni were not decisions made by isolated foreign outposts that had no contact with or direction from company execs. There is clearly high-level executive complicity at play in many of the worst examples of corporate human rights abuses. Moreover, Sykes’ blithe assumption that MNCs have no ability to promote or deter human rights abuses by local government officials — because “[i]nvestors who interfere in any substantial way with the government’s preferred course of action can be booted out and [r]eplaced with others” — seems entirely at odds with actual experience. In many cases, MNCs operating in developing nations possess a near-monopoly status, and directors carefully develop close, err, “financial” ties to local government authorities, giving them considerable influence and decision making authority. See, e.g., faxes showing that the Nigerian government repeatedly expressed to Shell “concern at the limited availability of foreign capital”, and gave ongoing assurances that it would do whatever was in its power to please Shell officials, during the course of the Ogoni massacre. The idea that corporations in developing nations are operating in some state of near perfect competition with no ability to make demands on host governments is not an assumption that can be made without any supporting evidence.

In order to give an accurate analysis from a law and economics perspective of the costs and benefits of ATS litigation, what is needed — and what so far has been lacking in ATS literature — is an empirical understanding of the actual incentives corporations have to engage in or to assist foreign human rights abuses. Once we can get a better grasp on that, it would be much easier to answer the question of whether the Alien Tort Statute is the right the method of altering those incentives.

-Susan

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