Corporate Social Responsibility and the Law : Foley Hoag LLP

After the recent decision in Kiobel v. Royal Dutch Petroleum, 06-4800-cv, 06-4876-cv (2d Cir. September 17, 2010) (.pdf), in which the Second Circuit Court of Appeals held that corporations cannot be sued under the Alien Tort Statute (“ATS”) for violations of customary international law, it is worth reviewing statements made by courts in other circuits with regard to corporate liability under the ATS.

As is reflected in the summaries below, many federal courts have not yet directly addressed the question of corporate liability under the ATS and others have merely made observations without precedential value.  Some courts have assumed, without comment, that corporations and other private actors are proper defendants in ATS cases.  Other courts have found that corporate defendants are only proper defendants when the plaintiffs can show that defendants were de facto state actors. 

For background, an overview of the 12 regional circuits within the U.S. federal court system can be found here.

First Circuit -- The First Circuit Court of Appeals has not directly addressed the question of corporate liability under the ATS. 

Second Circuit -- Kiobel’s holding that corporations cannot be held liable under the ATS is now law in the Second Circuit.  This decision may be reviewed en banc, or by the Supreme Court.

Prior to Kiobel, the Second Circuit assumed “without deciding, that corporations...may be held liable for the violations of customary international law” in Presbyterian Church of Sudan v. Talisman Energy, Inc, 582 F.3d 244 (2nd Cir. 2009).  In Khulumani v. Barclays Nat. Bank Ltd., 504 F.3d 254 (2d Cir. 2007) (Katzmann, J., concurring), the Second Circuit observed, although the issue was not raised on appeal, that “[w]e have repeatedly treated the issue of whether corporations may be held liable…as indistinguishable from the question of whether private individuals may be.”  In Abdullahi v. Pfizer, Inc., 562 F.3d 163 (2d Cir. 2009), the Second Circuit allowed certain claims to proceed in an ATS suit and did not directly address the question of whether corporations were proper defendants.

Third Circuit -- The Third Circuit Court of Appeals has not directly addressed the question of corporate liability under the ATS.  The Third Circuit upheld the lower court’s dismissal of Hereros ex rel. Riruako v. Deutsche Afrika-Linien Gmblt & Co., 232 Fed.Appx. 90 (3d. Cir. 2007), a case involving claims under the ATS, on other grounds.

In a lower court decision, the District Court in Iwanowa v. Ford Motor Co., 67 F. Supp. 2d 424 (D.N.J. 1999), stated that “[n]o logical reason exists for allowing private individuals and corporations to escape liability for universally condemned violations of international law” and noted that it was therefore inclined to find that “private entities using slave labor are liable under the law of nations.” The District Court, however, did not decide whether corporate defendants were liable as private actors after finding that the defendants were de facto state actors.

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On September 17, in a controversial opinion, the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum that corporations cannot be properly sued under the Alien Tort Statute (“ATS”) for violations of customary international law.  The case is one of a series of cases arising from claims that Royal Dutch Petroleum was complicit in human rights abuses against the Ogoni people in Nigeria.  Three related cases (the Wiwa cases) settled on the eve of trial in June 2009 for a disclosed settlement of $15.5 million.

In an opinion written by Judge Jose Cabranes, the Second Circuit concluded that

Because customary international law consists of only those norms that are specific, universal, and obligatory in the relations of States inter se, and because no corporation has ever been subject to any form of liability (whether civil or criminal) under the customary international law of human rights, we hold that corporate liability is not a discernable—much less universally recognized—norm of customary international law that we may apply pursuant to the ATS. Accordingly, plaintiffs’ ATS claims must be dismissed for lack of subject matter jurisdiction.

The Kiobel opinion has some legal scholars wondering whether this may be the beginning of the end for ATS litigation against corporations.  The decision will certainly be appealed, and this may be the case that results in Supreme Court clarification on the applicability of the ATS to corporate actors.  The question of whether corporations are properly liable under the ATS was left unsettled by the Supreme Court in Sosa v. Alvarez-Machain, and the Supreme Court declined to take up the issue when it recently denied Pfizer’s writ of certiorari in Pfizer v. Abdullahi.

In Kiobel, the majority stated that “the fact that corporations are liable as juridical persons under domestic law does not mean that they are liable under international law (and, therefore, under the ATS).”  In doing so, the Court directly addressed the question posed in a footnote in Sosa.  In that footnote, the Supreme Court stated that an evaluation of whether a norm of international law was sufficiently definite to support a cause of action under the ATS involved the "related consideration" of “whether international law extends the scope of liability for a violation of a given norm to the perpetrator being sued, if the defendant is a private actor such as a corporation or individual.”  The Court in Kiobel took up this "related consideration" and found that corporations are not proper defendants in ATS cases because “the principle of individual liability for violations of international law has been limited to natural persons—not ‘juridical' persons such as corporations.”

Before Kiobel, several post-Sosa appellate court decisions have upheld jurisdiction over corporate defendants.  Notably, many of these decisions have not involved much analysis of whether corporations were proper defendants.  In Presbyterian Church v. Talisman, decided in 2009, the Second Circuit assumed “without deciding, that corporations...may be held liable for the violations of customary international law[.]”  In Khulumani v. Barclays Nat. Bank Ltd., decided in 2007, defendants did not raise the question of corporate liability on appeal, but the Second Circuit observed that  “[w]e have repeatedly treated the issue of whether corporations may be held liable…as indistinguishable from the question of whether private individuals may be.”  Other appellate courts, including the Eleventh Circuit in Romero v. Drummond Co., decided in 2008, and Aldana v. Del Monte Fresh Produce, decided in 2005, have similarly upheld corporate liability under the ATS.   

These cases have left unsettled the question of whether the ATS properly applies to corporate defendants.  In Kiobel, the Second Circuit noted this uncertainty and cited a recent decision by the District Court for the Central District of California that declined to find corporate liability under the ATS.  In Doe v. Nestle, decided on September 8, the District Court first observed that “domestic courts have almost uniformly concluded that corporations may be held liable for violations of international law” and then found that “existing cases have not adequately identified any international law norms governing corporations. Accordingly, the Court concludes that corporations cannot be held directly liable under the Alien Tort Statute for violating international law.”

Advocates for corporate liability will find support in the concurring opinion in Kiobel, written by Judge Pierre Laval, in which he strongly critiqued the majority opinion's finding on corporate liability as “[w]ithout any support in either the precedents or the scholarship of international law[.]”  In his critique, Judge Laval questioned the potential impact of the majority's ruling, stating that

according to the rule my colleagues have created, one who earns profits by commercial exploitation of abuse of fundamental human rights can successfully shield those profits from victims’ claims for compensation simply by taking the precaution of conducting the heinous operation in the corporate form.

The policy arguments contained in Judge Laval's concurrence echo a 2005 opinion in In re Agent Orange Prod. Liab. Litig. in which the District Court for the Eastern District of New York found that “[l]imiting civil liability to individuals while exonerating the corporation directing the individual's action through its complex operations and changing personnel makes little sense in today's world.” 

It is certain that the Kiobel decision represents one of the most significant ATS decisions in years, although it is far too early to state that this is the end of ATS litigation for companies.  Both the majority and concurring opinions in Kiobel will find many advocates and detractors and all parties will continue to look to the Supreme Court for final resolution.

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The Securities and Exchange Commission ("SEC") published Rule 14a-11 today in the Federal Register (.pdf).  As discussed in our September 7 post below, this Rule provides for proxy access to certain long-term shareholders, including socially responsible investment funds and pension funds.  The rule is effective 60 days after being published in the Federal Register, or November 15, 2010.

Taking into account the uniform 120 day advanced notice deadline, any issuer whose one year anniversary for mailing date is prior to March 15, 2011 will not be subject to a proxy access campaign in 2011.  Application of the new access rules to the smallest public companies ("smaller reporting companies" under SEC rules) will be deferred for three years from the effective date.

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On September 13, Microsoft Corporation announced a major change in policy whereby the company will make a new unilateral software license available to NGOs and certain journalist organizations in Russia. 

Microsoft's announcement came shortly after The New York Times published a front-page article stating that Microsoft’s local counsel had provided assistance to Russian authorities in the criminal prosecution of NGOs and independent journalists on the basis of allegations that these groups were utilizing pirated Microsoft software.  Although software piracy is a serious problem across Russia, Russian authorities allegedly targeted journalists and advocacy groups for criminal prosecution. This is not surprising, given ongoing reports that journalists and advocacy groups in Russia are subject to increasing and often violent government repression. 

Microsoft's announcement indicated that the software license would be granted to organizations in a "number of countries" in addition to Russia, but did not name the other countries specifically.  The license will apply automatically, and the company stated that the terms of the license will "fully exonerate" any qualifying organization that is investigated for software piracy.  The license will be valid until 2012 (with the possibility for extension).  Between now and the expiration of the unilateral license, Microsoft stated that it will work to inform NGOs of an existing donation program whereby NGOs can obtain certain Microsoft software licenses free of charge.

Many technology companies are struggling with the ways in which their products can be used to violate human rights.  In Microsoft's case, it was not the company's technology that was used to curb lawful dissent, but rather the selective enforcement of intellectual property laws -- laws that undeniably protect property rights in which the company has a clear interest.  This situation presents complex legal and political challenges, and Microsoft announced that it will retain international legal counsel to conduct an investigation and recommend measures the company should take in the future.  Microsoft noted that "we aim to reduce the piracy and counterfeiting of software...in a manner that respects fundamental human rights" and observed that:

we want to be clear that we unequivocally abhor any attempt to leverage intellectual property rights to stifle political advocacy or pursue improper personal gain.  We are moving swiftly to seek to remove any incentive or ability to engage in such behavior...We must accept responsibility and assume accountability for our anti-piracy work, including the good and the bad.

What are the wider lessons from Microsoft’s experience?  Ideally, Microsoft should have been able to preemptively address this problem before it appeared on the front page of a major newspaper.  The company's announcement described meetings of internal counsel to assess the issues raised by The New York Times, but these issues were apparent before journalists chose to highlight them. 

In an open letter to the company published on September 14, Human Rights First suggests that Microsoft should engage in a dialogue with civil society groups in Russia about the use of technology for political repression.  Whether Microsoft engages in a formal or informal dialogues, Microsoft -- and its peers -- should consistently hold discussions with civil society so that new techniques aimed at suppressing potential dissent are identified and addressed.  Because these topics are politically sensitive, high-level company managers need to be aware of the concerns at stake and should lead the process of addressing them.  Notably, Microsoft is a participant in the Global Network Initiative, a multi-stakeholder initiative working to assist information and communications technology companies protect the human rights of freedom of expression and privacy.  These types of multi-stakeholder forums can be very useful to companies, but only if the lessons learned in these engagements are both communicated to top management and implemented on the ground. 

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On September 10, the Ninth Circuit Court of Appeals upheld a jury verdict in favor of Chevron Corporation (.pdf) in a case involving plaintiff allegations that Chevron was complicit in human rights abuses committed by Nigerian security forces in 1998.  Plaintiffs brought claims under the Alien Tort Statute (“ATS”) and the Torture Victim Protection Act (“TVPA”).

The primary events at issue in the litigation took place at an offshore platform belonging to Chevron’s Nigerian subsidiary.  After protesters spent several days at the platform in May 1998 protesting Chevron’s drilling activities, Chevron’s Nigerian subsidiary contacted the Nigerian Government Security Forces. The security forces that came to the scene ultimately fired on the protesters, killing two and injuring a number of others.

Plaintiffs originally filed the case in 1999 and almost ten years of litigation preceded the final commencement of trial.  In December 2008, after a seventeen-day trial, a jury in the District Court for the Northern District of California ruled in favor of Chevron on all counts.  One of the issues at trial was the nature of the protest activity at the platform.  Plaintiffs alleged that the protesters were unarmed and peaceful, while Chevron witnesses insisted that the protesters were armed and threatened violence against the platform and its crew.  Plaintiffs appealed the jury verdict, raising challenges to the jury instructions and the District Court’s evidentiary rulings.  Plaintiffs also appealed two points of law, including the District Court’s ruling that the TVPA does not apply to corporations.

The Court of Appeals fully affirmed the District Court’s judgment, including the finding that plaintiffs' ATS claims were preempted by the Death on the High Seas Act.  With regard to the TVPA claims, the Court determined that "the plain language of the TVPA does not allow for suits against a corporation."  This decision conflicts with a 2005 Eleventh Circuit decision in which the TVPA was held, without discussion, as applicable to corporate actors. (Aldana v. Del Monte Fresh Produce, N.A., Inc., 416 F. 3d 1242 (11^th Cir. 2005).)  This is a significant issue in part because most cases brought against companies for complicity in human rights abuses committed by public security forces abroad include claims under both the TVPA and the ATS. 

Although Chevron has prevailed in the judgments issued in this case, the length of the litigation and the considerable publicity surrounding it are powerful reminders of the legal and reputational risks that can accrue to companies operating abroad in states with poor human rights practices. Such risks have led Chevron and peer companies to participate in initiatives like the Voluntary Principles on Security and Human Rights as a means to identify and manage security force-related risks, as well as to include human rights due diligence processes in their management systems.

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On August 25, the Securities and Exchange Commission (“SEC”) passed a new proxy access rule that will provide certain shareholders with the right to nominate corporate directors and have those nominations appear in corporate proxy statements.  Shareholder advocates have advocated for a federal proxy access rule for nearly thirty years.  A draft rule was published in June 2009, and the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf) confirmed the SEC's authority to issue the new rule.

Specific provisions of new Exchange Act Rule 14a-11 include:

• A shareholder or shareholder group must have held at least 3 percent of a company’s shares continuously for at least three years in order to nominate a director, or directors. 
• Shareholders may nominate up to 25 percent of a company’s directors.  If the board includes less than eight directors, only one director may be nominated.
• Companies with less than $75 million in market capitalization are exempted from the rule for at least three years.
• Shareholders may not utilize the new proxy access rule if they are doing so with the purpose or effect of changing control of the company.
•  The rule impacts all Exchange Act reporting companies, including investment companies.  Companies whose only public securities are debt securities and foreign private issuers are not subject to the new rule. 

For certain companies, depending upon the mailing date of their last proxy statement, the new proxy access rule will impact the 2011 proxy season.  The new rule will go into effect 60 days after publication in the Federal Register (expected soon).  Shareholders must submit nominees no later than 120 days before the anniversary date of the mailing of a company’s proxy statement from the previous year.

Significantly, in addition to the new Rule 14a-11, the SEC also amended Rule 14a-8(i)(8) to limit corporate capacity to exclude shareholder proposals seeking revisions to a company’s procedural requirements for shareholder director nominations. 

Without a doubt, the 3 percent ownership threshold represents a significant hurdle to shareholders and is a strong counter-argument to the assertion that the new rules will allow director nominations to be “hijacked” by special interests.  That said, the new rules provide shareholders with significant new tools for use in engaging companies and pushing for changes in corporate management and operations.  Groups seeking to take advantage of the new proxy access rule will likely represent broad coalitions of shareholders concerned with issues ranging from corporate governance to the management of social and environmental concerns.  Even if these shareholders are unsuccessful in achieving the necessary ownership threshold, they will likely be able to use the new proxy access rule as an additional basis for the initiation of dialogue with corporate management regarding issues of concern. 

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