Corporate Social Responsibility and the Law : Foley Hoag LLP

On February 28, in proceedings that were both closely watched and anxiously anticipated, the U.S. Supreme Court heard oral arguments in Kiobel v. Royal Dutch Petroleum. For the first time, the question of whether corporations are proper defendants in Alien Tort Statute ("ATS") cases is squarely before the Court.  Petitioners had sought Supreme Court review of a decision by the Second Circuit Court of Appeals finding that corporations are not proper defendants under the ATS.  

Corporate Liability: Defined by International Law or a Question of Domestic Enforcement?

A preliminary transcript of the oral arguments is available here (.pdf). The transcript reflects that, on several fundamental points, Petitioners' counsel, Paul Hoffman, faced a skeptical bench. The hearing had barely begun when Justice Kennedy challenged Mr. Hoffman with the argument that "international law does not explicitly recognize corporate responsibility for the alleged offenses."  

Justice Kennedy's opening challenge encapsulates the fundamental question at issue in this case: must international law explicitly provide for corporate liability in order for corporations to be proper ATS defendants, or is the question of corporate liability a question of enforcement (or remedy) that can be properly decided by domestic courts? 

The Court was clearly split on this question.  At one point, Justice Kagan asserted that "the question of who can be sued is a remedial question."  In contrast, Chief Justice Roberts stated that "under international law, it is critically important who's undertaking the conduct that is alleged to violate international norms."

Concerns About Extraterritoriality

Several Justices raised questions that focused on the extraterritorial nature of the ATS, despite the fact that this issue was not directly before the Court and had not been fully briefed. After noting that Kiobel involved Nigerian plaintiffs alleging violations of international law in Nigeria, Justice Alito bluntly challenged Mr. Hoffman with the question - "What business does a case like that have in the courts of the United States?" 

The ATS Stands Alone

Also at issue was the fundamental uniqueness of the ATS.  Chief Justice Roberts, Justice Kennedy, and Justice Alito each questioned whether there was any other country in the world where such a suit could be brought. In contrast, Justice Kagan seemed less uncomfortable with the singular nature of the statute, observing that "[t]he ATS is just a unique statute.  It's unique against individuals, and it's unique against corporations."   

U.S. Support for Petitioners' Arguments on Corporate Liability

Petitioners were supported by the United States, appearing as amicus curiae.  Counsel for the United States, Edwin Kneedler, argued that "international law norms proscribe certain conduct" but enforcement "is left to each nation."  He urged the Court to focus on the fact that the ATS is explicitly about tort, stating that this "directs the Court to domestic tort law, and the question of whether a corporation can be held liable under domestic tort law."  Mr. Kneedler argued that a corporation "clearly can be" held liable under domestic tort law, stating that "[i]t could be at the time this statute was enacted, and it can be today." 

Respondents: International Law Does Not Support Corporate Liability

In representing Respondents, Kathleen M. Sullivan was unyielding in her argument that there is no source of customary international law "throughout the world that holds corporations liable for the types of human rights offenses" at issue in Kiobel.  She argued that "the law of nations is uniform.  It rejects corporate liability."  Justice Kagan directly challenged this assertion, stating that "as far as I can see, the international sources are simply silent as to this question." 

Pirates, Inc. and Hypothetical Norwegians Operating with Impunity 

In challenging the arguments of Respondents, several Justices seemed troubled by the potential implications of a complete rejection of corporate liability.  Justice Breyer raised the hypothetical of "Pirates, Inc."  Noting that an individual pirate could held be liable under the ATS for acts of piracy, Justice Breyer questioned whether the hypothetical corporation "Pirates, Inc." would nevertheless be free from liability for those same acts.  Ms. Sullivan declared quite definitively that "the corporation would not be liable." 

In questioning Ms. Sullivan, Justice Kagan observed that various treaties and international conventions "prohibit certain acts, [but] don't talk about the actors."  Justice Kagan raised the prospect of a hypothetical defendant arguing that a specific norm of international law does not apply to Norwegians because there is no international jurisprudence specifically about the liability of Norwegians, nor is there a specific reference to Norwegians in the norm at issue.  Justice Kagan concluded that "of course" an international law norm would  apply to Norwegians, "because it prevents everybody from committing a certain type of act."

Kiobel in Context -- A World Away from 2004

In reviewing the hearing, and the potential implications of the Court's future decision, it is notable that many of the recent commentaries on Kiobel have contextualized the case with reference to Citizens United and the significant policy debates surrounding the Court's 2010 decision that corporations are legal persons with limited rights of free speech.  As one Supreme Court observer questioned after the hearing, "the Supreme Court says corporations have a right to free speech. But can they get away with murder?"

Justice Breyer seemed to express particular discomfort with the potential implications of arguments that corporations are not "moral persons" under international law and therefore should not bear potential responsibility for certain offenses.  Ms. Sullivan sought to allay fears of "corporate impunity," noting that "corporate officers are liable for human rights violations" and "there can also be suits under state law or the domestic laws of nations."

Nevertheless, in a post-Citizens United world, questions of the rights and responsibilities of companies as defined by U.S. courts have become the attention of much public debate and commentary.  In addition, international developments, including the release of the Guiding Principles on Business and Human Rights, have directly addressed the responsibilities, if not liabilities, of corporations to account for the adverse human rights impact of their operations.  

The circumstances for this week's Kiobel hearing therefore seems quite different than the context for the Supreme Court's earlier review of the ATS in Sosa v. Alvarez-Machain (2004).  If the Supreme Court ultimately finds that corporations are not proper defendants in ATS cases, there may be considerably more backlash against such a finding than there would have been if the Court had decided the issue eight years ago. 

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A fascinating article in last weekend's New York Times Magazine discusses the powerful statistical techniques that some companies are using to analyze sales and other data in order to gain insights into their customers' behaviors and needs. The article raises a number of difficult consent and privacy issues.

The feature-length piece by Charles Duhigg uses the “predictive analytics” program developed by Target, America's third-biggest retailer, as a case study to illustrate how companies are combining data from customer interactions with other information obtained from commercial databases to draw strikingly detailed portraits of individual customers.

By combining information on the kinds of goods an individual purchases from their stores over several visits with other information about that individual's sociodemographic characteristics (such as age, ethnicity, and level of education) gleaned from public records databases, Target's predictive analytics program can deduce whether an individual shopper possesses characteristics that make them particularly susceptible to the specific marketing efforts.

According to the article, the most important of these characteristics for large retailers is pregnancy, for this is (understandably) a period of upheaval during which the shopping habits of the expectant parent(s) are most likely to change. Women who have been identified by the predictive analytics program as likely to be pregnant are then sent relevant coupons and other marketing materials in an attempt to win their retail dollars. Target's predictive analytics program has apparently become so good at correlating retail behavior with pregnancy that its booklets offering discounts on nursery items sometimes arrive in a customer's mailbox before the mother-to-be has informed other members of her household of the pregnancy!

In principle, there is nothing wrong with Target or any other company using information collected from various sources to fine-tune their marketing efforts or save their customers money by sending them coupons or special offers that are particularly targeted to them. There are, however, a number of problems with how Target and other companies from a wide array of economic sectors are deploying their predictive analytics programs in practice.

The first problem is that most companies are not informing customers of their data collection, retention, and analysis policies – let alone obtaining their consent to the same. Until the publication of the New York Times Magazine article last weekend, the only way that a consumer would know about Target's information collection and retention policies is by navigating to the company's website and reviewing its privacy policy.

Some retailers have partially addressed the informed consent problem by having their customers sign up for loyalty cards which must be presented in order to obtain sale prices. The fine print on the loyalty card application provides an opportunity for the company to state that it is collecting customer information for a variety of purposes. While these loyalty card applications can provide the consumer with some disclosure about what is happening, these fine-print disclosures are far from perfect—given that few consumers take the time to read the dense legalese before sending in the application form. What is more, there is nothing to prevent retailers with a loyalty card scheme from collecting, retaining, and analyzing purchase data from customers who have not bothered to obtain a loyalty card. For this class of customers, the loyalty card application form fails as a mechanism to obtain their informed consent to these practices.

The second problem is that there are no clear policies around the uses a company may make of the information that it collects from its customers–including at the point-of-sale. To stick with the example of Target, its privacy policy states the following under the heading of "Sharing with Other Companies (for their marketing purposes)":

We may share information with vendors, business partners and other organizations which are not part of the Target family. These companies and organizations may use the information we share to provide special offers and opportunities to you.

Such a policy may be appropriate for a business which sells an innocuous product, such as lumber or stationery. It is, however, manifestly inappropriate for a retailer that sells products ranging from food to clothing to nonprescription drugs. If an individual's purchases of these kinds of products can be used to determine whether she is pregnant, it is not difficult to see how a predictive analytics program could be used to determine whether a customer is overweight, diabetic, or sexually active – to name just three kinds of intimate details that can be revealed by the things we buy. Nor does it take a particularly fertile imagination to see how such information could be used by potential employers, insurance companies, and others in ways that no consumer would ever have dreamt about while waiting in the checkout line.

To be sure, there is nothing in the New York Times Magazine article to suggest that Target is selling or otherwise sharing product purchase information on an individual-by-individual basis with third companies. Even so, Target and other companies which are collecting data which may reveal the most intimate secrets of their customers must develop much more robust policies pertaining to the sharing of such data with third parties.

Companies also need to think long and hard about how and where they are storing these vast databanks of sensitive information, what they are doing to protect this information from prying eyes, and also just how long they need to retain this information in order to achieve their marketing purposes. To avoid the kind of controversy which followed the introduction of the Nectar loyalty card by Sainsbury's and other British retailers several years ago, smart companies need to start thinking about how to address these challenging issues today.

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It is likely that the coming year will see a number of legal developments relating to the immunity and liability of corporations, states, and individuals as recognized by U.S. courts.  With an increasing number of suits filed against companies for human rights abuses, the question of whether immunity attaches is of great significance.

Courts inside and outside the United States are weighing questions regarding jurisdiction and immunity, and their decisions and arguments will likely be picked up by other courts dealing with issues of corporate responsibility for alleged human rights violations.  

What follows is a brief round-up of some of the most anticipated legal developments in the field of corporate responsibility to keep an eye on during 2012.  In this overview, we look at three key questions under consideration by U.S. and international courts :

1. Can corporations, or their executives, be sued for human rights violations?
2. Does immunity under the Foreign Sovereign Immunities Act reach to corporations, states, and individuals?
   
3. What does international law say about state immunity?

(1) Can corporations, or their executives, be sued for human rights violations?

The answer to the question of whether corporations may be sued for human rights violations under the Alien Tort Statute (ATS) or Torture Victim Protection Act (TVPA) in the U.S. will have serious consequences in terms of corporate liability.  With the Supreme Court preparing to hear arguments in Kiobel v. Royal Dutch Petroleum and Mohamad v. Rajoub on February 28, discussions are ramping up regarding liability and immunity in human rights litigation in U.S. federal courts.  Between the two (consolidated) cases the Supreme Court will be looking at three questions:

1. Whether the issue of corporate civil tort liability under the Alien Tort Statute ("ATS"), 28 U.S.C. § 1350, is a merits question, as it has been treated by all courts prior to the decision below, or an issue of subject matter jurisdiction, as the court of appeals held for the first time. (Kiobel v. Royal Dutch Petroleum)
2. Whether corporations are immune from tort liability for violations of the law of nations such as torture, extrajudicial executions or genocide, as the court of appeals decisions provides, or if corporations may be sued in the same manner as any other private party defendant under the ATS for such violations, as the Eleventh Circuit has explicitly held. (Kiobel v. Royal Dutch Petroleum)
3. Whether the Torture Victim Protection Act, 28 U.S.C. § 1350 note § 2(a), permits actions against defendants which are not natural persons (Mohamad v. Rajoub)

All three questions will be of significant consequence in the field of corporate responsibility.  Until now there was a circuit split as to whether corporations may be sued under the ATS.  Notwithstanding the disagreement of whether a corporation may be sued under the ATS, it is clear that an individual corporate executive may be sued pursuant to the statute.  Thus, depending on the decision of the Supreme Court there may be an increase in suits filed against individuals rather than corporations.  This may lead to the emergence of an additional line of questions regarding individual liability for the actions of a corporation.

Lurking in many of these cases is the question of what exactly comprises the law of nations, which is referenced in the ATS.  Some courts have concluded it is synonymous with customary international law, while others have rejected such an understanding.  A clear definition of what amounts to the law of nations is critical to determining if a claim properly falls within the ATS.  Though not one of the questions presented to the Supreme Court, it will be interesting to see whether the Court addresses it in its decision.

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The announcement by Twitter last month that it is deploying the ability to block tweets on a country-by-country basis in response to government demand for content restrictions has generated an enormous amount of controversy.

Some commentators have accused the company, whose CEO once memorably described it as belonging to the “free-speech wing of the free-speech party,” of giving in to the demands of governments who take a narrow view of the freedom of expression in order to grow their business in lucrative new markets.

Other commentators view the decision as inevitable given that the company has grown to the point that it requires a physical presence outside the United States. This makes both Twitter and its employees vulnerable to jurisdictional assertions by foreign governments, including by democratic governments whose constitutions afford somewhat less expansive free speech protections than does the uniquely American First Amendment.

Still others have welcomed Twitter's development of a mechanism to block certain tweets from appearing in a particular country pursuant to a government request as sparing both Twitter and its users the far worse fate of the site being blocked entirely, as happened in China.

While reasonable people can certainly disagree on whether Twitter's new country-specific tweet blocking abilities are a positive development in principle, what has largely been missing from the public debate is a recognition that the manner in which such policies are implemented has almost as much of an impact on what effect the policy has in the real world.

Developing the ability to block tweets on a country-by-country basis does not necessarily mean that Twitter will honor every request it receives from every government. Twitter may well decide that such requests are only legally binding in countries where it hosts data or where it has employees who can be dragged into court on charges of contempt. Alternatively, Twitter may only accede to requests from governments that have the technical ability to block Twitter without switching off the entire Internet, as Egypt attempted to do at the height to the demonstrations in Tahrir Square.

Factors that are important to consider when reviewing a company's response to government demands for content restrictions include:

• Who exactly within the company is making the decision on whether to honor a government request to restrict content? Are lawyers knowledgeable in the laws of the requesting jurisdiction making the call, or is the decision left to technical staff who may not have the expertise to judge whether a particular request is legitimate?
• What is the internal process for reviewing decisions by frontline staff?
• When if ever might the company challenge the request of the government in court?

All of these factors ultimately have just as much of an impact, in the case of Twitter's recent policy announcement, on the type and number of tweets that will be blocked in a particular country as the bare bones of the policy itself.

Finally, from a technical perspective, it appears that the precise means Twitter has chosen for blocking certain content on a country by country basis allows users to easily evade these restrictions. Twitter reports that it uses a visitor's IP address in order to determine their physical location. Recognizing, however, that IP-based geolocation is not perfect, Twitter allows users to manually specify their location in their account settings. This information appears to be saved in a browser cookie which appears to override IP-based geolocation for all purposes–including country-specific content restrictions. No one has been able to test the efficacy of this feature against Twitter's new country-specific blocking abilities for the simple reason that Twitter has yet to publicly acknowledge blocking a tweet in a particular country. The real test will surely come, however, the next time that the Internet is pressed into service as a platform for organizing antigovernment protests of the kind that rocked the Arab world last year.

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The new IFC Environmental and Social Performance Standards -- in particular, Performance Standard 7 on indigenous peoples -- present a range of management and operational challenges for certain companies. For the first time, the Performance Standard includes a requirement of free, prior, and informed consent (“FPIC”) from indigenous peoples.

The new Performance Standards went into effect in January 2012 and are applicable to a greater number of the IFC’s investments than the 2006 Performance Standards, which only applied to project finance. Notably, the new Standards only apply to the IFC’s new investments, while the the 2006 Performance Standards apply to existing investments. Notably, the Equator Banks will apply the 2012 Performance Standards to new investments, which will result in their application to much of the world’s project financing.

The 2006 Performance Standard on indigenous peoples required “free, prior, informed consultation.” The requirement of consent in the new Performance Standard 7 comes on top of arguably more rigorous and complex requirements in Performance Standard 1 that address engagement with all communities.

Performance Standard 7 requires IFC clients to identify adverse impacts on indigenous communities and develop action plans to address them with the informed consultation and participation of affected indigenous communities. In addition, companies are expected to seek the FPIC of communities when:

• The project will impact the lands and natural resources subject to traditional ownership or under customary use;
• The project will require relocation of communities; or
• The project will significantly impact critical cultural heritage of indigenous peoples.

What is FPIC?  Definitions vary, but the IFC’s definition will be influential. The IFC requires FPIC to be established though a good faith negotiation with the community. In addition, the client should document that there is a mutually accepted process for obtaining consent, and should ensure that there is evidence that the parties agree on the outcome of the negotiations. As we suggested in a previously published report, Implementing a Corporate Free, Prior, and Informed Consent Policy: Benefits and Challenges, this means that companies should:

• Develop a formal agreement on the process with communities;
• Document the process to demonstrate it was followed; and
• Document the agreement, if one is obtained.

In addition, the Performance Standard requires companies to involve indigenous peoples’ representative bodies and members of the affected communities, and provide sufficient time for decision-making. Finally, the process should include vulnerable groups, such as women and youth.

Our conversations with companies indicate that they are grappling with how to best implement the new standards. Many companies are accustomed to engaging in complex negotiations with indigenous peoples, but may need to adjust their practices.  Specifically, they may be required to demonstrate, to the IFC or other stakeholders, that:

• The engagement process used to obtain consent was not imposed unilaterally by the company. The process should be tailored to a particular situation in consultation with the community;
• The process should seek the input of vulnerable groups and involve traditional decision-making bodies – again, precisely how this should be done may be culture and context-specific;
• The community agreed upon the process used to obtain consent; and
• The company has documented the community’s agreement to the project, including the scope of that agreement.

In short, for some companies, the new Performance Standard 7 will require significant changes to company engagement processes. In other instances, it may simply require companies to more effectively document their existing good practices.

Given the controversy surrounding large scale infrastructure on indigenous lands around the world, companies should consider reviewing their practices and filling gaps to ensure they maintain their social licenses to operate, as well as their financing. When conducting such a review, companies should bear in mind that most national laws require consultation, not FPIC, so mere compliance with national law may not be sufficient to meet the requirements of the new Performance Standard.

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