Kirsten Jansen
Multinational Corporations and Accountability for Human
Rights Abuses: Beyond Limited Liability
By Kirsten Jansen
“I see in the near future a crisis approaching that unnerves me and causes
me to tremble for the safety of my country. As a result of the war,
corporations have been enthroned and an era of corruption in high places
will follow, and the money power of the country will endeavor to prolong
its reign by working upon the prejudices of the people until all wealth is
aggregated in a few hands and the Republic is destroyed. I feel at this
moment more anxiety for the safety of my country than ever before, even
in the midst of war. God grant that my suspicions may prove
groundless.”1
--Abraham Lincoln, 1864
While Lincoln’s concerns pertained to national corporations, his concerns are no
less valid when analyzing the growing power and presence of today’s multinational
corporations (MNCs).2 According to a 2000 study, of the 100 largest economies in the
world, only 49 are countries, while 51 are global corporations.3 Wal-Mart, the number 12
corporation, is bigger than 161 countries, including Israel, Poland, and Greece. 4 The
aggregate sales of the world’s top 200 corporations exceed more than a quarter of the
world’s economic activity.5 Additionally, the study revealed that over forty thousand
corporations in the world are engaged in activities that cross national boundaries.6
1
Letter from Lincoln to Col. William F. Elkins, Nov. 21, 1864, in The Lincoln Encyclopedia 40 (Archer H.
Shaw ed., 1950) (quoting Beth Stephens, The Amorality of Profit: Transnational Corporations and Human
Rights Law, 20 BERK. J. INT’L L. 45, FN 63 (2002).
2
For the purposes of this paper, Multinational Corporation represents any company that “owns (in whole or
in part), controls and manages income generating assets in more than one country.” (See Peter Muchlinski,
Multinational Enterprises and the Law 12 (1995).
3
Sarah Anderson and John Cavanagh, Top 200: The Rise of Global Corporate Power, at
http://www.globalpolicy.org/socecon/tncs/top200.htm (last visited Oct. 10, 2004).
4
Id.
5
Id.
6
Id.
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Kirsten Jansen
As MNCs grow in number and in wealth, they are gaining commensurate global
and domestic political power.7 In response to the enormous power of these institutions
and their related potential to commit environmental, labor, and human rights abuses,8 the
international community has worked, with considerable success, to establish international
treaties, codes of conduct, and other non-binding agreements that impose international
norms on MNCs.9 However, the enforcement mechanisms for such norms are currently
inadequate10, and the MNC’s ability to insulate itself from liability for human rights
abuses is of particular concern in an outdated legal paradigm that addresses an antiquated
notion of the corporation.11
While limited liability was developed to encourage middle class investment by
limiting individual shareholder liability to the shareholder’s own personal financial
investment in a corporation, public corporation law also demanded that shareholders play
a strictly passive role and removed them from any role in management. This framework
is no longer relevant with respect to the MNC. As Professor Phillip Blumberg notes:
7
See, e.g., Beth Stephens, The Amorality of Profit: Transnational Corporations and Human Rights Law,
20 BERK. J. INT’L L. 45, 57 (2002) (“Economic power carries with it a growing political clout. Corporations
play influential direct and indirect roles in negotiations over issues ranging from trade agreements to
international patent protections to national and international economic policy.”). See also Joel Bakan, The
Corporation, at 27 (2004) (“There has been a transfer of authority from the government…to the
corporation, and the corporation…needs to assume that responsibility…and needs to really behave as a
corporate citizen of the world; needs to respect communities in which it operates, and needs to assume the
self-discipline that, in the past, governments required from it.”)(quoting Sam Gibara).
8
See, e.g., Stephens, at 51-53. (Noting labor violations by Nike; environmental violations by Texaco,
Freeport-McMaron, and Shell; and human rights abuses by Unocal Corporation).
9
See Id. at 69-73 (tracing the development of various treaties and agreements targeting MNC conduct).
10
See generally Id.
11
See, e.g. Phillip I. Blumberg, The Corporate Entity in an Era of Multinational Corporations, 15 DEL. J.
CORP. L. 283, 285 (1990) (“Corporation Law in the United States (and in other countries as well) is
breaking down because of the increasing tension between the conventional view of each corporation as a
separate legal entity, irrespective of its interrelationships with its affiliated corporations…and the economic
reality of a complex industrialized society overwhelmingly conducted by corporate groups: parent
companies, sub-holding companies, and innumerable subsidiaries collectively conducting worldwide
enterprises. The predominance of such powerful multinational corporate complexes is creating irresistible
pressures for the development of new legal concepts to impose more effective societal controls than those
available under traditional entity law reflecting the societies of a century ago.”).
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The reality of our times, which the law must take into account, is that large
multinational corporations with hundreds of public shareholders and corporate
structures of ‘incredible complexity’ dominate the modern business world…the
law has applied a single body of rules for imposition of shareholder liability
without regard to whether the shareholder was an individual or the parent or an
affiliated corporation of a giant multinational complex.12
In 2001 Edwin Black published “IBM and the Holocaust,” a book that documents
IBM’s involvement, through its subsidiaries, with Nazi Germany and occupied Europe,
and his revelations are relevant in this discussion of MNC accountability. 13 In 2002
Black published a second edition of his book14 in which he claims that IBM’s New York
headquarters established a completely separate subsidiary in occupied Poland under the
name “Watson Business Machines.”15 Black asserts that this subsidiary was directly
controlled by its New York parent company.16 IBM’s Polish subsidiary provided Nazi’s
with the technology to, among other things, sort and categorize victims transported to the
Polish concentration camp Auschwitz.17
IBM was not alone in its dealings with Nazi Germany, 18 and at the heart of all
such morally offensive conduct is the pursuit of profit. As one reviewer of Black’s 2001
book pointed out, IBM’s behavior was no different from any other corporation doing
business with Nazi Germany, and it “merely demonstrat[es] ‘the utter amorality of the
12
Id. at 287-288. (Blumberg does, however, note that both the courts and the legislature have begun to
acknowledge the difference between individual shareholder liability and parent-subsidiary liability, he
argues that such developments are in the nascent stages).
13
Edwin Black, IBM and the Holocaust: the Strategic Alliance Between Nazi Germany and America’s
Most Powerful Corporation (2001) (herein after Edwin Black, IBM and the Holocaust).
14
Edwin Black, IBM and the Holocaust: The Strategic Alliance Between Nazi Germany and America’s
Most Powerful Corporation (2002) (hereinafter Black, The Strategic Alliance).
15
Id. at 779. (Kir: check pgs 193 in 1st edition)
16
Id. (Kir: check pgs. 193 in 1st edition)
17
Id.
18
See, e.g. Bayzler and Fitzgerald, supra note 12, at 772 (noting that several U.S. Corporations profited
from the business with the Nazi regime, including Chase Manhattan Bank, Standard Oil, Texaco, IBM,
ITT, Ford Motor Co., and General Motors). See also Joel Bakan, The Corporation, at 87 (2004)
(Discussing General Motors’ German subsidiary Adam Opel AG, which manufactured trucks for the
German army).
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profit motive and its indifference to consequences…many American companies refused
to walk away from the extraordinary profits obtainable from trading with a pariah state
such as Nazi Germany.” 19
It is increasingly recognized that “[l]arge corporations magnify the consequences
of the amoral profit motive. Multiple layers of control and ownership insulate individuals
from a sense of responsibility for corporate actions.
The enormous power of
multinational corporations enables them to inflict greater harms, while their economic
and political clout renders them difficult to regulate.”20 One scholar appropriately points
out that very few of the executives doing business with the Nazi regime were ever forced
to witness the human consequences of that business.21
This note calls for the elimination of limited liability, as it exists today, in the
context of MNC tort liability. In an effort to encourage MNC respect for human rights
and international norms, this note argues that modern corporate law no longer adequately
serves the needs of society, and that while the development of corporate personhood
originally focused on corporate rights, the growing power and wealth of the MNC
requires a shifting focus on corporate duties. 22 This note argues that enterprise analysis
should be used to determine both MNC tort liability and MNC jurisdictional issues under
the Alien Tort Claims Act.23
This note also calls for the adoption of a corporate legal paradigm that reflects
values beyond profit alone. Though this note makes no argument that corporations
should be actively pursuing social causes, it does argue that comparative systems of
19
Stephens, supra note 5, at FN 1. (Richard Bernstein)
Stepehens, supra note 5, at 46.
21
Id.
22
Blumberg, supra note 9, at 285.
23
28 U.S.C.A. § 1350 (2000).
20
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corporate law call for greater social accountability of the corporation, and that such
increased accountability is more appropriate in light of the immense wealth and power of
the MNCs. Such a paradigm shift, however, necessitates the whole of society’s input,
and informed input will require greater exposure to the human consequences of corporate
conduct.
Part I of this note will explore the evolution of the three distinct philosophies of
the corporation as a separate juridicial unit
24
and the concept of limited liability in U.S.
corporate law.25 This discussion will provide an economic analysis of limited liability,
including the economic objectives of the corporate form and the related reduction in
transaction costs through the legal construct of limited liability. However, this note will
argue that the current framework fails to address the reality of modern multinational
corporations and that limited liability in this context externalizes corporate risks at the
expense of involuntary stakeholders.
Finally, this section will compare enterprise
analysis to entity analysis and argue that enterprise analysis is the more appropriate
analysis in the context of MNCs.
Part II will explore the Alien Tort Claims Act26 as a vehicle for foreign victims of
human rights abuses by U.S. MNCs to gain access to U.S. courts. This section will focus
on the challenges such victims face in establishing personal jurisdiction. Specifically,
this section will critique the courts’ use of “control” to establish parent-subsidiary
liability27, arguing that the concept of control, while applied very rigidly by the courts, is
See Blumberg, supra note 9, at 291-299 (discussing the corporation as an “artificial person,” a
“contractual” relationship, and a “natural entity).
25
Id. at 322-329.
26
28 U.S.C.A. § 1350 (2000).
27
See, e.g., Timo Rapakko, Unlimited Shareholder Liability in Multinationals, 374-375 (1997) (listing the
factors courts consider when analysing parent-subsidiary control as taken from F. Powell, Parent and
Subsidiary Corporations, 9 (1931)).
24
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much too amorphous a concept to allow for any meaningful results. Applying enterprise
analysis, on other hand, provides a more concrete result.
Part III will examine in greater detail the facts surrounding IBM’s business
relationship with Nazi Germany, and in light of the discussions in Parts I-III, it will
provide an analysis of how those facts might play out under enterprise analysis in an
ATCA litigation.28
Part IV of this note will explore the nature of the corporate duty to maximize
shareholder wealth and will confront the human consequences of such a pursuit when the
corporation rejects human rights considerations. Part V will offer a conclusion.
Part I: The Corporation as a Legal Institution and the Function of Limited Liability
A. The Three Theories of the Corporation as a Separate “Juridical Unit”29
While the corporation has received historical recognition as a “separate legal
personality” from that of the shareholder, its exact nature as such has often been
debated.30 U.S. corporations’ status as a separate legal unit has evolved around three
different philosophies.31
Initially, corporations were instruments of the legislature,
created and chartered by the legislature for very narrowly tailored purposes, such as the
building of railroads.32 As state creations, they “ow[ed] their existence to state action,
rather than to the acts of its shareholder-incorporators.”33
There are potential issues here with the decision in Am. Ins. Ass’n v. Garamendi, 123 S. Ct. 2374 (2003),
in which the court struck down a California statute that threatened to rattle the German settlement program
related to the Holocaust. However, that case would not necessarily preclude those from litigating against
IBM.
29
Blumberg, supra note 9, at 293.
30
Id. at 291.
31
Id. at 292.
32
Id.
33
Id.
28
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Under this initial conception of the corporate juridical unit, typically referred to as
“artificial person” theory,34 lawmakers and jurists granted “core” rights to corporations,
including “the capacity to sue and be sued, to hold and transfer property, to have a time
of existence…all separate [rights] from individuals or others who might own its shares
from time to time.”35 Beyond these core rights, the corporation had no additional rights
but for those granted by the state in its charter, in contrast to the “fuller panoply of legal
rights possessed by natural persons.”36
The “artificial person” theory of the corporation gradually gave way to a theory
that derived from jurist’s contemplation of the new Constitution, and Supreme Court
decisions grew to reflect their consideration of corporate rights in this new constitutional
context.37 This second theory, known as the “contract” theory, viewed the corporation as
“an association of individuals contracting with each other in organizing the
corporation.”38
While the states had previously played a more active role in
incorporating organizations, this new theory resulted in a growth of general incorporation
statutes, which led to decreased involvement by the state, as incorporation was left to the
incorporators and shareholders.39 While this theory provides that the “constitutional
Id. Blumberg warns against confusing “artificial” person concepts with corporate personhood, the latter
of which is a much stronger “entity” view of the company. He quotes Chief Justice Marshall’s description
as an accurate elucidation of the “artifical” person theory he’s discussing: “A corporation is an artificial
being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it
possesses only those properties which the charter of its creation confers upon it, either expressly, or as
incidental to its existence.”(Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 636
(1810).
35
Id. at 286. .
36
Id. at 293.
37
Id. at 294.
38
Id. at 293.
39
Id. Blumberg quotes Justice Field’s elucidation of this theory: “Private corporations are, it is true,
artificial persons, but…they consist of aggregations of individuals united for some legitimate business…It
would be a most singular result if a constitutional provision intended for the protection of every person
against partial and discriminating legislation by the states, should cease to exert such protection the
moment the person becomes a member of a corporation.” (The Railroad Tax Cases, F. 722, 743-44
34
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rights of the shareholders are attributed to the corporation because ‘the courts will always
look beyond the nature of the individuals whom it represents,’” it does not follow that the
corporation still does not enjoy its historical “core” rights, separate from those of the
shareholder, nor did it follow that individual shareholders could somehow invoke those
“core” rights.40
The third theory of the corporation as a separate juridicial entity characterizes the
corporation as an “organic social reality with an existence independent of, and
constituting something more than, its changing shareholders.”41
This view of the
corporation is also known as the “natural theory, “the real entity,” or “realism” theory and
is the prevailing modern view.42 The “real entity” concept grants corporations their own
rights akin to those granted natural persons and separate from and beyond those
associated with its state created rights shareholder interests.43
While there is considerable debate over which of these theories should prevail in
our legal regime44, the corporation, in fact, embraces all three of these notions, and as one
scholar pointed out, “Max Weber came closest to capturing this ambivalence by treating
collectivities only as ‘ideas’ in the heads of judges…while at the same time assigning
them ‘a powerful, often decisive, casual influence on the course of action of real
individuals.’”45
(C.C.D. Cal. 1882), writ of error dismissed as moot sub. nom. San Mateo County v. Southern Pac. R.R.,
116 U.S. 138 (1885); Santa Clara v. Southern Pacific R.R., 18 F. 385 (C.C.D. Cal. 1883), aff’d, 118 U.S.
394 (1886)).
40
Id. at 295.
41
Id.
42
Id.
43
Id.
44
Id. (drawing from Teubner, Enterprise Corporatism: New Industrial Policy and the Essence of the Legal
Person, 36 AM. J. COMP. L. 130, 138 (1988)).
45
Id. at 295-296 (quoting Teubner, Enterprise Corporatism: New Industrial Policy and the Essence of the
Legal Person, 36 AM. J. COMP. L. 130, 138 (1988)) (citing M. Weber, Economy and Society 13 (1978)).
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However, the adoption of these various philosophies by the courts reflect societal
norms at various points in history and have, to a large degree, informed the development
of entity law, which in turn has been reinforced through the legal construct of limited
liability.46 In fact, this third phase of the corporate juridicial unit viewing the corporation
as a “’real entity’ with its own interests transcending those of its shareholders…has
dominated corporate law for decades” and has led to the growth in both the number of
corporations and the size of corporations.47
However, this “real entity” concept of the
law has gone unchallenged while courts have grappled not with the idea of the “real
entity” itself, but rather, with just how many additional rights beyond the “core” rights
should be extended to it.48 Under the “real entity” view, “[c]orporations have been
assumed to be equivalent to each other. The corporation has been seen as the equivalent
of the firm conducting the enterprise, and the shareholders as investors not engaged in the
conduct of any portion of the enterprise for their direct personal account.”49 While that
view may have been relevant in the early development of corporations, such a view is no
longer relevant or useful when the law allows for “organization of corporate groups
without express authorization by statute or special charter.”50
Of particular relevance to this note is the assertion that when corporations are
members of a larger corporate group, the corporation and the enterprise are no longer
“identical.”51 The reality of the growth of multinational corporations involving multiple
businesses is that the group of corporations forming the enterprise is run “collectively by
46
Id. at 297.
Id.
48
Id. at 325
49
Id. at 326 (Bloomberg distinguishes, however, between small corporations where “shareholders may be
managers as well as major investors,” and large corporations, where such management by shareholders is
not likely to exist.)
50
Id.
51
Id.
47
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the coordinated activities of numerous interrelated corporations under common
control.”52 Under the law, corporations such as Mobil Oil Corporation are viewed as
being comprised of hundreds of legally separate corporations, while the reality is that the
corporations actually represent a single enterprise acting in a coordinated manner under
common control.53 It is this modern disconnect between the law governing corporations
and the reality of MNCs that implicates the relevance of limited liability.
B.
Limited Liability and the Multi-National Corporation
1.
History
To argue effectively for the abolition of limited liability in the context of MNC
tort liability, it is necessary to first analyze the evolution and function of limited liability
in American corporate law.
In the mid-1800’s, the railway construction business was booming, but the capital
investment required for such projects was typically more than the wealthy businessmen,
on their own, could provide.54 Therefore, businessmen soon flooded the market with
Railway stocks in an effort to fund the construction, and for the first time, middle-class
people began to invest in corporate shares.55 However, at that point, the public was also
discouraged from investing to that extent that investors were held personally liable,
52
Id. Blumberg notes that while law concerns itself with the separation of the different corporations within
the enterprise, economists concern themselves with the economic health of the enterprise as a whole. He
also asserts that judicial decisions have grown to reflect this concern with economics, noting that parentsubsidiary relationships have been pierced in tax cases and in stream-of-commerce cases where it was
established that the parent participated in the economic activity n question at “an earlier stage” even when
such conduct was unrelated by ownership or control.
53
Id.
54
Bakan, supra note 36, at 10-11.
55
Id. at 11.
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“without limit,” for the company’s debt.56
To fuel industrial expansion, both
businessmen and politicians began to lobby for the concept of limited liability, under
which an investor’s liability would be limited to that which he or she initially invested,
and nothing more.57 Advocates of limited liability claimed that the limitation would
attract large numbers of middle class investors to share in the investments of their
wealthier neighbors, which would, in turn, “mean that their self respect [would be]
upheld, their intelligence encouraged and an additional motive given to preserve order
and respect for the laws of property.”58
Critics in both America and England, however, objected to the theory of limited
liability on moral grounds.
One British parliamentarian spoke out against limited
liability, claiming it would vitiate “[t]he first and most natural principle of commercial
legislation…that every man was bound to pay the debts he contracted, so long as he could
do so,” and that it would “enable persons to embark in trade with a limited chance of loss,
but an unlimited chance of gain,” and would lead to a “system of vicious and improvident
speculation.”59 Despite these criticisms, limited liability was adopted by legislatures
across the nations through the second half of the nineteenth century.
56
Id.
Id.
58
Id. at 11-12 (quoting the Select Committee on the Law of Partnership, 1851, B.P.P., VII, vi (as cited in
Rob McQueen, Company Law in Great Britain and the Australian Colonies 1854-1920: A Social History,
P.h.D. thesis, Griffith University, p. 137)).
59
Id. at 12-13. Bakan also notes Gilbert and Sullivan’s satire of the corporation in Utopia Ltd, in which
the lyrics read:
“Though a Rothschild you may be, in your capacity,
As a company you’ve come to utter sorrow,
But the liquidator’s say, ‘Never mind—you needn’t pay,’
So you start another company tomorrow!”
57
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2.
The Economics of Limited Liability
The American corporation operates within a market system. Private property
rights are inextricably linked with corporate law and provide a necessary backdrop for the
introduction of transaction costs.60 For the purposes of this note, property rights and
limited liability will be viewed through the lens of economic efficiency, which, though
often criticized as an unsatisfactory social norm, nonetheless provides a useful contrast to
strictly moral discussions, particularly since economics, law, and social norms are highly
interactive.
One scholar suggests that the privatization of property results in reduced
transaction costs, which benefit society as a whole.61
He views transaction costs as
“crucial element[s] in all legal policy analysis,” asserting that all economic conduct
consists of transactions and that each transaction has an associated cost, which include
the costs of “finding potential contracting parties…identifying good[s] and/or services in
the transaction, [] disclosing terms at which one is willing to deal, [] conducting
negotiations, [] drafting the contract, and [] enforcing the contract.”62 The logic behind
any contract is that both parties will gain from the exchange and that society on the whole
will benefit to the extent that all of these costs are minimized.63
In the context of private property, the shift from communal ownership to private
ownership has resulted in reduced transaction costs.64 Property rights essentially consist
of two elements: “a right to economic return and a right to control.”65 The economic
60
Rapakko, supra note 43, at 51.
Id. at 44.
62
Id.
63
Id.
64
Id. at 51
65
Id. at 52. Rapakko notes however, that Posner has attributed three elements to property rights:
universality, exclusivity, and transferability. Rapakko describes that “Universality refers to a situation
61
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right of return, however, is balanced by the liability of risk that the owner will not see any
return, a risk that he did not have to bear when the property was community owned.66
Privatization of property increases “individual risk-bearing” because “individuals switch
from bearing an equal portion of the communal risk into bearing personally the total risk
with respect to their property.”67 In fact, because property rights impose on owners the
risk of unforeseeable events, property law differs significantly from both tort and
corporate law, which limit liability to foreseeable risk.68 Any unexpected “hardship” is
suffered solely by the private owner rather than shared with the community. 69 However,
as noted earlier, the private owner is incentivized to maintain the property and thus glean
the returns and profit from any sale, which is said to maximize utility and social
welfare.70
The right to control property entails a related obligation on others not to interfere
with the owner’s rights, thereby eliminating the problems associated with communal
property rights.71
“Thus the difficult issue of how to distribute the jointly owned
products is resolved.
In the absence of private property rights each member of a
community would have to negotiate and contract with all other members.”72
where all resources are owned by someone, the exclusivity to the ability to exclude all others from using
property, and the transferability enables the change of property into more valuable uses.” (concepts from
R.A. Posner, Economic Analysis of Law 34 (4 th ed. 1992)).
66
Id. at 53.
67
Id.
68
Id. at 55
69
Id. at 54.
70
Id. at 53-54. Tapakko notes, however, that utilization cannot be the sole justification for privatization
given the increased risk-bearing and the fact that “incentives can also be provided under a communal
property regime through task specialization and by contracts for the specialized tasks.” (54).
71
Id. at 55.
72
Id. at 56.
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Privatization also reduces the transaction costs associated with
“monitoring and
enforcement of the community rule.”73
Transaction cost analysis reveals not only that privatization of property results in
reduced transaction costs, but also that, with respect to corporations, property rights
governance structures are more efficient than communal ownership governance
structures.74 Such a discussion, however, must first address the corporate form. While
corporate law recognizes a hierarchy that places shareholders on top, the board of
directors “subordinated to shareholders,” and management subordinated to the board o
directors, economists list the hierarchy in the exact opposite order, concerning themselves
more with who controls the organization than who owns it.75 However, property rights in
a corporation are intimately connected with risk allocation and risk-bearing among its
various stakeholders, and therefore, an analysis of the efficiency of limited liability must
begin with a discussion of shareholders.
Limited liability was extended to shareholders to fuel investments in otherwise
extremely risky ventures.76 Due to the high failure rate of entrepreneurial and small
businesses, financing such ventures without the investment of shareholders would require
that lenders charge a risk premium that would be prohibitively expensive.77 By granting
shareholders the right to invest with limited liability, the legislatures encouraged business
investment and growth.78
73
Id. at 57.
Id. at 58.
75
Id. at 131.
76
Id. at 142.
77
Id. at 138.
78
Id. (noting that legislative action is always related to social norms).
74
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Shares of corporations are property rights subject to limitations, for there are
multiple stakeholders in corporations, each with interacting rights. 79 The motivation
behind this “multi-party property right allocation incorporations” may be the economic
incentives which are provided by such rights, and the reduction in transaction costs
provided by the ability to contract for such property rights at a low cost.”80
Shareholder’s property rights in a corporation bear the highest financial risk.81 If
a corporation fails or is ordered to liquidate, the shareholders are last on the pecking order
for recovery of their investment, second to secured debt holders and unsecured debt
holders, as represented in the liabilities column on the corporation’s financial statement.82
Additionally, when the value of a corporation fluctuates, those fluctuations are reflected
in the share price and suffered or celebrated by the shareholders.83 In exchange for
bearing the greatest risk among the corporate stakeholders, the corporate laws also grant
shareholders control of the corporate assets.84
However, in large public companies like MNCs, shareholders usually only hold
small amounts of equity and play a strictly passive role in the corporation.85 In fact,
because shareholders can diversify their risk by investing across a broad range of
holdings, ideally limiting their risk to systemic risk, or that associated with general
market risk on the whole, control for such shareholders across greatly diversified
holdings becomes unmanageable.86
Additionally, shareholders might not have the
79
Id. at 143.
Id.
81
Id. at 146.
82
Id. at 145
83
Id.
84
Id. at 146.
85
Id. at 147.
86
Id. at 149-150.
80
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necessary information to manage specific industries.87 So, while corporate laws “contain
the presumption of shareholder control, …shareholders have the right, as gatekeepers, to
assign control rights to others, and also to assign the task of allocating such control rights
to others,” and in public corporations, the shareholders almost always effect that right.88
The corporate structure of multi-party rights creates a system that significantly reduces
transactions costs by allocating and balancing property rights, financial risk, and control
rights.89
Specifically, limited liability reduces transaction costs in three vital areas: first,
“investor’s contracting costs with co-investors, second, investor’s contracting costs with
potential purchasers of their investments, and third, investor’s contracting costs with the
business.”90 When a business seeks significant financing, it is unlikely to find all of its
financing from a small group of investors, given that investors usually seek to diversify
their investments.91
However, if large numbers of investors each had to contract
individually with a corporation based on their exposure to unlimited liability, the
transaction costs associated with financing businesses would be huge, requiring
continuous negotiation on management and insolvency issues.92
For future investors, the shareholder’s limited liability “provides for standardized
claims to corporate assets, in the form of shares of a corporation, and enables selling and
acquisition of such shares separately from the management of the assets.”93 This in turn
creates a liquid market for the shares, which allows shareholders to sell their shares at a
87
Id. at 150
Id. at 149.
89
Id. at 161.
90
Id. at 426
91
Id.
92
Id. at 427.
93
Id.
88
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cost much lower than if the liquid market did not exist.94 Additionally, limited liability
allows the corporation and the co-investors to avoid having to contractually address the
insolvency risk, which would otherwise require that the wealthier investors be granted
additional compensation with every increase in insolvency risk.95
Limited liability is also economically justified by the fact that, as a general legal
and social policy, shareholders are meant to bear the burden of foreseeable risks. 96 Due
to the fact that shareholders represent the lowest liquidation priority, as long as
shareholders “own a meaningful equity stake in the corporation,”97 the value of that
equity will always “reflect the expected business and liability risks.” 98 The logical
extension of that idea is that the burden of unforeseeable risks, to the extent they either
become foreseeable or are realized, will also be imposed upon the shareholders, in that
the equity value will reflect such a revelation.99
However, to the extent that liability never extends to unforeseeable risks,
involuntary stakeholders in the forms of individuals or communities “will bear risks of
harm for which they may not be compensated.” 100 Rapakko, though, views this inequity
as inevitable, pointing out that if neither shareholders, nor corporations or other
stakeholders have access to information pertaining to the relevant risk, there may be no
single efficient mechanism to regulate and allocate unforeseeable risk, though he also
94
Id.
Id. at 428
96
Id. at 424.
97
Rapakko notes that the externalization of risk becomes a moral hazard in situations in which
“shareholders do not have a meaningful equity stake” in the corporation, which will provide incentive to
“assume a highly risky business strategy on behalf of the corporation.” (425).
98
Id.
99
Id.
100
Id.
95
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notes that society has created several different regimes to address this issue.101 Even so,
it is this externalization of risk that has generated criticism of limited liability,
particularly in light of the size and power of the modern MNC.
While Rapakko’s analysis vindicates limited liability and provides a nice
economic framework within which to consider limited liability, Professor Blumberg and
others have noted that the MNC, in which several interrelated businesses are operated for
a common good, is in no way analogous to the passive shareholder envisioned when
limited liability was adopted.
3. Entity Analysis vs. Enterprise Analysis for Piercing the Corporate Veil
In fact, many scholars have argued that limited liability law, originally established
to facilitate and encourage individual shareholder investment, was addressed primarily at
passive shareholders, while the growing complexity of the MNC concerns a much more
actively involved parent company. This development necessitates a move away from
recognition of a parent company as an entirely separate legal entity from its
subsidiaries.102 These scholars argue that the piercing of the corporate veil cases have
yielded entirely inconsistent decisions.103 A move away from entity analysis and towards
101
Id. at 425.
See e.g., Blumberg, supra note 9, at 285 (proposing the elimination of unlimited liability for firms
within corporate groups); Dent, Limited Liability in Environmental Law, 26 WAKE FOREST L. REV. 151,
178 (1991) (suggesting a “reasonable prudence” test for holding shareholders liable); D. Leebron, Limited
Liability, Tort Victims, and Creditors (updated) (Center for Law and Economic Studies, Columbia
University School of Law, Working Paper No. 48) (arguing for the elimination of limited liability for
corporate subsidiaries); Stone, The Place of Enterprise Liability in the Control of Corporate Conduct, 90
YALE L.J. 1, 74 (1980).
103
David Aronofsky, Piercing the Transnational Corporate Veil: Trends, Developments, and the Need for
Widespread Adoption of Enterprise Analysis, 10 N.C.J. INT’L L. & COM. REG. 31 (1985) (drawing from
Paul Blumberg, The Law of Corporate Groups §1.02, at 8 (1983)) and (noting a case in which a trial judge
stated, “The corporate veil has become a misnomer in modern times…and because the have recognized that
a corporate veil may be pierced for one purpose, but not for another, today’s corporation is multi-veiled.”)
Amarillo Oil Co. v. Mapco, Inc., 99 F.R.D. 602, 603 (N.D. Tex. 1983)).
102
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enterprise analysis would create a much more predictable framework for determining
when to pierce the corporate veil and impose liability on the parent corporation. 104 A
move towards enterprise analysis would not only yield more consistent decisions, but
would also reflect the original purpose of the limited liability doctrine, which was to
satisfy “[a] practical need…for natural persons to be able to pool their capital into
operative business entities while protecting the personal assets of each investor from the
unrelated claims of co-investors and of persons dealing with the business entity.”105
While the limited liability doctrine was established to promote capitalism and
insulate individual investors’ personal assets from liability, the rationale underlying
piercing that veil of limited liability was expressed in Bangor Panta Operations, Inc. v.
Bangor & Arrostook:106 “Although a corporation and its shareholders are deemed
separate entities for most purposes, the corporate form may be disregarded in the interests
of justice when it is used to defeat an overriding public policy.” 107 The concept of
“entity” was initially developed to distinguish the corporation as a separate legal unit
from that of the corporation’s shareholders.108
However, courts have traditionally
extended this distinction to the MNC by insulating the parent company from liability for
its subsidiary’s or affiliate’s actions except in rare cases warranting the piercing of the
104
See, e.g., David Aronofsky, Piercing the Transnational Corporate Veil: Trends, Developments, and the
Need for Widespread Adoption of Enterprise Analysis, 10 N.C.J. INT’L L. & COM. REG. 31 (1985) (arguing
for the use of enterprise analysis in piercing the corporate veil issues involving MNC’s).
105
Id. at FN 7, pg. 33 (quoting Bryant, Piercing the Corporate Veil, 87 Comm. L.J. 299, 299 (1982)
(emphasis added)). See generally Blumberg, The Law of Corporate Groups §1.01.1, at 3-4 (1983)).
106
417 U.S. 703 (1974)
107
Bangor Panta Operations, Inc. v. Bangor & Arrostook, 417 U.S. 703 (1974).
108
Id. at 37. The shareholder-investor is distinguished from the shareholder-parent. See also Blumberg,
supra note 9, at 327 (noting that “unlike the public shareholder-investors in the modern corporation”…the
parent corporation is an active investor and a “major part of the enterprise, engaged along with its
subsidiaries in the collective conduct of a common business under centralized control’).
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corporate veil.109 The trend adopted more recently by some courts and expressed in
recent statutes is to eliminate limited liability where it can be shown that “common
ownership, direction, and unity of economic purpose among corporate affiliates within
the company can be shown.”110
To overcome the burden of this presumption, a
corporation would have to prove that its actions and existence within the enterprise were
entirely unrelated to the alleged claim.111 The benefits to be realized from such an
analysis, it is argued, far outweigh the potential negative effect on investor activity.
Greater liability would call for greater accountability and ideally encourage the MNCs to
take greater responsibility for their subsidiaries’ activities, rather than shifting the burden
to society by evading such accountability.112
Furthermore, such an analysis would
conform to the Supreme Court’s ruling that a parent and its wholly owned subsidiary
“possess identical legal and economic interests as a matter of law.”113
This shifting of duties and obligations among subsidiary and parent corporations
and affiliates is also appropriate in light of the unsatisfactory judicial and statutory
approaches to piercing the corporate veil.114 The statutory approach to corporate liability
Id. at 37. See also Blumberg, supra note 9, at 288 (noting that “the law has applied a single body of
rules for imposition of shareholder liability without regard to whether the shareholder was an individual or
the parent or the affiliated corporation of a giant multinational complex; in effect, a ‘shareholder’ is a
‘shareholder’” and that “identical protection has traditionally been accorded to the shareholder who is
merely an investor in the corporate business and to the shareholder-parent company in a complex group,
which is itself engaged in the conduct of the business of the group, although the relationships of these two
very different types of shareholders to the enterprise are universes apart).
110
Id. at 32. But see Blumberg, supra note 9, at 290 (arguing that courts have not gone far enough in their
application of enterprise analysis, stating that they “typically attribute certain rights or impose certain duties
upon the group…by reason of the activities of its subsidiary only for the purposes of the case at hand, and
thus, they do not question the basis of entity law as they still maintain their recognition of the separate
corporate existence of the controlled company).
111
Aranofsky, supra note 121, at 32.
112
Aranofsky, supra note 121, at 32.
113
Id.
114
See, e.g., Blumberg, supra note 9, at FN 183, pg. 328 (quoting H. Ballantine, Corporations § 136, at 312
(rev. ed 1946, stating that “The formulae invoked by usually give no guidance or basis for understanding
the results achieved.”)).
109
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in the MNC context turns primarily on the definition of “control,” and perhaps even more
importantly, only establishes liability with respect to the issue addressed in that specific
statute. The traditional judicial tests usually require the presence of the following three
factors to pierce the corporate veil: (1) control of the parent over the subsidiary; (2)
inadequate capitalization of the subsidiary by the parent, and (3) the exercise of the
control has resulted in a fraud or injustice or the inadequate capitalization has resulted in
“fundamental unfairness.”115
The courts may also employ the agency doctrine and
impose liability where the affiliate or subsidiary acts as the parent’s agent by doing that
which the parent corporation could have done on its own.116
Under this traditional analysis, however, the test to establish control is
demanding, and courts will analyze several factors117 to determine whether the subsidiary
or affiliate has become a “mere instrumentality” of the parent.118 Rarely is such control
found to exist,119 as the courts have traditionally respected the separate legal identities of
115
Aranofsky, supra note 121, at 38-39; Rapakko, supra note 43, at 373-77.
Aranofsky, supra note 121, at 40.
117
See Id. at FN 30, pg. 38; See also Rapakko, supra note 43, at 374-75. These factors include: (1) stock
ownership by the parent of the subsidiary or affiliate; (2) the sharing of common directors and officers
between the parent and subsidiary or affiliate; (3) the extent to which the parent finances the subsidiaries or
affiliates activities and the extent to which the subsidiary can function on its own; (4) whether the parent
“subscribes to all or most of the capital stock and whether the parent incorporated the subsidiary;” (5)
whether or not the affiliate or subsidiary is grossly undercapitalized; (6) whether the prent pays the
subsidiary’s or affiliate’s expenses, salaries, and losses; (7) whether or not the subsidiary or affiliate does
business solely with the parent company and has no substantial assets but those provided by the parent; (8)
whether the parent the parent treats or describes the subsidiary or affiliate as a department or division
within the parent corporation; (9) whether the officers and directors of the affiliate or subsidiary can
function autonomously from the parent corporation (10) whether the parent corporation has exercised the
formal legal requirements of separate legal incorporation; and (11) whether or not the parent corporation
treats the subsidiary or affiliate assets as its own.
118
See, e.g. Steven v. Roscoe Turner Aeronautical Corp., 324 F.2d 157, 160 (7th Cir. 1963); Allegheny
Airlines, Inc. v. United States, 504 F.2d 104, 112 (7th Cir. 1974), cert. Denied, 421 U.S. 978; CM Corp. v.
Oberer Dev. Corp., 631 F.2d 536, 538 (7th Cir. 1980).
119
See, e.g. Lowendahl v. Baltimore & O.R.R. Co., 287 N.Y. S. 62, aff’d, 6 N.E. 2d 56 at 76. (ruling that
control required complete domination of business policies and management, and not mere ownership of
stock, and that such control must have been used to commit fraud.)
116
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the parent and subsidiary or affiliate except in cases where that recognition would
circumscribe public policy or cause an injustice.120
Conversely, in enterprise analysis, the existence of “control” is presumed, as the
coordinated activities of the operations and resources of the affiliates and subsidiaries
serve to benefit the entire enterprise or group as a whole.121
Therefore, while the
existence of control may be separated from the exercise of control in the statutory
context, and while the establishment of control is even more demanding in the judicial
context, enterprise analysis argues that such control is, in the context of corporate groups,
established as a presumption.122 The application of control to conglomerates, however,
presents a different problem. Where the affiliate or subsidiary corporations are engaged
in entirely different industries or businesses, such a group demonstrates the potential
weakness of the application of enterprise theory to all corporate groups. 123
In this
situation, the application of limited liability to parent corporations seems much more in
line with the original purpose of the doctrine, as the corporation and all its members are
restricted with regards to their access to knowledge and their ability to evaluate risks.124
Even in the context of conglomerates, however, control under enterprise analysis
seems to present an efficient model with respect to the corporate group’s exposure to
120
See Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 at 435, 438-41 (1980) (ruling
that in certain multinational companies, “many of these subsidiaries and affiliates…engage in business
activities that form part of [an] integrated…enterprise…a’unitary business’…[supporting] the conclusion
that most, if not all of its subsidiaries and affiliates contribute to appellant’s worldwide…enterprise.”); See
also infra, at 22.
121
See Blumberg, supra note 9, at 329-30.
122
Aranofsky, supra note 121, at 331-32. (noting that the exercise of control, where necessary on a caseby-case analysis, turns on the “extent of centralization or decentralization” which, in the context of the
corporate group, is no more than “a tactical decision of the moment as to management techniques).
123
Blumberg, supra note 9, at FN 180, pg. 327.
124
Id.
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liability for the torts of the others.125 Using the presumption of control in the group
would necessarily prohibit some corporations from analyzing and “segregating corporate
risks.” As such, any blanket application must address this economic inefficiency and
demonstrate that the reduction in potential investments would be outweighed by the
benefits of imposing liability.126
Where conglomerates are concerned, the blanket
imposition of liability for costs arising from “one economic activity upon unrelated
activities in other areas” would create the externalization of costs. However, such costs
would be limited to only those assets beyond which the perpetrating constituent is unable
to cover a tort award of damages.127 Thus, any negative impact would be limited to
conglomerates and further limited by the boundaries of the situation addressed above.128
Conversely, in the non-conglomerate scenario, it is highly beneficial to impose liability
among the constituent parts of the group for the torts of any of its members, as such
liability would force the corporate group, and hence any MNC, to internalize the costs
that it was otherwise able to externalize to society.129 Moreover, the availability of
insurance may cover such torts.130
In fact, some scholars argue that unlimited liability should be applied to all
corporations in the context of tort law, noting the rising value of tort claims and the
125
Id. at 341-42. Blumberg distinguishes between the application of this concept to tort law and other areas
of law, suggesting that it may not always be economically efficient to impose liability.
126
Id. at 342. See also Aranofsky, supra note 121, at 43.
127
Id. at 343.
128
Id.
129
Id. See also Henry Hansmann, and Ranier Kraakman, Toward Unlimited Liability for Corporate Torts,
100 YALE L.J. 1879, 1879 (1990-1991) (noting that limited liability creates “incentives for excessive risktaking by permitting corporations to avoid the full costs of their activities,” but that noting also that such
incentives are accepted as the price for facilitating capital financing for corporations).
130
Blumberg, supra note 9, at 342.
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possibility that such claims will exceed the net worth of even the largest corporations.131
When applying unlimited liability to publicly held firms, a categorization under which
most MNCs fall, there are several elements to be considered. There are a large number
of passive shareholders, a large number of assets involved, and a market for freelytrading stock. There also exists the potential for tort liability to far surpass even the assets
of the largest corporations.132 Many economists and lawyers alike have argued that the
maintenance of a highly liquid market necessitates the doctrine of limited liability. They
argue that the imposition of unlimited liability would not only create unmanageable
transaction costs,133 but would also be impossible to administer, without necessarily
achieving the desired effect of giving greater incentives to managers to improve firm
policy.134 Two scholars have argued that unlimited liability is achievable under an
“information-based rule”135 and that collection of such an award would not be
prohibitively expensive. This note suggests, however, that the passivity of the individual
shareholder-investors and asymmetry of information between the corporate managers and
shareholders, somewhat analogous to the conglomerate scenario mentioned earlier,
unfairly imposes liability and raises transaction costs substantially. Conversely, the
131
See, e.g., Henry Hansmann, and Ranier Kraakman, Toward Unlimited Liability for Corporate Torts, 100
YALE L.J. 1879, 1880 (1990-1991) (recognizing the potential for mass awards in environmental harms,
product litigation, and tort cases and arguing that unlimited liability would “eliminate the inefficient
incentives associated with limited liability).
132
Id. at 1894.
133
See, e.g., infra, pgs. 15-20.
134
Id. at 1895.
135
Id. at 1897 (arguing that liability of individual shareholders should attach “at the earliest of the
following moments: (1) when the tort claims in question were filed; (2) when the corporation’s
management first became aware that, with high probability, such claims would be filed; or (3) when the
corporation dissolved without leaving a contractual successor”).
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MNC exercises control and has access to information such that it should assume liability
for the torts of its constituent members.136
Part II: The Alien Tort Claims Act and Multinational Tort Liability
1. Substantive Issues
The economic realities governing the global distribution of wealth provide the
MNC with incentives to exploit the natural resources, property, cheaper labor, and more
lenient environmental and safety regulations often associated with developing countries.
In fact, many governments in developing countries are financially motivated to increase
foreign direct investment, often at the expense of the health of its citizens. 137 When these
citizens become the victims of a corporate tort, there is often little to motivate foreign
governments to enforce the rights of their citizens against the corporation, or indeed
against the government’s protection and facilitation of that corporation’s conduct. The
citizens, in recent cases, have attempted to use the Alien Tort Claims Act to gain access
to the American judicial system.138
The ATCA provides foreign citizens with a venue to assert claims against the
foreign subsidiary or affiliate of a MNC where such a claim alleges violations of
customary international law and where the courts can establish either personal or general
jurisdiction over the defendant.139 Though the statute was basically inactivated for nearly
200 years, it was invoked in 1980 after a young man was tortured to death in Paraguay
136
See infra, pg. 26.
See Bhopal disaster and Unocal cases, among others.
138
See, e.g. the Unocal case.
139
Beth Stephens, Corporate Accountability: International Human Rights Litigation Against Corporations
in U.S. Courts, in Liability of Multinational Corporations Under International Law, Volume 7 at pg. 210
(edited by Menno T. Kamminga and Saman Zia-Zarifi, Klumer International 2000).
137
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and his family discovered that his torturer had moved to New York.140 The appellate
court rejected the lower court’s dismissal and, in Filártiga v. Peňa-Irala,141 ruled that the
statute allows aliens to sue for violations of international law around which the court
“found an international consensus.” The court then ruled that the torture of a citizen by
an official of his government is recognized by the international community as a violation
of international law.
In 1992, the U.S. Congress enacted the Torture Victims Protection Act
(TVPA)142 and extended protection to US citizens under international violations of
torture or summary execution. While the statute extended civil remedies to U.S. citizens
and endorsed the Filartiga decision, it also required that the underlying violation “be
committed under actual or present authority, or color of law, of any foreign nation.”143
However, accountability has been expanded to reach those in a commanding position
who “planned, ordered or directed human rights abuses, or who knew or should have
known about the abuses and failed to prevent their occurrence or punish those
responsible.”144
Though the “commanding position” liability pertains to government officials, an
argument can be made that where a corporation wields enormous economic and political
influence, the corporation should itself be deemed a State actor. This is relevant to the
argument that limited liability should be eliminated in the context of MNC tort violations.
The enterprise analysis addressed earlier requires the MNC to take responsibility for all
of its members’ tortuous actions, and as such, presumes the parent exerts control.
140
Id.
630 F.2d 876 (2d Cir. 1980).
142
28 U.S.C. § 1350 (note) (1992).
143
Stephens, supra note 156, at 212 (quoting TVPA, section 2 (a)).
144
Id. at 214.
141
26
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Analogously, then, a parent corporation could be held accountable for the actions of its
subsidiaries where that subsidiary is acting as a State and the parent is in a “commanding
position.” The requisite knowledge would be presumed.
In its language directing U.S. federal courts to assert jurisdiction over torts
concerning the violation of the “law of nations,” the ATCA has been interpreted to
include any violation of international law norms that are recognized as universal,
obligatory, and definable.145
Violations recognized under this standard include
disappearance, summary execution, prolonged detention, genocide, war crimes, crimes
against humanity, slavery, and “certain acts of cruel inhuman or degrading treatment, and
gender violence such as rape.”146 The language of the statute allows for additional claims
as norms develop to support such claims.147
U.S. Courts have expanded accountability to include not just public or state
actors, but also private actors and private conduct where the international definition of the
offense includes private actors and conduct.148 Additionally, U.S. courts have extended
the state action obligation to cover private action by following the standards it developed
under 42 U.S.C. §1983, the federal statute “defining violations of constitutional rights by
public officials.”149 Thus, private action will be attributed to the state when the private
actor performs a public function, where the state commands private actors to perform
145
Id at 213 (noting that the standard was first articulated in Forti v. Suarez Mason, 672 F. Supp. 1531 at
1540 (N.D. Cal. 1987).
146
Stephens, supra note 156, at 213. As an aside, it is interesting to note the prolonged detention and
degrading treatment elements given the situation at Guantanamo Bay and the Abu Ghraib prison scandal.
However, given that the statute protects against violations committed by a foreign nation.
147
Id.
148
Id. at 214-15 (quoting Kadic v. Karadzic, 70 F.3d 232 (2d Cir. 1995)) (ruling that violations by de facto
state officials were covered too, as the Torture Convention prohibits acts of torture “inflicted by or at the
instigation of or with the consent or acquiescence of a public official or other person acting in an official
capacity.” The court went on to note that the State action requirement addresses a regime’s ability to “exert
official power over those living under its control, not official recognition.”)
149
Id. at 217.
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public responsibilities, where the state and private actions are so intertwined as to be
undistinguishable, and where the state and private actor are involved in “joint action.”150
Corporations will be liable, just as individual private actors are, when they are
either directly responsible for violations of international human rights norms, or when
they act in complicity with a government or government officials to commit other human
rights violations.151 Additionally, for violations requiring State action, such as torture
and summary execution, the corporation will be held liable when it acts in complicity
with State actors.152 The State action requirement will be satisfied when the corporation
engages in joint action with the government or its official or when it conspires with “or
otherwise act[s] in concert with those officials.”153
2.
Procedural Issues
Foreign citizens seeking access to U.S. courts through the ATCA must still
overcome jurisdiction restrictions.154 In order to hear the case, the courts must establish
that they have both subject matter and personal jurisdiction over the defendant.155
Subject matter jurisdiction is not much of a hurdle, as state courts of general jurisdiction
assert subject matter jurisdiction over almost any claim brought against a defendant over
whom they have personal jurisdiction.156 Federal subject matter jurisdiction rules are
more restrictive, however, the ATCA grants the federal courts jurisdiction over torts in
violation of the law of nations and therefore grants them subject matter jurisdiction over
150
Id. at 217. The argument can also be made that in certain instances, a corporation may actually wield so
much influence that the corporation itself ought to be considered the State.
151
Id. at 224.
152
Id. Oxford’s American Dictionary defines complicity as “partnership or involvement in wrongdoing.”
153
Id. at 225.
154
Id. at 220.
155
Id.
156
Id.
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any claim that falls within the reached of the statute.157 A foreign citizen seeking access
to U.S. federal courts can satisfy the subject matter jurisdiction requirement by alleging
in her claim “a tort in violation of the law of nations.”158
Personal jurisdiction is more difficult to establish in ATCA cases, and it requires
that the court find it has either general or specific personal jurisdiction over the
defendant.159
To determine whether or not a court has specific jurisdiction over a
defendant, the state courts, though varied in their rules, look to the defendant’s in-state
activities.160 The courts will typically analyze both the nature of the defendant’s contact
with the state and its relation to the litigation. 161
To determine whether or not a court has general personal jurisdiction over a
defendant, the courts look to the defendant’s domicile.162 For private individuals, a court
asserts personal jurisdiction over defendants domiciled within the state.163
For
corporations, courts assert personal jurisdiction over the defendant’s place of
incorporation.164 Additionally, a court can assert personal jurisdiction over a defendant if
the defendant is served with a complaint while present in the state.165 A related notion of
physical presence applies to corporations when the corporation is “doing business” in a
state, and most courts assert jurisdiction over a corporate defendant when it finds the
corporation was “doing business” in the state.166 This concept is a murky one, however,
157
Id.
Id. at 221.
159
Id.
160
Id.
161
Id.
162
Id.
163
Id.
164
Id.
165
Id.
166
Id. at 222
158
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and requires a largely case-specific analysis.167 To establish general personal jurisdiction
over a parent of a MNC on the basis of “doing business,” the court will consider, among
other factors, whether the activities of a subsidiary should be attributed to the parent, and
the in-state activities of an agent of the parent.168
Even if all jurisdictional requirements have been satisfied, courts still have
discretion to dismiss a case based on the doctrine of forum non-conveniens.169 The
Bhopal litigation was dismissed precisely on these grounds, as the U.S. court determined
that the deadly events had occurred in India, the victims were located in India, the
applicable law was India’s law, and the India courts offered a viable alternative. Often at
issue in forum non conveniens dismissals is the applicability of foreign law, the
availability of witnesses and evidence, and the availability of a viable alternative.170 In
cases involving corrupt governmental regimes, the only path for foreign citizens to
achieve justice is through the American court system.
PART IV: IBM and Nazi Germany: Liability under Jurisdiction Enterprise Analysis
Edwin Black was first struck with the idea for his book while visiting The U.S.
Holocaust Memorial Museum with his parents.171 While there, he was exposed to an IBM
Hollerith D-11 sorting machine which used by the Nazi Regime in 1943 to coordinate
167
Id.
Id.
169
David Aronofsky, Piercing the Transnational Corporate Veil: Trends, Developments, and the Need for
Widespread Adoption of Enterprise Analysis, 10 N.C.J. INT’L L. & COM. REG. 31, at 48 (1985) (Forum nonconveniens gives courts the discretion to dismiss cases that, due to reasons of justice or convenience,
should be tried outside of the U.S.)
170
Id. at 49. The argument can be made, however, that to the extent the U.S. courts are exclusively
deciding internationa,l MNC tort cases under ATCA, they are also exclusively defining violations of the
law of nations, which is probably unpalatable to many sovereign nations, as well as scholars within the U.S.
171
Id. at 11.
168
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census data identifying Jewish citizens of Germany.172
IBM’s German subsidiary,
Dehomag, supplied the Nazi’s with custom-made Hollerith D-11 machines, which
utilized punch card technology enabling the Nazi regime to code, track, and identify their
various victims.173 For example, the number 12 represented a Gypsy inmate, while the
number 8 represented a Jewish inmate, and the code D4 signified “that a prisoner had
been killed.”174 Black claims that IBM had full knowledge the Nazi’s were using the
technology towards those ends and that it benefited by pocketing the profits made by its
German subsidiary during the war.175
Black not only asserts that IBM fully realized all of the profits from this
machinery,176 but also that a “senior IBM U.S. representative traveled to Europe to meet
with executives there and arranged for a lease of machines to ‘calculate exactly how
many Jews should be emptied out of the ghettos each day.’”177
In April of 2001, a class action lawsuit was filed in New York against IBM on
behalf of five Jewish survivors, but the suit was dropped when the German government
and industry threatened to slow payments to the German Holocaust Fund.178
Interestingly, a Swiss court has recently agreed to hear the case (Geneva was IBM’s
172
Black, supra note 10, at 8.
Id. at 9.
174
Gypsies to Sue IBM on ‘Nazi Link’, at
http://www.cnn.com/2004/WORLD/europe/06/22/switzerland.ibm.ap.
175
Black, supra note 12, at 778. (Kir- Check pgs. 375-378 of Black book.)
176
Black, supra note 17, at 437. Note, however, that IBM disputed Black’s findings, arguing “We have
seen no proof of that…Facts which had been known for many years were used as the basis of allegations in
the first book, and they seem to be used in similar fashion in the paperback. We’re not convinced that there
are any new findings here.” See Oliver Burkeman, IBM “Dealt Directly with Holocaust Organizers”—
Author Says US Firm had Control of Polish Subsidiary, Guardian (London), Mar. 29, 2002.
177
Id.
178
Bayzler and Fitzgerald, supra note 12, at 784 (noting that the suit named as defendants both IBM U.S.
and its German subsidiary. German companies sought insulation from legal actions before committing to
the fund) (IBM’s German subsidiary ended up paying $3million into the fund but denied that such a
payment constituted liability) (See Anita Ramastary, A Swiss Court Decides to Allow Gypsies’ Holocaust
Lawsuit to Proceed, at http://writ.findlaw.com/ramastary/20040708.html. (last visited Oct. 10, 2004)
173
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European headquarters during WWII).179 The plaintiffs in the case are four Gypsies from
Germany and France, all of whom were orphaned “in the Holocaust after losing family
members in death camps.”180 At least 600,000 gypsies died in the Holocaust, and the
lawsuit “alleges that IBM aided and abetted the mass slaughter of gypsies by knowingly
allowing the Nazis to use its punch-card Hollerith tabulating machines to code, track and
identify Gypsy victims.”181 While a lower court dismissed the case due to lack of
jurisdiction, the Swiss appeals court reversed the decision and concluded that “IBM’s
complicity through material or intellectual assistance to the criminal acts of the Nazis
during World War II via its Geneva office cannot be ruled out,”182 and “a significant
body of evidence indicat[es] that the Geneva office could have been aware that it was
assisting these acts.” According to one prediction, the “suit will turn on whether IBM
was responsible for the way its machines were used during the Holocaust.”183
Interestingly, the Swiss court notes that IBM could have been complicit by
providing intellectual assistance to the Nazis through its Geneva offices. In a way, this
logic is analogous to enterprise analysis in that the Geneva office is seen as one office in
the enterprise, an enterprise in which every constituent part is there to benefit the success
of the whole. In applying enterprise analysis to IBM and its subsidiaries, the parent
corporation is deemed to have “controlled” the subsidiary for the purposes of liability for
any of its subsidiaries’ wrongdoing. This seems entirely appropriate in light of Mr.
Black’s book, which reveals that even though IBM had many subsidiaries throughout the
Anita Ramastary, A Swiss Court Decides to Allow Gypsies’ Holocaust Lawsuit to Proceed, at
http://writ.findlaw.com/ramastary/20040708.html. (last visited Oct. 10, 2004) (I say interesting because this
may be the first time that an action alleging human rights violations by a corporation in WWII was
commenced outside of the U.S., which carries with it broad implications for future human rights cases).
180
Id.
181
Id.
182
Id.
183
Id.
179
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world, Mr. Watson, IBM’s CEO, was actually in correspondence with many of them.184
Certainly, as his correspondence reveals, Mr. Watson was very much involved with
making sure that the subsidiaries were feeding profits back into IBM. 185 Even when, due
to America’s declaration of war, it became impossible for IBM to directly do business
with some of its Eastern European subsidiaries, Black claims that IBM was still able to
influence these subsidiaries by keeping in close contact with its subsidiaries located in
neutral countries.186
The foreign victims of Nazi Germany could file claims against I.B.M. N.Y. and
its German subsidiary here in the U.S. by alleging “torts in violation of the law of
nations.” This would grant federal courts subject matter jurisdiction to hear the case
under several of the internationally recognized violations of international norms,
including prolonged detention, genocide, war crimes against humanity, slavery, and cruel
inhuman treatment.187 It could do so under ATCA by showing that the subsidiary acted
in “complicity” with Nazi Germany officials, as Black documents I.B.M.’s subsidiaries
knowledge of Nazi use of its technologies.188 Additionally, for those violations requiring
State action, including torture, the victims could certainly allege that the subsidiaries
conspired with the Nazi regime or “otherwise act[ed] in concert with those officials.”189
Personal jurisdiction over I.B.M. would be easy to establish, since it is
incorporated in the U.S.190 However, that does not eliminate the possibility of dismissal
due to forum non conveniens, and here, enterprise analysis might aid plaintiffs seeking
184
See, e.g. Black, supra note 10, at 166, 180.
Id.
186
Id. at 376.
187
See infra, pg. 28.
188
See, e.g., Black, supra note 10, at 377-381.
189
See infra, at 28.
190
It should be noted that the issue of personal jurisdiction is increasingly relevant where the MNC is
headquartered and incorporated elsewhere in the world, and its subsidiary in the U.S. is being sued.
185
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access to U.S. courts.191 Courts applying enterprise analysis will “presume that it is
neither unfair nor inconvenient to attribute the conduct or status of one corporate entity to
all of its affiliates who actions are relevant to the litigation.”192 Similarly, courts would
presume that the parent controlled the subsidiary.193
Ultimate liability would most likely rest on this issue of I.B.M’s control over its
subsidiaries (provided the subsidiary itself is found liable), and because the traditional
judicial tests are unrealistically demanding and formalistic in light of today’s corporate
realities,194 enterprise analysis is more appropriate framework in which to consider
liability. Because IBM’s German subsidiary was one constituent part of a larger I.B.M.
whole, and because all of the operations ultimately fed profits back into the enterprise,
control is to be assumed, and to the extent the subsidiary is liable, I.B.M. itself would be
held liable.195
Though Black blames I.B.M.’s C.E.O. Thomas J. Watson for I.B.M.’s dealings
with the Nazi regime, he also believes that “Watson didn’t hate the Jews. He didn’t hate
the Poles. He didn’t hate the British, nor did he hate the Americans. It was always about
the money.”196
PART IV: Tempering the Pursuit of Profit
There are many economists who would argue that I.B.M. and its subsidiary were
conducting themselves as any corporation should. Corporations, after all, have a duty to
191
David Aronofsky, Piercing the Transnational Corporate Veil: Trends, Developments, and the Need for
Widespread Adoption of Enterprise Analysis, 10 N.C.J. INT’L L. & COM. REG. 31, at 49 (1985)
192
Id.
193
See infra.
194
See infra, pg.21, FN 118.
195
See infra, pgs. 30-33.
196
Oliver Burkeman, IBM “Dealt Directly with Holocaust Organizers”—Author Says US Firm had Control
of Polish Subsidiary, Guardian (London), Mar. 29, 2002.
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maximize shareholder wealth.197
Government itself, they argue, must regulate
corporations when that pursuit of profit creates unacceptable results.
For example,
Milton Friedman, a world-renowned economist, argues that “the social responsibility of
business is to increase profits.”198 Likewise, in an interview with Joel Bakan, Friedman
stated, “A corporation is the property of its stockholders. Its interests are the interests of
its stockholders. Now, beyond that, should it spend the stockholders’ money for purposes
which it regards as socially responsible but which it cannot connect to the bottom line?
The answer I would say is no.”199
Anita Roddick, unique in her roles as both founder of The Body Shop and social
activist in the world at large, rejects Friedman’s analysis, blaming the “religion of
maximizing profits” for the legitimization of all activities in its pursuit, including the use
of child labor, the use of sweatshop labor, the destruction of the environment, etc.200
Friedman and Roddick, however, perhaps inhabit two extremes of the spectrum in the
debate on the utility of profit. While this note does not argue that profit is either
inherently moral or inherently immoral, it does argue that the pursuit of profit cannot be
valued, nor should it be legally mandated, at the expense of human rights.
While
Friedman bristles at the idea of using stockholder money to achieve socially responsible
goals, it does not necessarily follow that he believes human rights should be sacrificed in
the pursuit of profit.
The behind-the-scenes profit calculations conducted by many corporate
executives evidences, to an alarming degree, just how far corporations will go in pursuit
197
See infra, pg. 35.
Id. at 62.
199
Joel Bakan, The Corporation, at 34 (2004).
200
Id. at 55
198
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of such profit. For example, in 1993 General Motors was sued when a woman driving a
Chevrolet was rear-ended, causing the fuel tank to explode, leaving her and her four
children severely burned and disfigured.201 During the trial, it was revealed that the fuel
tank had been positioned just eleven inches from the bumper.202 General Motors, it
turned out, was aware of the dangers presented by such positioning. 203 A 1969 directive
had recommended fuel tanks be places at least seventeen inches from the tank.204 When
GM designed its subsequent models, however, the tanks were placed much closer to the
fuel tank and by the early 1970’s there had been over 30 fuel-fed fire lawsuits.205 Still,
GM designed the model that positioned the fuel tank just 11 inches from the bumper.206
Sometime in 1973, GM commissioned one of its engineers from the design division to
analyze the fuel-fed fires.207 In his report, the engineer estimated the potential legal cost
of each potential fatality and compared that against the cost of moving the fuel tanks.208
He calculated the following:209
500 fatalities x $200,000/fatality = $2.40/automobile
41,000,000 automobiles
The cost of making sure the fuel tanks did not explode was $8.59 per automobile.210 The
engineer then subtracted the cost of each fuel fatality to arrive at a total savings of $6.19
per automobile if it allow people to die rather than adjust the tank.211 The jury found
201
See Bakan, supra note, at 61.
Id. at 62.
203
Id.
204
Id.
205
Id.
206
Id.
207
Id.
208
Id. at 63.
209
Id.
210
Id.
211
Id.
202
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GM’s behavior to be morally deplorable and awarded the victims in the suit, Mrs.
Armstrong and her children, $107 million in general damages and $4.8 billion in punitive
damages.212
The judge ruled, “The court finds that clear and convincing evidence
demonstrated that defendant’s fuel tank was placed behind the axle on automobiles of the
make and model here in order to maximize profits- to the disregard of public safety.”213
These calculations are devoid of any exposure to their human consequences,
tough once the jury was exposed to them, the corporation was compelled to change. The
lack of exposure to human consequences of corporate conduct is magnified in the context
of MNCs, where subsidiaries are often doing work in developing countries. The potential
harms inflicted, then, can often go unnoticed but for the most publicized disasters. The
greater exposure we, as a society, have to these consequences, the greater likelihood that
we will compel corporations to change, and perhaps through a change in law.
Conclusion
It is undisputable that MNCs are amassing increasing wealth, power, and political
influence internationally. Corporate law, however, has not evolved commensurately to
adequately address this reality. Limited liability was and still is a useful tool to spur
capitalism and encourage capital investment. However, it was aimed at individual
personal investors who remained passively involved in the corporation. MNCs are not
individual persons, nor are they passively involved in corporate management.
By
insulating parent corporations from the tortious conduct of its subsidiaries, limited
liability externalizes the cost of harmful corporate conduct onto society at large, which is
an involuntary stakeholder in the corporation. Though U.S. labor and environmental
212
213
Id. (This award was later reduced)
Id. at 62.
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regulations and laws address some of this externalization in the U.S., it cannot necessarily
do so internationally, and most international codes of conduct governing corporate
conduct are non-binding. To address this disconnect, limited liability should be
eliminated in the context of MNC torts, and instead, the courts should apply enterprise
analysis, which would presume a corporation’s control over its subsidiary and encourage
accountability. This change, however, may only come about when society as a whole is
exposed to the human consequences of unchecked corporate conduct.
38