The author, a graduate of Brown University and Cornell Law School, successfully practiced corporate law in Manhattan until August 2013, when she left to pursue an accelerated master's degree in nonprofit management at the New School. She received the degree in May.
A corporation is legally defined as that “which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.” [1]Therefore, it is logical that tensions exist now and in the past when arguments arose that a corporation had in fact dual (and oftentimes conflicting) purposes: (1) generating profits for its shareholders and (2) a social responsibility to its stakeholders. Stakeholders are those who affected by a corporation’s business activities, including the general public, labor, the environment, and even local competing businesses.[2]
From its initial introduction in the 1970s to the present, the idea of Corporate Social Responsibility (CSR) has not been popular in the business community.[3] In an interview in 1970 with The New York Times Magazine, famed economist Milton Friedman famously remarked that a corporation “has one and only one social responsibility — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”[4]
During the late 1990s, third party global organizations, including The World Bank, NAFTA, and The United Nations, decided to implement laws making it easier for domestic companies to expand in size and wealth. Creation of the global organizations such as The General Agreement on Tariffs and Free Trade (GATT) encouraged unrestricted free flow of goods, services, and capital between nations that in turn led to the creation of transnational corporations.[5] Today, many transnational corporations (TNCs) earn more money per year than some nations’ gross domestic product (GDP) and employ more foreign workers than population entire countries.[6]
This rapid globalization led to an “inexorable integration of markets, nation states, and technologies to a degree never witnessed before...enabling individuals, corporations, and nation states to reach around the world farther, faster, deeper, and cheaper than before, the spread of free-market capitalism to virtually every country around the world.”[7]
Before the 1990s, corporations on such a global scale did not exist. They were restricted to their borders, meaning that they were severely limited in the ways they could do business, both financially and legally. They could not outsource their labor or their contracts therefore operating costs were always expensive, they were limited in what materials they could use given their location in the world, and they were subject to scrutiny by their state government given their small size and the fact that all of their operations took place in one place.[8]
Incorporation in one place makes it very easy to regulate, scrutinize, and if necessary, prosecute under federal and state law because jurisdiction is easy to determine-it is simply the state of incorporation. After the massive and oftentimes unregulated expansion abroad, however, corporations had many foreign subsidiaries in under developed nations and an untapped labor force that was desperate for work with no knowledge or conceptual understanding of the western ideas of “minimum wage,” “workers rights,” or “human rights.”
To date, TNCs control around 16% of the entire world’s productive assets and employ over 73 million global citizens around the world.[9] The financial power of one TNC is often greater than the annual GDP of some nations. Moreover, each of the twenty wealthiest TNCs earns annual profits that alone exceed the wealth of the eighty poorest countries in the world together. The market value of the top ranking TNCs is in the billions of dollars. For example, Currently, Apple Inc., a United States based TNC is the wealthiest and largest TNC in the world, is listed on the global price indices at $725 billion and 40% of the wealth controlled by TNCs is from those incorporated in the United States.[10]
Most historians agree that the creation of the modern “state” began in 1648 when the Peace of Westphalia ended The Thirty Years War in Europe.[11] This signified the end of the ancient world during which vast territories were ruled by a pope or an emperor, formally dissolved the Holy Roman Empire, and began the current period, in which hundreds of independent rulers control individual territories, each with its own fixed boundary, culture, system of government, economic system, and religion. [12]
The modern “state” has four essential components: (1) a permanent population; (2) fixed borders that it has the right to defend against other states; (3) an autonomous government with independent ruling authority; and (4) the capacity to enter into enter into agreements and treaties with other states autonomously. After World War II, a fifth component, different than the first four in that it is a not a right but an obligation to further the principles and practices of human rights and different also in that it contradicts the principles of self-rule, is now considered a component of statehood.[13]
Every state who is a party to the Universal Declaration on Human Rights agreed, that in today’s global society, accepted limits on sovereignty was worth receiving the privileges gained in becoming a member of the United Nations and the protections and rights associated with that membership.[14]
Most TNCs, despite their global power, massive, wealth, and employment of many hundreds of thousands of workers across the world, have continued to operate under an idea that they are not officially “states” and are not governed by the same laws and regulations that dictate the behaviors of states, specifically the law of nations.[15] Arguments continue between states, third party global governance organizations, European courts, federal courts, and business organizations about how to regulate both the labor practices and overall general practices of TNCs under international law given the now highly complicated foreign subsidiaries and subcontracting networks many of the parent companies employ and the jurisdictional complications that arise. Attempts made at regulation by third party global governance organizations have little to no effect because these global governance organizations often do not have the power to sanction.
Even though The Supreme Court ruled years ago that, for purposes of civil and criminal liability, a corporation should be viewed the same as an individual, United States based TNCs, compared to those based in Europe and Asia, have on the whole been more egregious offenders of labor rights violations abroad[16] Moreover, United States based parent companies now understand that CSR-related public relations based initiatives do attract financial capital but instead of investing money in their own foreign operations, many United States based TNCs instead invest small sums of money in philanthropic based initiatives having nothing to do with their own business endeavors, and then publicize them to the American people as “CSR policies.” This “bait and switch” is a common tactic employed by many United States based TNCs who want to benefit from proven reputational gains associated with CSR but do not want to invest actual dollars into changing their business practices.[17] CSR and charity are two very different topics.
For years, TNCs have take a “reactive” approach to dealing with human rights violations in their labor operations abroad, meaning that once an injury happens, a representative from the parent company steps in. This approach is cheaper, does not address the cause of the injury, fix the problem, does not address the stakeholders affected by the source of the injury or deal with protecting them at all. A reactive approach is concerned only with preserving the reputation of the corporation by silencing the injured party (which involves the signing of a nondisclosure agreement (NDA), paying for his medical care by giving him the lowest dollar amount possible, or, if he is he is dead, paying his family a small sum of money in corporation for their silence.[18]
The opposite of a reactive approach is a preventative approach whereby corporations spend more money before workers begin working on factory equipment, invest in a training program to teach workers how to use it, make sure that workers are treated well and that safe conditions are maintained, pay workers’ a living wage, and maintain a certain standard of care in the hopes that these factors will result in a more productive work force in the long run.[19] After the reforms of the Industrial Revolution, domestic corporations are now legally mandated to act preventatively when it comes to the safety of their workers. However, without government oversight and given free reign, the notion of spending money to protect what was seen by corporations what was seen by many as an unlimited and unskilled resource made no business sense.
When TNCs were in their growth phase, investing money to build safer factories and implementing more stricter and protective working conditions would have halted production and therefore decreased profit. Therefore, from a strictly business sense, by not investing in protective measures, the correct decision was to simply continue to replace injured workers with more workers and continue to move along at a rapid pace. Businesses don’t engage in social responsibility without either fear that their actions are illegal or knowledge that their efforts will lead to an increase in profits.
Most foreign subsidiaries are in developing nations. TNCs made an excellent strategic move when it placed its outside operations in these locations as it often found cheap raw materials and a vast population desperate for work. Developing nations lack financial capital, often have a weak governance structure, have little or no access to the outside world via the internet and the media, and have a large population that is unskilled and needs work.[20] A TNC provides a promise of work, a guarantee of some infrastructure, and immediate flush of financial capital if it can buy large amounts of natural resources in a short amount of time (even if the prices are below market value.) Even if working conditions are prohibitive, there are no other options for thousands of unskilled workers and moreover, there is no access to outside media to even understand western concepts like “workers rights,” “union,” or “minimum wage.”
By securing a developing nation’s raw materials, employing its entire population, and being the only guarantee that its nation will continue to receive financial capital in the future, TNCs often buy not only a state’s population and raw materials but many times buy its sovereignty. Thus, the largest and wealthiest TNCs are now throwbacks to ancient Greece and Rome. Large and wealthy rulers control their subjects from an ocean away with little idea of what is going on and without really caring about anything but production at the end of the day. Very often, workers do not know whom they are working for or what they are doing. As TNCs continue to expand, parent companies are further isolated from any incidents that take place abroad. The largest TNCs today of contracts and subsidiaries working on so many projects that it is more complicated that a Gordian Knot.
For years, corporate attorneys rightfully felt secure that even if a connection was established between wrongful conduct of a foreign subsidiary and a parent company, no federal court could possibly hold a parent company in the United States accountable for a human rights violation of their employee an ocean away. It turns out, however, that federal courts were willing to make that connection.
In 1980 an imaginative legal team realized that a statute not used since 1789, the Alien Tort Statute (ATS), could be used as a means to circumvent the jurisdictional challenge of pleading a foreign plaintiff’s claim in federal court.[21] Although this case did not deal with corporate liability, it did survive a motion to dismiss in federal court putting corporate defendants on notice that a legitimate [22]avenue existed for foreign plaintiffs to sue them in federal court for torts committed abroad.
Despite an initial worry that there would be a floodgate of litigation, ATS litigation merely trickled for years. Only 81 cases were filed between 1980 and 2004 due to a combination of terrified foreign plaintiffs with little resources, powerful defendants, and a heightened pleading standard and an often defendant friendly-court.[23]
The next case of significance was not until 2004. In Sosa v. Alvarez-Machain, the Court held that federal courts [can] hear claims in a very limited category defined by the law of nations and recognized at common law.”[24] Many scholars criticized Sosa, believing that it creating additional causes of action under the ATS not originally intended by the Framers. This is in fact the opposite of what the Court intended to do. In fact, the Court was attempting to limit the use of the ATS by stating that that the Framers meant it was only to be used as a vehicle to keep international peace and that they intended courts to allow it only to used in the same spirit.[25]
Moreover, by specifically notating the causes of actions that the Court will hear under the ATS, it sent a clear message to all circuit courts of the narrow purview of its use. Only cases in which the foreign plaintiff suffered international human rights violation(s) by a corporation and had minimum contacts with the United States would survive a motion to dismiss at the pleadings stage.[26]
In 1996, two groups of Nigerians plaintiffs brought a lawsuit in the Second Circuit against The Royal Dutch Company and its subsidiary, Shell Petroleum, alleging that many of them were tortured and executed by the Nigerian military at the command of the Shell Company. In 2007, one group of plaintiffs settled with The Royal Dutch Company for $15.5 million.[27]
In 2007, The Supreme Court granted certiorari to rule on the issue of “whether corporations are immune from tort liability for violations of the law of nations…or if corporations may be sued in the same manner as any other private party defendant under the ATS.”[28] The Court accepted the case to give clarity to the circuit courts where a clear divide had started in the hearing of foreign plaintiffs’ claims against TNCs for torts committed abroad.
After hearing oral argument from both sides, the Court demurred on the question originally argued and amongst themselves, came up with new legal issues for the two sides to argue. The issue of corporate liability was off the table. Both parties were now asked to argue the case on the issues of whether claims under the ATS are legally valid if they are brought for violations of the law of nations occurring outside the United States and if TNCs can be liable? The Court also addressed the issue as to whether TNCs could be liable on a theory of extraterritoriality.[29] Once again, both sides had to prepare and argue before the Court. When the defendant won, it was not the verdict that was important any longer so much as the process by which it was attained.
When the case of Kiobel v. Royal Dutch Petroleum Co.[30] was accepted for cert on the issue of whether TNCs could be held liable as a matter of law, this holding would have been one of the most significant in the modern era. If TNCs were exempt from international law and controlled the world’s wealth and resources, one can only imagine all of the “worst case” scenarios. Of course, this didn’t happen because the Court realized, better late than never, what they were doing, and so they did the best thing they could thing of other than not accepting the case to begin with-arguing the case on finite points of law in an attempt not to cause any further damage.
The biggest issue in Kiobel is the one not addressed directly, that of corporate liability. Instead of dismissing plaintiffs’ claims on that issue, the Court dismissed them first because of jurisdictional problems, stating that the facts did not overcome the rebuttal presumption of extraterritoriality and then further concluding and then concluding that TNCs are subject to the law of nations (or international law.) Thus, if anything, the opinion is favorable to foreign plaintiffs in that it affirmatively states the Court’s belief that TNCs should be regulated by international law and moreover, that plaintiffs’ claims failed simply because of jurisdictional issues and not because they lacked merit.
In a concurring opinion, Justice Samuel Alito touches on the original issue meant to be addressed, corporate liability, logically stating“[c]orporations are often present in many countries, and it would reach too far to say that mere corporate presence suffices for extraterritorial ATS liability.”[31] Justice Alito reaffirms the basic premise in civil procedure that any first year law student knows that in order to overcome the rebuttal presumption of extraterritoriality (e.g. since the plaintiff lives abroad and the act occurred abroad) the plaintiff must demonstrate that the corporate defendant has more than just a mere “corporate presence” in the forum state and that the corporate defendant’s behavior “touches and concerns” the forum state.
Not surprisingly, Kiobel did not resolve the circuit split or curtail ATS litigation. It provided no bright line rule to circuit courts to determine if a TNC’s behavior either “touched and concerned” the United States or if they had more than a “mere corporate presence” in the United States nor did it provide a list of factors to determine if a plaintiff’s case had sufficient strength to overcome the rebuttable presumption of extraterritoriality. Thus, each case brought before a circuit judge is a matter of first impression requiring no further legal justification.[32]
The Supreme Court’s recent ruling in 2014, overturning the Ninth Circuit’s holding that the Argentinian subsidiary Daimler Mercedes Benz Argentina, “collaborated with state security forces to kidnap, detain, torture and kill certain” employees of Daimler’s Argentinean subsidiary is more troubling than Kiobel in that Daimler is an exclusive importer and distributor in the United States and had several facilities in California, its California contacts could be imputed to Daimler itself and thus clear basis for jurisdiction.[33] The Supreme Court, however, in overturning the Ninth Circuit, found simply having “sizable” sales in a forum is not sufficient to justify the exercise of general jurisdiction, which can only be found if a corporation’s contacts with the state are “so continuous and systematic as to render it essentially at home in” that state.[34] It seems, therefore, that although The Supreme Court reserves the power to hold TNCs liable for their conduct, it is often times not willing to allow federal courts to exercise it.
Although it is still somewhat unclear if an TNC is subject to “the law of nations” most judges in the United States operate under the presumption that domestic corporations are subject to the law and so TNCs are treated the same until a direct ruling from The Supreme Court states otherwise. Since the rapid expansion of TNCs, there have been some positive changes exhibited in their behavior but they have been slow and in most cases reactive. In many cases, TNCs act only when there are immediate threats that the media will disclose unfair labor practices, human rights violations, or other questionable business practices. There is no longer any legal question as to whether The Supreme Court will hear the claims of a foreign plaintiff in court. Only questions of fact remain as to each specific case but there remains doubt as to the willingness of the current Supreme Court to exercise their authority to prosecute corporate defendants.
Despite uncertainty over whether or not they will be prosecuted, there will be a time in the near future or in years from now that the public will demand TNCs be accountable to stakeholder interests. TNCs were created in a time of relaxed trade regulations, reduced oversight, and in a time that did not hold businesses accountable for their actions. Priorities have shifted drastically now. After the 2008 global recession, there is little tolerance now for the exploitation of the very rich at the expense of the very poor, the environment or the world at large. It is only a matter of time before third party auditing of offshore factories, implementation of minimum wage and hour laws abroad, and other regulatory standards are no longer voluntary but required as they are in the United States. TNCs were allowed to grow enormously wealthy and expand quickly but every smart businessperson knows the time to implement a new business model in order to continue to exist. There is a way to reconcile shareholder and stakeholder interests. Those TNCs who invest money now to achieve that balance will be those that succeed in the end game. Those who continue to operate as if business continues to be about the bottom line will not last long in the new world order. As Benjamin Disraeli said, “In a progressive country…change is inevitable.”
[1] See Goddard v. Chaffee, 2 Allen (Mass.) 305, 79 Am. Dec. 796; Sterne v. State, 20 Ala. 46) (1861).
[2] A company’s stakeholders are individuals or groups who are directly impacted by the business’ operations and decisions and can be either potentially benefitted or harmed by the decisions the business makes. See Carlson, J.R., Carlson D.S., & Ferguson M. (2011); See also “Deceptive Impression Management: Does Deception Pay in Established Workplace Relationships?” Journal of Business Ethics, 100(3), 497-514 (2010).
[3] See Thomas McInerney, “Putting Regulation Before Responsibility Towards Binding Norms of Corporate Social Responsibility”, 40 cornell int’l lj. 171, 172 (2007) (For purposes of this article, CSR is simply defined as “a variety of initiatives corporations should participate in from voluntary codes of conduct to programs whereby companies can undergo external audits to verify the adequacy of their practices in a variety of areas of social concern.”)
[4] See Milton Friedman, "The Social Responsibility of Business is to Increase its Profits", The New York Times Magazine, (Sept. 13, 1970.)
[5] See Danailov, Sylvia,“The Accountability of Non-State Actors for Human Rights Violations: the Special Case of Transnational Corporations,” (Geneva, October 1998) (citing studies to show the enormous wealth and power of TNCs today).
[6] See Id. at 45.
[7] See generally Dadgelen, Osman & Recep Yucel,“Globalization of Markets, Marketing Ethics and Social Responsibility,” International Journal of Tech Engineering, 10(5), (2010).
[8] See generally Dadgelen, Osman & Recep Yucel,“Globalization of Markets, Marketing Ethics and Social Responsibility,” International Journal of Tech Engineering, 10(5), (2010).
[9] See Danailov, Sylvia, “The Accountability of Non-State Actors for Human Rights Violations: the Special Case of Transnational Corporations,” (Geneva, October 1998) (citing studies to show the enormous wealth and power of TNCs today).
[10] “Market value” is the share price times the number of shares outstanding. Listed companies do not include investment companies, mutual funds, or other investment vehicles.
Definition provided by The World Bank,
http://data.worldbank.org/indicator/CM.M KT.LCAP.CD/countries
[11] See Danailov infra at 45.
[12] See Id at 45.
[13] See generally U.N. Charter (1945) (Art. 45 (“right to self defense”); Art. 52; and Art. 55 (right to enter into treaties with member nations); Art. 74 (“it is the policy of the UN “to respect the territories” and geographic borders of member states.”).
[14] See generally Art. 1 (The Purposes of the UN are…[T]o develop friendly relations among nations based on respect for the principle of equal rights and self-determination of peoples and to take other appropriate measures to strengthen universal peace…and to be a center for harmonizing the actions of nations in the attainment of these ends.”).
[15] See Danailov infra at 44-47(discussing the various “soft law” international laws that attempt to regulate the behavior of TNCs to date.)
[16] See generally Pembina Consolidated Silver Mining Co. v. Pennsylvania, 125 U.S. 181 (1888) (holding the Fourteenth Amendment, forbidding a State to deny persons equal protection under the law, applies to private corporations as well as to individuals, public agencies, and the government); See also Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819) (holding corporations may contract with other parties and sue or be sued in court in the same way as natural persons or unincorporated associations of persons.)
[17] See generally John M. Conley & Cynthia A. Williams, “Engage, Embed, & Embellish: Theory versus Practice in the Corporate Social Responsibility Movement”, 31 J. Corp. 1,1-2 (2005).
[18] See Kolk, A. 2003, “Trends in Sustainability Reporting by the Fortune Global 250”, Business Strategy and the Environment, 12:270-291 (2003).
[19] See Id at 47.
[20] See Hough, Phillip A., “A Race to the Bottom? Globalization, Labor Repression, and Development by Dispossession in Latin America’s Banana Industry,” Global Labor Journal, Vol.3, No.2 (2012).
[21] The Alien Tort Statute (ATS), 28 U.S.C. § 1350, enacted as part of the Judiciary Act of 1789 and originally intended by the Framers was created to assure foreign governments that the U.S., as a fledgling nation, was partially to prevent and provide remedies for breach of customary international law concerning diplomats and merchants.
[22] See Filártiga v. Peña-Irala, 630 F.2d 876, 878 (2d Cir. 1980) (holding that deliberate torture under color of law violated the law of nations and ruled that the ATS provided subject matter jurisdiction over a human rights claim brought by Paraguayan citizens against a Paraguayan police official for torts occurring abroad).
[23] See Jason Jarvis, A New Paradigm for the Alien Tort Statute Under Extraterritoriality and the Universality Principle, pepperdine law review 30(4) 676-78 (2003).
[24] 542 U.S. 692 (2002).
[25] See Jason Jarvis, A New Paradigm for the Alien Tort Statute Under Extraterritoriality and the Universality Principle, pepperdine law review 30(4) 676-78 (2003) (Legal critics argue that the Court took liberties in interpreting “what the framers” meant in Sosa. However, when examining the history behind The ATS, this argument fails. The Framers created The ATS, primarily, to give aliens the power to sue other aliens in federal court and in doing so, conferred specific jurisdiction over torts brought by an alien in violation of the law of nations. The Founders believed at the time the ATS was drafted that the three principle violations of the law of nations were (1) violation of safe passage, (2) infringement of the right of ambassadors, and (3) piracy-but this was not meant to be an exclusive or finite list and further, these were considered torts by the framers.
[26] 542 U.S. 692 (2002)(holding that the present day “law of nations” would extend to torts that were “specific, universal, and obligatory.”)
[27] See Wiwa v. Royal Dutch Petroleum Co., 226 F. 3d 88, Ct. of Appeals, 2nd Circuit (2000).
[28] See Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010), cert. granted,
132 S. Ct. 472 (Oct. 17, 2011) (No. 10-1491).
[29] See Id. at 14.
[30] Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010), cert. granted,
132 S. Ct. 472 (Oct. 17, 2011) (No. 10-1491).
[31] See Kiobel. V Royal Petroleum Co., 133 S. Ct. 1659, 1669 (2013) (J. Alito, concurring.)
[32] See Id. at 14.
[33] See Daimler AG v. Bauman et al., 134 S. Ct. 746 (2014.)
[34] See Id.
