Deterrence research inquiry

From: RDShatt@aol.com
To: garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu
Sent: 5/3/2012 7:01:09 A.M. Central Daylight Time

Subj: A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes

Dear Dr. Garber,

I have embarked on this project concerning entity level liability versus officer and employee individual liability as a means to try to deter corporate wrongdoing.

I have read with great interest your 2009 article
A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes in the United States | RAND (full pdf text here).

Relative to the subject of deterrence, the article, on pages 22 and 23, says that "general deterrence effects are very difficult to establish empirically." More fully, your article says:

Deterrence of behavior that imposes more risk of injury than is socially desirable is widely accepted, along with compensation, as one of the two fundamental social purposes of a civil liability system.24 The fundamental idea is that civil law—for example, tort law—introduces the possibility of paying damages for injuries and thereb yalters the cost-benefit calculus of potential defendants when making decisions that affect the injury risk to which they expose their customers (e.g., Cooter & Ulen 2000:chapter 8; Kaplow & Shavell 2002:section 5). 

General deterrence effects are very difficult to establish empirically for at least three reasons. First, many of the legal doctrines and procedures of main interest to policy makers—e.g., products liability—vary little across states; thus, estimating deterrence effects by comparing corporate decisions or safety levels across states is not likely to be feasible. Second, in the products context, a product that is marketed nationally generally has the same physical features and carries the same warnings in all states.25 Thus, such decisions are effectively made at the national level, presumably on the basis of an assessment of the overall or average liability climate nationally. Third, researchers cannot observe what potential defendants would have done if the legal rules had been different.26 Thus, specific examples of deterrence effects on particular MLEs would be speculative.

Various failures of deterrence are apparent, however. An important class of  deterrence failures is “under deterrence” namely, instances in which safety-enhancing actions were not taken that, with the benefit of hindsight, would have been socially advantageous (and also in a defendant’s interest). One example is provided by litigation involving hip and knee implants defectively manufactured by Sulzer (Journal of Law and Health 2001-2002). This MLE involved thousands of products-liability claims filed in the late 1990s, and resulted in a global, limited-funds settlement for approximately $1 billion in damages. Serious injuries, litigation, and compensation payments were the result of a manufacturing defect, namely failure by Sulzer (during a limited time period) to clean implants that had been contaminated by oil. Other examples include failure to adequately study injury risks in instances such as breast implants (Angell 1997:54-55) and MER/29 (Rheingold 1968).

I did not find in the article any separate mention of officer and employee individual liability as a means to deter corporate wrongdoing. Given your general view of the difficulty of establishing deterrent effects empirically, it is possible there is little research potential for investigating scientifically a differential deterrent effect of officer and employee individual liability, and there may be no meaningful research on the subject.

In any event, let me ask: Can you cite me any research literature on the subject of the deterrent effect on corporate behavior of imposing officer and employee individual liability?

Thank you very much.

Sincerely,
Rob Shattuck



From: garber@rand.org
To: RDShatt@aol.com
CC: garber@rand.org
Sent: 5/3/2012 2:36:02 P.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Episodes

Rob:

I know very little about the literature on the kinds of liability you are asking about (i.e., "officer and employee individual liability"). I do recall seeing work by Tom Baker (Penn law school) related to D&O insurance—and Tom does get into deterrence effects in some of his work--you might try him. I don't recall seeing anything on holding corporate employees liable, except that DOJ has brought criminal complaints against individuals (high-level—probably all were officers) at Purdue Pharma (a privately held company) about marketing of OxyContin.

Good luck with your ambitious project. Please send me whatever you write when appropriate.

Best,

Steve

From: RDShatt@aol.com
To: garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu, tombaker@law.upenn.edu
Sent: 5/6/2012 8:58:51 A.M. Central Daylight Time

Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

Dear Dr. Garber,

Thank you very much for your quick reply.

My project is trying to draw in an array of significant actors, including lawmakers, regulators, judges, prosecutors, state attorneys general, plaintiffs' lawyers, corporate management, and ethics and compliance professionals.

Regardless of whether there is meaningful scientific research on the deterrence effect of imposing liability on responsible officers and employees for corporate wrongdoing, general knowledge about human nature is suggestive that consideration needs to be given to that, and policymakers and other actors will shape the law or take other action based on what their judgement tells them.

You referred to the Department of Justice. Three Wall Street Journal articles when I started my project last year were suggestive that the Obama administration was possibly shifting to targeting individuals. See this, this, and this.

Punishment inside the corporation of individual officers and employees has been incorporated in Section 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organizations, which provides:

The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

While the deterrence value of individual liability, from society's point of view, needs to be evaluated without other bias, some of the important actors are probably not bias-free. For more on this, see Interim project report. (I am sure your own studies have provided you much insight about the way biased self-interest can affect the consideration, evaluation and implementation of social policy and process.)

To my knowledge ethics organizations such as the Ethics & Compliance Officer Association and the Ethics Resource Center are unwilling to give attention to this subject. I know it is a hard topic to wrestle with. Your own article may contribute to a greater sense of the importance of my subject. Individual liability for corporate wrongdoing continues to be reported in the news. Last month, one Wall Street Journal article reported a "first" criminal case in the BP oil spill event against an engineer who was accused of deleting texts on flow rate, and another article, entitled "Weighing SEC's Crackdown on Fraud," reports that the SEC has charged more than 100 people and firms with fraud tied to the financial crisis, and that, of 74 cases filed against individuals, the SEC went after 55 chief executives. These articles can be found here. This all seems to cry out for thoughtful consideration by ethics and compliance professionals.

I hope I will learn more whether there is anything that the RAND ICJ or CCEG will pick up on here (or I will find they have already explored and written about the same).

I will include Professor Baker to receive a copy of this email and will follow up with him as you suggest.

Sincerely,

Rob Shattuck

From: tombaker@law.upenn.edu
To: RDShatt@aol.com, garber@rand.org
CC: pat@ethics.org, KDarcy@theecoa.org, Paul_Heaton@rand.org, Michael_Greenberg@rand.org, lzicklin@stern.nyu.edu, mpainter@depaul.edu, beqeditor@uncc.edu, tombaker@law.upenn.edu
Sent: 5/6/2012 9:04:13 A.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

I am not interested in being involved with a project that calls itself "combatting plaintiffs lawyers."

From: RDShatt@aol.com
To: tombaker@law.upenn.edu
Sent: 5/6/2012 9:18:22 A.M. Central Daylight Time
Subj: Re: A Framework for Analyzing Influences and Outcomes of Mass Litigation Epis...

Thank you very much for your quick reply, Professor Baker. If there is any critique you would like to make of anything I say in my blog, I will be pleased to post the same.

Sincerely,

Rob Shattuck