Regulation via Litigation

For all the talk of populism, the Trump Administration is preoccupied with easing federal oversight of big business. It’s done this through attempts to undo regulations and by weakening enforcement of the rules that remain. Sure, there are areas in which it is politically expedient to pretend to be tough on corporate misconduct. That’s what we see with drug prices or the current Boeing scandal, but for the most part companies are getting what they want.

It’s a different story in the courts. In recent days there has been a slew of major settlements and verdicts in which large corporations will be paying out substantial sums to resolve various allegations of wrongdoing.

Purdue Pharma and the Sackler Family agreed to pay $270 million to the state of Oklahoma to resolve a lawsuit relating to the company’s role in the opioid crisis that has taken the lives of more than 200,000 people in the United States. Many more such lawsuits involving other states are expected to follow.

Johnson & Johnson and Bayer agreed to pay $775 million to settle about 25,000 lawsuits involving the blood thinner Xarelto, which they jointly sell. The suits allege that the companies failed to warn patients that the drug could trigger potentially fatal massive bleeding.

A federal jury in California ordered Monsanto to pay $80 million to a man who alleged that he developed cancer as a result of using the company’s controversial weedkiller Roundup. The jury found that Monsanto was liable because it failed to include a warning label about the cancer risk. Monsanto’s parent, the German chemical company Bayer, said it will appeal the verdict. Also under appeal is another Roundup verdict from last year in which the plaintiff was awarded $289 million (lowered by the judge to $80 million).

Many more lawsuits are in the works, in some cases threatening the survival of companies. Pacific Gas & Electric had to file for bankruptcy protection in the face of tens of billions of dollars in potential liability in connection with California wildfires believed to have been caused by its aging transmission lines. A ruling by the Connecticut Supreme Court allowing wrongful marketing claims cases against gun makers may lead to billions in settlements by the industry.

Such litigation is nothing new, but the cases are taking on increasing importance in the fight against corporate misconduct at a time when federal regulation is faltering. The danger is that lawmakers and the courts themselves may curtail the ability to bring these lawsuits. There is not much they can do when the suits are brought by state attorneys general, but class actions may be more vulnerable.

This is already happening in the area of employment law. In 2011 the U.S. Supreme Court dismissed a nationwide gender discrimination suit against Walmart and made it more difficult to get such classes of plaintiffs certified. Last year, in the Epic Systems case, the high court made it easier for employers to use arbitration agreements to block lawsuits over issues such as wage theft.

If litigation goes the way of regulation and there are no effective controls on corporate behavior, we will be in big trouble.

Regulatory Charade

It always seems to take a tragedy to reveal the truth about the regulatory system in the United States. After an explosion at an oil refinery, a massive oil spill, a major outbreak of food poisoning, a coal mine collapse or a train derailment, it comes to light that regulators, rather than being the overbearing bureaucrats depicted by corporate apologists, are often unequipped to exercise adequate oversight of the operations of big business.

That scenario is playing out once again in the wake of two deadly crashes of Boeing’s newest passenger jet. Day after day we are learning more details of how an under-resourced Federal Aviation Administration cut corners in its review of the company’s 737 Max.  The agency, pursuing a new approach that has been in the works for years, delegated key portions of the approval process to Boeing itself, including the assessment of a new software system that has been implicated in the crashes.

Critics have long complained that regulators have frequently been captured by the corporations they are supposed to oversee, meaning that those companies exercise undue influence over the agencies. What’s been going on at the FAA is even more pernicious. Boeing is not just swaying the FAA; it is supplanting it. Rather than regulatory capture, this is regulatory eradication.

The idea that corporations should be allowed to oversee themselves is unwise in general but particularly wrong-headed when it comes to a company like Boeing. The aircraft producer has a long record of safety lapses. This goes back decades. For example, after a Japan Air Lines 747 crashed during a domestic flight in 1985, killing 520 people, Boeing admitted that it had performed faulty repairs on the plane’s rear safety bulkhead.

In 1989 the FAA proposed a then-record fine of $200,000 against Boeing for failing to promptly report the discovery that fire extinguishers on two 757s were faulty.

In 1994 the Seattle Times, after reviewing 20 years of reports submitted to the FAA, concluded that more than 2,700 Boeing 737s then in service were flying with a defective part that could cause the plane’s rudder to move unpredictably, possibly turning the aircraft in the opposite direction being steered by the pilot.

These kinds of problems continued. In January 2013, after several incidents in which lithium-ion batteries in 787s caught fire, the FAA ordered the grounding of all U.S.-based Dreamliners. The head of the National Transportation Safety Board accused the company of having submitted flawed safety test results on the batteries.

This history apparently did not factor into the FAA’s decision to rely heavily on Boeing during the 737 Max approval process and it did not prevent the agency from resisting calls to ground the jet until pretty much all of the rest of the world took that common-sense step following the crash in Ethiopia.

Shamed into action, the FAA is now behaving more like a real regulator again. Yet this too is part of the typical scenario: when outrage about a deadly incident escalates, an agency acts tough. But this rarely lasts. Once the uproar dies down, the regulators return to their comfortable relationship with the regulated, and the public is once again put at risk.

Shattering Myths About Business and Society

Those who believe that corporate executives are virtuous, government regulators are overreaching, and that we live in a meritocracy have been cringing every time they listened to a newscast in recent days. That’s because two major stories have been shattering myths about the way things work in the U.S. business world and the broader society.

The controversy over whether Boeing’s 737 Max aircraft should be grounded in the wake of a deadly crash in Ethiopia revealed the true nature of business regulation in the United States. Contrary to the image, depicted ad nauseum by corporate apologists, of bureaucrats crippling companies with unnecessary and arbitrary rules, we saw in the Federal Aviation Administration an agency that is essentially held captive by airlines and aircraft manufacturers.

It was only after the rest of the world ignored assurances from Boeing and took the common-sense step of grounding the planes that the FAA finally acted. The agency, its parent Department of Transportation and the Trump Administration had to be shamed into fulfilling their responsibility of protecting the public.

It remains to be seen whether the Trump Administration will temper its anti-regulatory rhetoric after this incident in which it was clear that the country needed more rather than less oversight. Unfortunately, the problem goes beyond rhetoric.

Since taking office, Trump has made it a crusade to dismantle much of the deregulatory system. Left to his own devices, Trump would continue on this path. His new budget proposes massive cuts in the budgets of regulatory agencies, including 31 percent at the EPA.

That budget was dead on arrival in the Democratic-controlled House, but the administration is undermining agencies by rolling back enforcement activity. Public Citizen has been documenting this ploy in a series of reports drawing on data from Violation Tracker. Its latest study shows a 37 percent drop in enforcement actions by the Consumer Financial Protection Bureau, the Federal Trade Commission and the Consumer Product Safety Commission during Trump’s first two years, compared to the final two years of the Obama era.

The other big myth-busting story is the admissions scandal at elite universities. The revelation that wealthy parents have been paying large sums to a fixer who bribed coaches and used other fraudulent means to get their kids into the Ivy League should cause all critics of affirmative action to hang their heads in shame.

It speaks volumes that one of the parents arrested in the case is William McGlashan, founder of The Rise Fund, an ethical investing vehicle managed by the private equity firm TPG Capital. Working with the likes of Bono and philanthropist Pierre Omidyar, the fund says it is “committed to achieving social and environmental impact alongside competitive financial returns.”

Defenders of the fund will attempt to separate its mission from McGlashan’s personal issues. Yet the scandal helps puncture the image of moral superiority projected by those who claim they can do good and get richer at the same time. It gives more ammunition to those who suspect that ethical investing may be little more than a way to ease the conscience of the wealthy with more than their share of misdeeds.

Undoubtedly, protectors of the conventional wisdom are seeking ways to restore support for the notions that regulation is bad and that the rich are good people who earned everything they have. Yet for now, let’s enjoy these moments of clarity.

Resisting the Trump Organization Business Model

A recent 60 Minutes episode provided further evidence of how the pharmaceutical industry successfully pressured federal regulators to allow excessive prescribing of powerful opioids, paving the way for the ongoing epidemic of fatal overdoses. In recent days there have been reports that Purdue Pharma, the company at the center of the crisis, is planning a bankruptcy filing to reduce the risk from the 1,600 lawsuits that have been brought against the company.

These developments illustrate how the main structures that are supposed to deter corporate misconduct – government regulation and the civil justice system – are not up to the task. Despite the endless complaints from the business world about rules and lawsuits, there are in fact few meaningful limits on corporate behavior.

Despite years of evidence showing that many industries dominate and neutralize the government agencies that are supposed to oversee them, the proponents of deregulation all too often carry the day. The current presidential administration has embraced that ideology whole-heartedly and has even tried to promote the idea that relaxed regulation benefits not only corporations but workers and consumers.

Yet there’s growing evidence that what interests Trump most is using regulatory powers to punish his political enemies and reward his friends. That’s the message of new reporting by Jane Mayer in The New Yorker that Trump personally urged the Justice Department to try to block AT&T’s acquisition of Time Warner, apparently thinking that by sinking the deal he would harm Time Warner’s CNN unit and boost its rival, the exceedingly Trump-friendly Fox News.

There were earlier reports that Trump’s criticism of Amazon’s contract with the U.S. Postal Service was an indirect assault on the Washington Post, owned by Amazon CEO Jeff Bezos.

Aside from being an obvious abuse of presidential power, this approach is no better than a “principled” deregulatory stance. While Trump may occasionally direct his ire against companies that deserve to be punished, the vast majority of miscreants will end up being let off the hook.

Many of the same business apologists who criticize regulation also fulminate against lawsuits. These tort reformers don’t explain how else we are supposed to deal with rogue corporations. Nor do they acknowledge that such companies can greatly limit their exposure with the help of the bankruptcy court.

Purdue Pharma would be far from the first corporation to use Chapter 11 in this way. The filing would not shield the company entirely, but it would greatly reduce its financial liability and make it easier to survive the process.

Moreover, the Wall Street Journal pointed out that “Purdue’s assets may not be enough to resolve the company’s potential liability, in part because most of its profits had been regularly transferred to members of the company’s controlling family, the Sacklers.” In other words, much of the corporation’s ill-gotten gains are already out of the reach of the plaintiffs.

When restraints are weak or non-existent, it is more likely that companies will adopt the business model of the Trump Organization, which appears to be that of breaking every rule and cheating everyone it can. Our challenge is to find new ways to fight back.