In order to ensure that victims of business-related human rights and gross environmental abuses in countries that host transnational business (host countries) are able to have the ability to seek and obtaining a remedy for their harm, courts should ignore the separate legal personality of parent corporations operating in countries with weak or corrupt judicial systems where the victims cannot otherwise obtain a remedy against the subsidiary, allowing corporate parents to be held liable for such harm. In such situations, the corporate parents are the entities that can best, and normatively should, remedy the victims’ harm, even if they do not “control” the subsidiary or are directly responsible for the harm. This is because the parent corporations inure great financial benefits through the operation of such subsidiaries often at the expense of nonconsenting, third-parties by externalizing the risks and harms. Moreover, the corporate parents are well aware of human rights risks in these countries, and of the difficulties victims will have in obtaining a remedy if they are harmed.

The doctrine of limited liability of shareholders, deeply ingrained into the law of the United States and many other countries, limits liability of corporate parents just as it does individual shareholders. The only exception is the rare situation where a plaintiff can establish the subsidiary was a mere alter ego of the corporate parent and thus pierce corporate the veil, or where the plaintiff can otherwise establish that the parent is directly liable through the parent’s own action. The doctrine of limited liability applies no matter how egregious the harm, and no matter how much financial benefit the parent receives from the operations of the subsidiary. Such limits on parent liability for a subsidiary’s illegal and harmful actions are not problematic as long as victims can identify the subsidiary causing the harm and can obtain a remedy in the host country. Unfortunately, many victims of business-related tortious conduct that violate international human rights norms live in host countries with ineffectual and/or corrupt government and judicial systems, and often face many additional obstacles in obtaining a remedy against the subsidiary in the host country. Often in these countries, there are no mechanism for victims harmed by businesses’ actions to seek or obtain redress or no statutory or common law basis to bring a claim; victims are unable to collect even if there is a judgment due to lack of funds, underfunding, or bankruptcy; and victims are often unable to identify the subsidiary against which to bring a claim due to the complexity of corporate structure.

Given this juxtaposition, there is increasing recognition that it is unfair that parent corporations receive tax and other benefits from their use of wholly-owned subsidiaries while being able to avoid liability when those wholly-owned subsidiaries engage in human rights violations, even where the parent corporation is not at fault.

Due to this unfairness, a few scholars have argued for various approaches, such as unlimited liability of shareholders or for an “enterprise theory” of liability. Still others have recently argued for a slightly different approach that I term the “due diligence approach”: that there should be a presumption of liability on the part of a parent corporation for extraterritorial acts of its wholly-owned subsidiary, but that the parent can overcome the presumption by showing that it had engaged in “due diligence” efforts to ensure that its subsidiary operated consistently with human rights and environmental standards and was otherwise unaware of the abuses. At least one country, France, has pending legislation that takes a similar approach.

However, while some of these approaches are viable, they each have serious limitations. Unlimited liability, and enterprise liability based on financial control, go too far. Similar to piercing the veil, control-based enterprise liability (to which nearly all enterprise liability theories adhere), and even aspects of the “due diligence” approach, rely on notions of the parent “controlling” the subsidiary in order for victims to obtain a remedy. Additionally, the due diligence approach, in addition to uncertainty about what constitutes “due diligence,” might be too easy to “game,” with compliance officers simply “checking off” boxes. Moreover, similar to veil piercing, the more feasible approaches do not address the underlying inequality and unfairness created by the great financial and tax benefits inuring to the parent at the expense of harm absorbed by these non-consenting third parties. Whether a parent corporation is liable should not depend on whether it controls the subsidiary or whether it has met certain “due diligence standards”; rather, developed countries should be moving toward a system, at least for the most egregious harms, where the entity that receives the greatest economic benefit from subsidiary’s operation is ultimately accountable for the harm when the victims are not otherwise able to obtain a remedy from the subsidiary in the host country.

Finally, with regard to U.S. parent corporations, none of the suggested approaches takes into account the additional barrier created by the 2013 Supreme Court decision of Kiobel v. Dutch Royal Shell.[1] In that case, the Court held that the presumption against a statute’s extraterritorial application, in the absence of Congress stating otherwise, applies to claims of customary international law violations brought under the Alien Tort Statute[2] (under which most torts for violations of international human rights law have been brought). Thus, even if limited liability can be overcome, such as through piercing the corporate veil or through these other suggested approaches, victims of extraterritorial human rights violations still are likely to be unable to hold the parent corporation accountable for a remedy in U.S. courts. Therefore, any solution to the problem of barriers to remedy created by the doctrine of limited liability must also address the barrier created by Kiobel. The solution I advocate does so because it creates a cause of action of sorts that would apply to extraterritorial conduct. This is what I propose:

In order to ensure victims of egregious harms have the ability to obtain a remedy for harm, I propose that for in claims involving customary international human rights violations (such as those brought in the United States under the ATS) and serious environmental torts, limited liability of parent corporations for should be disregarded where that parent takes a majority interest in or creates a subsidiary as part of unified economic enterprise that operates in a “high-risk host country,” i.e., one that has a weak, ineffective, or corrupt judicial system;[3] and (a) victims cannot obtain an adequate judicial remedy in the country due to such corruption, lack of a cause of action, or other judicial or law-related reasons; (b) victims cannot determine what entity is responsible, and thus what entity to hold accountable, given the enterprises’ complex corporate structure; or (c) a subsidiary is underfunded and thus cannot pay any damages resulting from the violations.

Ideally, this should be done through a statutory enactment noting that parent corporations would be liable in the above situations. In the alternative, courts could incorporate this approach in “piercing the corporate veil” analyses, or when considering other theories of liability, such as enterprise liability. Regardless of the exact mechanism, it is time we hold parent corporations, which are well aware of the barriers victims face in obtaining a remedy in many host countries where they operate, and are well aware of the human rights risks in such countries, ultimately accountable for remedying victims’ harms when their subsidiaries engage in, or are vicariously responsible, for violations of international human rights law and gross environmental abuses.

ENDNOTES

[1] 133 S. Ct. 1659 (2013).

[2] 28 U.S.C. § 1350.

[3] The question of whether the country is an-risk country would be a question of fact.

REFERENCES:

William Douglas & Carol Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193 (1929)

Meredith Dearborn, Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups, 97 Cal. L. Rev. 195 (2009)

Robert B. Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 Vand. L. Rev. 1 (1994)

Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. Corp. L. 573 (1986)

Kiarie Mwaura, Internalization of Costs to Corporate Groups: Part-Whole Relationships, Human Rights Norms and the Futility of the Corporate Veil, 11 J. Int’l Bus. & L. 85 (2012)

The preceding post comes to us from Gwynne Skinner, Associate Professor of Law, Willamette University College of Law. An expanded argument for parent company liability for subsidiaries’ actions can be found in Professor Skinner’s recently published law review article, Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law, 72 Wash. & Lee L. Rev. 1769 (December 2015) available here; and in her expert report for the International Corporate Accountability Roundtable, Parent Company Accountability: Overcoming Obstacles to Justice for Human Rights Violations, (September 2015), found here.