Under In re Caremark Int’l Inc. Derivative Litig., directors can be liable for failing to adequately oversee corporate compliance. While Caremark has famously been described as “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” it has been very influential, nonetheless. Much of Caremark’s force is “soft,” making use of extra-legal mechanisms such as norms and pressures from shareholders and other constituencies.

Caremark clearly covers oversight of compliance with law and regulation, but what else might it encompass? What about ethical violations or business risk? Courts have left the door open for a broader scope, particularly as to business risk, but they have not yet gone through that door.  In a new article, I make the case for a broader scope, articulating its rationale and boundaries.

First, notwithstanding the understanding that Caremark as at least covers liability for illegal behavior, there is an argument that some illegality would not lead to liability.  One example is when the corporation disagrees with a finding of illegality, as happened in Melbourne Municipal Firefighters v. Jacobs.  Another, though untested, example is when a corporation’s strategy is to challenge the law, as Uber and AirBnB have done.  Second, in cases where Caremark claims have been most successful, there have been salient and visceral harms to third parties. Prominent examples include In re Boeing Company Derivative Litigation, which involved deadly plane crashes, and Marchand v. Barnhill, which involved tainted ice cream.  Aside from third-party harms, there were reputational and financial harms to the corporations. All these were relevant to the determination of business risk and were arguably as or more damaging to the corporation than legal risk.

A plausible rationale for Caremark is the possibility of third-party harm that would significantly damage the firm. This rationale would support liability for inadequate monitoring for risks that did not implicate illegality.  Some business risks could fit into this category, including business risks associated with ESG. A company’s ESG initiatives may be directed at minimizing future harm, maximizing anticipated regulatory compliance, or avoiding reputational harm. Even so, some ESG initiatives, such as those that relate to diversity hiring goals, may not be appropriately within business risk; extending Caremark liability to those initiatives requires a different and more ambitious analysis than presented here.

There is also a danger that an overly expansive reading of Caremark would unduly chill risk-taking. In contrast to compliance risk, which is to be minimized, business risk is to be “managed”: To make profits, businesses need to take risks. Courts are keenly aware that their expertise is not in making business decisions. They do not want to second-guess directors’ business decisions, nor do they want to discourage capable candidates from considering a board position for fear of being subject to personal liability.

There are three responses to these objections.  One, Caremark is ultimately focused only on process – good process precludes Caremark liability. In addition, good process necessarily involves consideration of risks beyond illegality. Two, alongside Caremark are many federal and state rules, practices, and norms that cover areas beyond illegality, including ethical considerations. Consider the American Law Institute Principles of Compliance’s definition of Compliance Risk:

Compliance Risk. The risk that an organization will experience financial, operational, or reputational losses, legal sanctions, or other negative consequences because of its unwillingness or failure to follow laws, regulations, rules, its code of ethics, its ethical standards, or legally applicable or otherwise binding industry codes of conduct, or to cooperate appropriately with regulators.^[1]

Three,  judicial “sermonizing” has a long history in Delaware. A broader scope for Caremark, like Caremark itself, could work as much through a standard of conduct as a standard of liability, where opinions attempt to shape behavior and practice  through dicta. Caremark expansion need not chill well-considered risk-taking.

What sorts of conduct might come within Caremark’s expanded scope? The article discusses a few examples.  One is from the 2008 financial crisis, recounting a strategy by Goldman Sachs to give bonuses to salespeople for selling low-quality securities to nominally sophisticated customers thought to be credulous:

[D]espite doubts about its performance and asset quality, Goldman engaged in an aggressive campaign to sell the Timberwolf securities [that they knew to be of low quality]. . . . Mr. Sparks and Mr. Lehman [of Goldman] sent out numerous sales directives or “axes” to the Goldman sales force, stressing that Timberwolf was a priority for the firm. In April, Mr. Sparks suggested issuing “ginormous” sales credits to any salesperson who sold Timberwolf securities, only to find out that large sales credits had already been offered…. Goldman also began targeting Timberwolf sales to “non-traditional” buyers and those with little CDO familiarity…^[2]

Another example involves a lawsuit over the death of a woman from an allergic reaction after eating at a restaurant in the Disney Springs shopping complex in Orlando, Florida:

Family members said they chose the eatery because Disney and [the restaurant] advertised that it made accommodating people with food allergies a top priority.  Despite assurances from the waiter that [the woman’s] order was allergen-free, the complaint in the Orange County court says, she had an acute allergic reaction and died of anaphylaxis from elevated levels of nut and dairy in her system.

The Walt Disney Co. on Monday agreed to have a court decide on a wrongful death lawsuit, brought by a widower in Florida after earlier arguing that the case belonged in arbitration because the man signed up for a trial of streaming service Disney+ in 2019.^[3]

Here, the corporation decided to waive a right to arbitration. Not carefully considering the pros and cons of doing so would arguably have fallen within an expanded Caremark scope.

The effect of a broadened scope for Caremark may be modest given the many other requirements, constraints, and pressures corporations face, especially since the bulk of the expansion concerns the standard of conduct rather than the standard of liability. But the law’s expressive force is important, as are other effects of an expanded scope for Caremark. Increasingly, the law has difficulty keeping up with developments and technologies that can cause real harm. Consistent with not unduly burdening business, adding more teeth to companies’ incentives to be mindful of that harm would seem valuable, especially given the extent to which they may face competitive pressures to do otherwise.

ENDNOTES

[1] Principles of the L., Compliance & Enf’t for Orgs. §§ 1.01(h), (n) (Am. L. Inst. 2025).

[2] Claire A. Hill & Richard Painter, Better Banks, Better Bankers: Promoting Good Business Through Contractual Commitment 34 (2015) (quoting Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, Report Before the S. Comm. on Homeland Sec. & Governmental Affs., S. Hrg. 112-675 (Apr. 13, 2011).

[3] Reuters, Disney Drops Arbitration Push, Agrees to Have Wrongful Death Lawsuit Decided in Court, USA Today (Aug. 20, 2024), https://eu.usatoday.com/story/money/legal/2024/08/20/disney-drops-arbitration-wrongful-death-case/74869877007/ (change in original paragraph sequence).

Claire A. Hill is James L. Krusemark Chair in Law at the University of Minnesota Law School. This post is based on her recent article, co-authored with Zohreh Zakiani, “What Should Caremark Encompass?” available here.