On Wednesday, June 7, 2017 Professor Kish Parella presented her forthcoming article, Reputational Regulation, Duke Law Journal, Vol. 67, Issue 5 (2018) at Stanford Law School as part of the 2017 Stanford/Harvard/Yale Junior Faculty Forum. Professor Parella’s article was selected for the session on civil litigation and disputes because it explores the information effects of litigation, including reputational sanctions and indirect incentives for voluntary organizational change by business actors. Professor Parella was one of 16 junior scholars selected this workshop and the full schedule is available here. The abstract of Professor Parella’s article is below:
Universities cover up sexual assault. Energy companies pollute rivers. Hospitals commit fraud. All these examples illustrate how the actions of organizations harm society. When these organizations act in ways that offend the public interest, parties seeking to change that behavior traditionally turned to litigation (civil and criminal) to force large organizations to reform, whether by command or consent. For example, following Brown v. Board of Education, “structural reform litigation” forced large-scale organizations, from school boards to prisons, to change their practices. Similarly, in the wake of recent financial scandals, federal prosecutors have relied on the threat of indictment to pressure large corporations to agree to significant structural reforms. The problem is that these avenues for organizational change are under threat due to concerns about expertise, supervision and enforcement, separation of powers, and procedural barriers.
This Article addresses this problem by proposing an alternative strategy for organizational reform that relies on the indirect reputational effects of litigation. Under this approach, organizational change does not result from court order or parties’ settlement but from the information effects of litigation. Litigation disseminates information about an organization into the public space. This information has reputational consequences for the affected organizations. Voluntary organizational change is a response to that reputational shaming. Critically, these reputational sanctions can accompany all types of litigation and not just those specifically seeking “structural reform” remedies; as a result, “reputational regulation” of organizations can thrive even if structural reform litigation does not.
This Article identifies and explains the operation of four reputational sanctions: financial, policy, regulatory spill-over, and barriers to entry. We are most familiar with the financial sanction where consumers adopt “naming and shaming” boycotts to punish corporations for their behavior, thereby encouraging the latter to change their practices. But reputational sanctions also take the other three forms and can also encourage large organizations to change their practices even when financial sanctions are weak or inoperative. Collectively, these reputational sanctions – operating outside the boundaries of traditional legal and regulatory processes – are employed by both public and private actors and play an increasing role in the decisions that organizations make.