A new approach to fiduciary duties and employees: Wrongful discharge in violation of public policy

University of Cincinnati Law Review

Volumn 75, Issue 4, 2007, Pages 1453-1497

  Marchesani, Daniele ^a  

^a NONE

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EID: 34948896489     PISSN: 00096881     EISSN: None     Source Type: Journal    
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References (348)

1. BENJAMIN N. CARDOZO, THE NATURE OF THE JUDICIAL PROCESS 94 (1921).
2. Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).
3. See id.
4. See, e.g., Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del. 2001) ("The directors of Delaware corporations have a triad of primary fiduciary duties: due care, loyalty, and good faith."); Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) ("The director's fiduciary duty to both the corporation and its shareholders has been characterized by this Court as a triad: due care, good faith, and loyalty.").
5. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
6. See McMullin v. Beran, 765 A.2d 910, 917 (Del. 2000).
7. See In re Caremark Int'l, Inc., Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996).
8. Aronson, 473 A.2d at 812.
9. See Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) ("The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves 'prior to making a business decision, of all material information reasonably available to them.'").
10. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 364 n.31 (Del. 1993);
11. Van Gorkom, 488 A.2d at 873.
12. See Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) (noting that substantive due care is a concept "foreign to the business judgment rule.").
13. Cede & Co., 634 A.2d at 368 ("[A] trial court will not find a board to have breached its duty of care unless the directors individually and the board collectively have failed to inform themselves fully and in a deliberate manner.... Only on such a judicial finding will a board lose the protection of the business judgment rule under the duty of care element and will a trial court be required to scrutinize the challenged transaction under an entire fairness standard of review.").
14. In re Caremark Int'l, Inc. Derivative Litig., 698 A.2d 959, 968 (Del. Ch. 1996) ("The second class of cases in which director liability for inattention is theoretically possible entail circumstances in which a loss eventuates not from a decision but, from unconsidered inaction.").
15. Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984).
16. See Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963) ("[Ajbsent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.").
17. In re Caremark Int'l, Inc., 698 A.2d at 970.
18. See id. at 959.
19. See Guth v. Loft, 5 A.2d 503, 510 (Del. Ch. 1939) ("Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest").
20. See also Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) ("Essentially, the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.").
21. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del. 1995).
22. See Paramount Commc'ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 42 n.9 (Del. 1994) ("Where actual self-interest is present and affects a majority of the directors approving a transaction, a court will apply [the entire fairness test].").
23. See DEL. CODE ANN. tit. 8, § 144 (2003). Section 144 "deals with the ... problem of the conditions under which a corporate contract can be rendered 'un-voidable' solely by reason of a director interest" but does not say what standard of review applies to the transaction. Cinerama, Inc. v. Technicolor, Inc. 663 A.2d 1134, 1154 (Del. Ch. 1994), aff'd, 663 A.2d 1156 (Del. 1995).
24. See Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114, 120 (Del. 2006).
25. See Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997) ("[W]hen a controlling shareholder stands on both sides of the transaction... the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny. ... This policy reflects the reality that in [such cases] the controlling shareholder will continue to dominate the company regardless of the outcome of the transaction.").
26. See Emerald Partners v. Berlin, No. 9700, 2001 WL 115340, at *25 n.63 (Del. Ch. Feb. 7, 2001), vacated 787 A.2d 85 (Del. 2001), remanded to 2003 WL 21003437 (Del. Ch. Apr. 28, 2003) (discussing the duty of good faith as a subsidiary requirement of the duty of loyalty).
27. See also Hillary A. Sale, Delaware's Good Faith, 89 CORNELL L. REV. 456, 463 (2004) ("Although corporate directors are unquestionably obligated to act in good faith, doctrinally that obligation does not exist separate and apart from the fiduciary duty of loyalty.").
28. Sale, supra note 24, at 463.
29. See also In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 62-63 (Del. 2006);
30. Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1 (2005);
31. Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 DUKE L. J. 1 (2005).
32. Sale, supra note 24, at 484 ("[R]ather than relying on allegations of the fiduciaries' status or conflict, bad faith focuses on the indifference or egregiousness with which fiduciaries approached the substance of the transaction.").
33. Id. at 494.
34. In re Walt Disney Co., 906 A.2d at 67 n.112 ("[W]e do not reach or otherwise address the issue of whether the fiduciary duty to act in good faith is a duty that, like the duties of care and loyalty, can serve as an independent basis for imposing liability upon corporate officers and directors.").
35. Id.
36. Id. at 65. ("Both our legislative history and our common law jurisprudence distinguish sharply between the duties to exercise due care and to act in good faith, and highly significant consequences flow from that distinction.").
37. See generally D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277 (1998).
38. See also MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATE LAW 97 (1995);
39. Henry Hansmann & Reinier Kraaman, The End of History for Corporate Law, 89 GEO. L.J. 439, 440-41 (2001);
40. Amir N. Licht, The Maximands of Corporate Governance: A Theory of Values and Cognitive Style, 29 DEL. J. CORP. L. 649, 688 (2004);
41. Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 STETSON L. REV. 23, 23 (1992);
42. David Milion, Redefining Corporate Law, 24 IND. L. REV. 223, 227-28 (1991);
43. Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. PA. L. REV. 2063, 2065 (2001).
44. Hansmann & Kraaman, supra note 31, at 440-41.
45. Taylor v. Miami Exporting Co., 5 Ohio 162 (1831);
46. Robinson v. Smith, 3 Paige Ch. 222 (N.Y. Ch. 1832). Professor Gordon Smith associates these cases with the birth of the shareholder primacy norm.
47. See Smith, supra note 31, at 307-308.
48. See also Malone v. Brincat, 722 A.2d 5, 9 (Del. 1998) ("The board of directors has the legal responsibility to manage the business of a corporation for the benefit of its shareholder owners");
49. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (explaining that the "board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.");
50. Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
51. Revlon, 506 A.2d at 182, which explains how the board may, under the appropriate circumstances, consider the interest of other constituencies, indicated that: [T]he Revlon board could not make the requisite showing of good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract. The noteholders required no further protection, and when the Revlon board entered into an auction-ending lock-up agreement... on the basis of impermissible considerations at the expense of the shareholders, the directors breached their primary duty of loyalty.
52. Id. (citations omitted). The Delaware Supreme Court has clarified that "Revlon and Unocal and the duties of a Board when faced with a contest for corporate control do not admit of easy categorization as duties of care or loyalty." In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d 59, 67 (Del. 1995). In any event, the language of the Court was clear that as far as the limited issue of balance between different constituencies, it is a matter of loyalty. See also TW Servs., Inc. v. SWT Acquisition Corp., Nos. 10427, 10298, 1989 WL 20290, at *7 (Del. Ch. Mar. 2, 1989), where former Chancellor Allen indicated that it is: non-controversial that. .. directors owe duties of loyalty to the corporation and to the shareholders; that this conjunctive expression is not usually problematic because the interests of the shareholders as a class are seen as congruent with those of the corporation in the long run; that directors, in managing the business and affairs of the corporation, may find it prudent (and are authorized) to make decisions that are expected to promote corporate (and shareholder) long run interests, even if short run share value can be expected to be negatively affected, and thus directors in pursuit of long run corporate (and shareholder) value may be sensitive to the claims of other "corporate constituencies."
53. Id. (footnote omitted).
54. See also Millon, supra note 31, at 228.
55. But see Smith, supra note 31, at 285 (maintaining that the shareholder primacy norm is embodied in the duty of care).
56. See Richard A. Booth, Who Owns the Corporation and Who Cares, 77 CHI.-KENT L. REV. 147, 147 (2001);
57. David Millon, New Game Plan or Business as Usual? A Critique of the Team Production Model of Corporate Law, 86 VA. L. REV. 1001, 1010-11 (2000);
58. Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 TEX. L. REV. 579, 586 (1992);
59. Smith, supra note 31, at 280.
60. See also, generally Ronald Chen & Jon Hanson, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 MICH. L. REV. 1 (2004);
61. Thomas A. Smith, The Efficient Norm for Corporate Law: A Neotraditional Interpretation of Fiduciary Duty, 98 MICH. L. REV. 214, 214 (1999).
62. See Millon, supra note 3 5, at 1011.
63. See generally Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189 (2002). The agency argument, which many scholars discuss independently as one of the rationales supporting the shareholder primacy rule only addresses the nature of the privileged position of the shareholders; it does not explain why the shareholders are the principals and the directors the agents.
64. See Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. TIMES MAG., Sept. 13, 1970, at 32-33, 122-26 ("[I]n his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation .. . and his primary responsibility is to them.").
65. See also Malone v. Brincat, 722 A.2d 5, 9 (Del. 1998);
66. Mitchell, supra note 35, at 586 n.28 (citing case law that adopts this view).
67. See generally ADOLPH A. BERLE & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 117 (1937) (noting that "with the increasing dispersion of stock ownership in the largest American corporations, a new condition has developed with regard to their control. No longer are the individuals in control of most of these companies, the dominant owners. Rather there are no dominant owners, and control is maintained in large measure apart from ownership.").
68. See also Fischer Balck & Myron Scholes, The Pricing of Options and Corporate Liabilities, 81 J. POL. ECON. 637 (1973).
69. See BERLE & MEANS, supra note 39, at 220-21 (noting that "[t]he law holds the management to certain standards of conduct. This is the legal link between ownership and management. As separation of ownership from management becomes factually greater... it becomes increasingly the only reason why expectations that corporate securities are worth having, can be enforced by the shareholders.").
70. See also Oliver Hart, An Economist's View of Fiduciary Duty, 43 U. TORONTO L.J. 299, 303 (1993);
71. Milion, supra note 31, at 229-31.
72. According to the Delaware Supreme Court: An underlying premise for the imposition of fiduciary duties is a separation of legal control from beneficial ownership. Equitable principles act in those circumstances to protect the beneficiaries who are not in a position to protect themselves. One of the fundamental tenets of Delaware corporate law provides for a separation of control and ownership. The board of directors has the legal responsibility to manage the business of a corporation for the benefit of its shareholder owners. Malone, 722 A.2d at 9 (footnotes omitted).
73. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991).
74. See also OLIVER E. WILLIAMSON, THE MECHANISM OF GOVERNANCE 184 (1996);
75. Eugene F. Fama & Michael C. Jensen, Organizational Forms and Investment Decisions, 14 J. FIN.ECON. 101, 102-03 (1985).
76. See generally EASTERBROOK & FISCHEL, supra note 42. "The 'corporate contract' is the metaphorical contract consisting of the sum of the voluntary arrangements among the various parties who contribute resources to the corporate enterprise and have claims against it." Smith,
77. supra note 35 at 216.
78. See EASTERBROOK & FISCHEL, supra note 42, at 36 ("[T]he expectation is that the residual risk bearers have contracted for a promise to maximize long-run profits of the firm, which in turn maximizes the value of their stock. Other participants contract for fixed payouts-monthly interest, salaries, pensions, severance payments, and the like. . .. Risk bearers get a residual claim to profit; those who do not bear risk on the margin get fixed terms of trade."). For a discussion and critique of this approach,
79. see Licht, supra note 31, at 705-13;
80. Macey, supra note 31, at 26-31.
81. As the residual claimants, the shareholders are the group with the appropriate incentives ... to make discretionary decisions. The firm should invest in new products, plants, etc., until the gains and costs are identical at the margin. Yet all the actors, except the shareholders, lack the appropriate incentives. Those with fixed claims on the income stream may receive only a tiny benefit (in increased security) from the undertaking of a new project. Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395, 403 (1983).
82. [Maximizing profits for equity investors assists the other "constituencies" automatically. The participants in the venture play complementary rather than antagonistic roles. In a market economy each party to a transaction is better off. A successful firm provides jobs for workers and goods and services for consumers. The more appealing the goods to consumers, the more profit (and jobs). Prosperity for stockholders, workers, and communities goes [invisible] hand in glove with better products for consumers. EASTERBROOK & FISCHEL, supra note 42, at 38.
83. Id. at 90-108.
84. Shareholders' inability to protect their investment through contractual means is indeed the rationale upon which transaction cost economic concludes "the board of directors should be seen as a governance instrument of the stockholders." Oliver Williamson, Corporate Governance, 93 YALE L.J. 1197, 1210 (1984).
85. See Prod. Res. Group, L.L.C v. NCT Group, Inc., 863 A.2d 772, 790-91 (Del. Ch. 2004) ("When a firm has reached the point of insolvency... the firm's directors are said to owe fiduciary duties to the company's creditors. ... By definition, the fact of insolvency places the creditors in the shoes normally occupied by the shareholders-that of residual risk bearers.");
86. Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc'ns Corp., No. 12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991) ("At least where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residue risk bearers, but owes its duty to the corporate enterprise.").
87. ROBERT C. CLARK, CORPORATE LAW 20 (1986) ("A single objective goal like profit maximization is more easily monitored than a multiple, vaguely defined goal like the fair and reasonable accommodation of all affected interests.");
88. EASTERBROOK & FISCHEL, supra note 42, at 38 ("a manager told to serve two masters . .. has been freed of both and is answerable to neither... .");
89. Milion, supra note 35, at 1041 ("[W]hen the decision maker must balance conflicting interests, the fiduciary idea may not be up to the task. It is ill-suited to situations in which a steward must figure out how to serve two masters at the same time.");
90. Roe, supra note 31 at 2065 ("[A] stakeholder measure of managerial accountability could leave managers so much discretion that managers could easily pursue their own agenda, one that might maximize neither shareholder, employee, consumer, nor national wealth, but only their own.").
91. Hansmann & Kraaman, supra note 31, at 440-41.
92. See also Adam Winkler, Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History, 67 LAW & CONTEMP. PROBS. 109, 131 (2004).
93. Edward B. Rock & Michael L. Wachter, Tailored Claims and Governance: The Fit Between Employees and Shareholders, in EMPLOYEES AND CORPORATE GOVERNANCE 121, 121 (Margaret M. Blair & Mark J. Roe eds., 1999).
94. See Kent Greenfield, The Place of Workers in Corporate Law, 39 B.C. L. REV. 283, 288-94 (1998);
95. Stout, supra note 37, at 1192. On employee ownership,
96. see generally Wanjiru Njoya, Employee Ownership and Efficiency: An Evolutionary Perspective, 33 INDUS. L.J. 211 (2004).
97. See Rock & Wachter, supra note 51, at 122 ("it can be argued that employees also share many 'residual claimant' characteristics. .. .");
98. Greenfield, supra note 52, at 305-311;
99. Sanford M. Jacoby, Employee Representation and Corporate Governance: A Missing Link, 3 U. PA. J. LAB. & EMP. L. 449, 457 (2001);
100. Brett H. McDonnell, Corporate Constituency Statutes and Employee Governance, 30 WM. MITCHELL L. REV. 1227, 1234-35 (2004).
101. See Greenfield, supra note 52, at 308-09;
102. Jacoby, supra note 53, at 457;
103. McDonnell, supra note 53, at 1234-35;
104. Rock & Wachter, supra note 51, at 122;
105. Clyde Summers, Codetermination in the United States: A Projection of Problems and Potentials, 4 J. COMP. CORP. L. & SEC. REG. 155, 170 (1982).
106. See Greenfield, supra note 52, at 313-321;
107. McDonnell, supra note 53, at 1235;
108. Marleen O'Connor, Restructuring the Corporation's Nexus of Contracts: Recognizing a Fiduciary Duty to Protect Displaced Workers, 69 N.C. L. REV. 1214 (1991);
109. Katherine Van Wezel Stone, Employees as Stakeholders Under State Nonshareholder Constituency Statutes, 21 STETSON L. REV. 45, 5469 (1991);
110. Wai Shun Wilson Leung, The Inadequacy of Shareholder Primacy: A Proposed Corporate Regime that Recognizes Non-Shareholder Interests, 30 COLUM. J.L. & SOC. PROBS. 587, 594-96 (1997).
111. See Sanford M. Jacoby, Corporate Governance and Employees in the United States, in CORPORATE GOVERNANCE AND LABOUR MANAGEMENT 54-55 (Howard Gospel & Ander Pendleton eds., 2005);
112. Marleene O'Connor, Labor's Role in the American Corporate Governance Structure, 22 COMP. LAB. L. & POL'Y J. 97, 104-05 (2000);
113. Van Wezel Stone, supra note 55.
114. See Greenfield, supra note 52, at 287;
115. O'Connor, supra note 56, at 104-05.
116. O'Connor, supra note 56, at 104-05;
117. O'Connor, supra note 55, at 1247-56;
118. Marleen O'Connor, The Human Capital Era: Reconceptualizing Corporate Law to Facilitate LaborManagement Cooperation, 78 CORNELL L. REV. 899, 946-965 (1993).
119. Contra see Mitu Gulati, Incorporating Labor, 22 COMP. LAB. L. & POL' Y J. 171 (2000).
120. See O'Connor, supra note 56, at 105.
121. Id. at 108.
122. See also O'Connor, supra note 58, at 946-65.
123. See O'Connor, supra note 55, at 1254-55.
124. See also Jacoby, supra note 56, at 52-53 (in favor of establishing disclosure obligations for the benefit of employees).
125. See O'Connor, supra note 56, at 1254-55.
126. See generally, Kathleen Hale, Corporate Law and Stakeholders: Moving Beyond Stakeholder Statutes, 45 ARIZ. L. REV. 823 (2003);
127. Licht, supra note 31, at 700-05;
128. McDonnell, supra note 53.
129. See, e.g., ME. REV. STAT. ANN. tit 13-A § 716 (1996);
130. MASS. GEN. LAWS ANN. ch. 156B, § 65 (West 1997);
131. N.Y. BUS. CORP. LAW. §717(b) (McKinney 1997);
132. CONN. GEN. STAT. § 33-313(e) (repealed 1997). Professor Lawrence Mitchell elaborated a test for the enforcement of the fiduciary duties under the stockholder statutes. See Mitchell, supra note 35, at 635-640.
133. The Connecticut Statute mandates directors to take into consideration other constituencies interests. See CONN. GEN. STAT. § 33-756(d) (2003).
134. See Mitchell, supra note 35, at 631;
135. O'Connor, supra note 56, at 103-04.
136. McDonnell, supra note 53, at 1231-32.
137. See also Licht, supra note 31, at 703-05.
138. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247 (1999).
139. They maintain that: [A] public corporation is a team of people who enter into a complex agreement to work together for their mutual gain. Participants - including shareholders, employees, and perhaps other stakeholders such as creditors or the local community - enter into a "pactum subjectionis" under which they yield control over outputs and key inputs (time, intellectual skills, or financial capital) to the hierarchy. They enter into this mutual agreement in an effort to reduce wasteful shirking and rent-seeking by relegating to the internal hierarchy the right to determine the division of duties and resources in the joint enterprise.
140. Id. at 278 (footnote omitted).
141. Id. at 298-309.
142. See also Gregory Scott Crespi, Redefining the Fiduciary Duties of Corporate Directors in Accordance with the Team Production Model of Corporate Governance, 36 CREIGHTON L. REV. 623 (2003) (discussing application of fiduciary duties for the benefit of all constituencies under the team production model).
143. BLACK'S LAW DICTIONARY 1245 (7th ed. 1999).
144. 5 A.2d 503, 510 (Del. Ch. 1939). See also, Pollitz v. Wabash R.R. Co., 100 N.E. 721, 724 (N.Y. 1912) (Directors "cannot exercise the corporate powers for their private or personal advantage or gain. The law stringently and rigorously forbids to the use or disposition of the funds or assets of the corporation for their individual enterprises or acquisition .... These principles based on sound public policy and morality, are so firmly fixed in our jurisprudence that they are not open to discussion ....");
145. Patient Care Servs., S.C. v. Segal, 337 N.E.2d 471, 478 (111. App. Ct 1975) ("The duties that an officer or director owe to his corporation ... include the requirement of undivided, unselfish, and unqualified loyalty, of unceasing effort never to profit personally at corporate expense, of unbending disavowal of any opportunity which would permit the fiduciary's private interests to clash with those of his corporation. These duties are rooted not only in elementary rules of equity but also in business morality and public policy.");
146. Leader Publ'g Co. v. Grant Trust & Savings Co., 108 N.E. 121, 124 (Ind. 1915) ("General public policy prevents a person from deriving a benefit to himself or working a wrong to another through a fiduciary relationship existing between the parties .... Such is the character of the relationship which exists between the officers of private corporations and the corporation."); Schildberg Rock Prods. Co., Inc. v. Brooks, 140 N.W.2d 132, 136 (Iowa 1966) ("[Officers and directors of a corporation .. . occupy a fiduciary relation to the corporation and its stockholders which requires them to act in the utmost good faith, not for their own personal interest. It is the policy of the law to put fiduciaries beyond the reach of temptation by making it unprofitable to yield to it").
147. ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 109 (Del. Ch. 1999) (where the Vice Chancellor discussed whether a court should deem a contract unenforceable when the corporation entered into as a result of fiduciary duty breach).
148. See Coolidge v. Riverdale Local Sch. Dist., 797 N.E.2d 61, 64 (Ohio 2003) (in discussing the public policy underlying the Workers' Compensation Act in a wrongful discharge claim, the court held that "there is no principle of judicial restraint that requires courts to refrain from deciding public-policy questions."); Wholey v. Sears Roebuck, 803 A.2d 482, 490 (Md. 2002) (in considering the propriety of "adopting a 'new' public policy mandate for a wrongful discharge claim," the court noted that "[i]n exercising our measured authority to define public policy... we must strive to confine the scope of public policy mandates to clear and articulable principles of law and to be precise about the contours of actionable public policy mandates.").
149. See also Roger J. Traynor, Some Open Questions on the Work of State Appellate Courts, 24 U. CHI. L. REV. 211, 219 (1957), where the former Justice of the Supreme Court of California explained that: There is always an area not covered by legislation in which the courts must revise old rules or formulate new ones, and in that process policy is often an appropriate and even basic consideration... . [I]n stating the policy at stake and demonstrating its relevance... no conscientious judge will set bounds to his inquiry. If he finds no significant clues in the law books, he will not close his eyes to a pertinent study merely because it was written by an economist or perhaps an anthropologist or an engineer. 75. Though the American law makes no distinction between the private corporation and the [public], the economics of the two are essentially different. The separation of ownership from control produces a condition where the interest of owner and of ultimate manager may, and often do, diverge .... Size alone tends to give these giant corporations a social significance not attached to the smaller units of private enterprises. By the use of the open market for securities, each of these corporations assumes obligations towards the investing public which transform it from legal method clothing the rule of a few individuals into an institution at least nominally serving the investors who have embarked their funds in its enterprise.
150. BERLE & MEANS, supra note 39, at 6.
151. See also Victor Brudney, Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. REV. 595, 610-12 ("When the fiduciary notion is examined in the context of the relationship of management of a public investor-owned corporation to the enterprise and the holders of its common stock, a still different configuration of interests and needs must be addressed.");
152. Tamar Frankel, Fiduciary Duties as Default Rules, 74 OR. L. REV. 1209, 1259 (1995) ("[P]ublic fiduciaries have greater impact on the economy and financial system by affecting more people, and the flow of capital from borrowers to savers.").
153. See generally THE AMERICAN CORPORATION TODAY (Carl Kaysen ed., 1996).
154. As Bearle and Means noted public corporations are "great aggregations in which tens and even hundreds of thousands of workers and property worth hundreds of millions of dollars, belonging to tens or even hundreds of thousands of individuals, are combined through the corporate mechanism into a single producing organization under unified control and management." BERLE & MEANS, supra note 39, at 2-3.
155. Easterbrook and Fischel discuss how the existence of fiduciary duties induces investors into investing: What promises will the entrepreneurs make in order to induce investors to hand over more money? .. . Some promises entail submitting to scrutiny in advance of action. ... At other times ... the most desirable methods of control will rest on deterrence .... Fiduciary obligations and litigation are forms of subsequent settling-up included among these kinds of devices. EASTERBROOK & FISCHEL, supra note 42, at 5.
156. See also Frankel, supra note 75, at 1223: Fiduciary rules address the unique problems posed for entrustors. In light of the social benefits from fiduciary relationships and the high risk of these relationships to entrustors, entrustors must be induced to enter the relationship by assurances that overcome their concern for the safety of their assets. They must be convinced that the relationship is likely to bring them net economic benefits. .. . Thus, the main purpose of fiduciary law is to reduce entrustors' risk from embezzlement of their entrusted property or interests, and to reduce the costs of monitoring fiduciaries.
157. Id.
158. See, e.g., MICHAEL C. JENSEN, A THEORY OF THE FIRM (2000).
159. See generally Mark J. Roe, The Institutions of Corporate Governance (Harvard Law & Economics Discussion Paper No. 488, 2004), available at http://ssrn.com/ abstract=612362.
160. See EASTERBROOK & FISCHEL, supra note 42, at 103 ("Duty-of-loyalty problems often involve . . . one-shot appropriations ... in which subsequent penalties through markets are inadequate. Liability rules are most helpful when other mechanisms fail. .. . The duty of loyalty supplements market penalties for breach in those situations where the market penalties themselves might be insufficient");
161. Roe, supra note 80, at 7 ("If a low percentage of a firm's assets is stolen in relation to forgone market opportunities, the market may not deter the manager. The manager may never get another job, but that manager will leave rich.").
162. See supra note 46 and accompanying text.
163. See John R. Boatright, Fiduciary Duties and the Shareholder-Management Relation: Or, What's so Special About Shareholders, 4 BUS. ETHICS Q. 393, 401 (1994) (arguing that "the value of maintaining the private, profit-making nature of the corporation comes from considerations of public policy. Put simply, the argument is that institutions in which management is accountable primarily to shareholders provides the most socially beneficial system of economic organization.").
164. See Melvin Aron Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1523-24 (1989). Professor Eisenberg discusses how allowing a restriction of fiduciary rules before a company goes public may negatively affect the national economy: The American economy is a corporate system, in the sense that control of the economic factors of production and distribution is vested largely in the hands of privately appointed corporate managers. This system is legitimated on three major bases. The first is a belief that the shareholders, as the owners of the corporation, have the ultimate right to control it. The second is a belief that corporate managers are accountable for their performance. The third is a belief that placing control of the factors of production and distribution in the hands of privately appointed corporate managers, who are accountable for their performance and who act in the interest and subject to the ultimate control of those who own the corporation, achieves a more efficient utilization of economic resources than that achievable under alternative economic systems... . If... publicly held corporations could have governance structures determined by the decisions of owner-managers long gone from the scene who imposed rules that did not constrain positional conflicts, a significant portion of our national economy could eventually come to be vested in the hands of corporations in which inefficient managers were not effectively accountable and could not easily be removed. Such a regime could both jeopardize the efficiency of the economy and put the legitimacy of the corporate system into question.
165. Id.
166. See EASTERBROOK & FISCHEL, supra note 42, at 103.
167. See also Brudney, supra note 75, at 595, n.12 ("to be sure, if violation of [the duty of care] occurs, it may be of significantly larger economic interest to society and investors than much of the conduct at which the duty of loyalty is aimed.");
168. Daniel R. Fischel & Michael Bradley, The Role of Liability and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis, 71 CORNELL L. REV. 261, 291 (1986).
169. See EASTERBROOK & FISCHEL, supra note 42, at 103 ("A satisfactory explanation for the distinction [between the duty of care and the duty of loyalty] may be found in the different payoffs from breach and policing.").
170. [I]t is important to bear in mind the relationship between risk and return - greater returns are accompanied by business opportunities presenting greater risks. An overly intrusive judicial approach toward directors' and officers' duties, particularly their duty of care, most certainly will discourage legitimate and necessary entrepreneurial risk-taking. . . . Furthermore, managerial decisions typically rely on assumptions and estimates of future events and conditions over which the corporation has no control. Theoretically, when applying the duty of care, courts should consider the circumstances surrounding a managerial decision when that decision was made. However, there is ample cause for concern that the crispness with which the trier of fact will be able to view and appreciate those circumstances as they earlier existed will be blinded by the plaintiffs counsel's reconstruction of the circumstances through the perspective of hindsight. The concern for a
171. See AMERICAN LAW INSTITUTE, PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATIONS § 4.01 cmt.d (1994) (which sees the business judgment rule as necessary "to protect directors and officers from the risks inherent in hindsight reviews of their unsuccessful decisions, and to avoid the risk of stifling innovation and venturesome business activity .. ..");
172. DENNIS J. BLOCK ET AL., THE BUSINESS JUDGMENT RULE 63-96 (4th ed. 1993 & Supp. 1995);
173. Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. REV. 83, 110-11 (2004);
174. Kenneth B. Davis, Jr., Once More, the Business Judgment Rule, 2000 WIS. L. REV. 573, 573-80 (2000).
175. See Bainbridge, supra note 88, at 114 ("[T]here is a substantial risk that suing shareholders and reviewing judges will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, ex post, as having been foreseeable and, therefore, preventable ex ante.");
176. Davis, supra note 88, at 580-82.
177. See Bainbridge, supra note 88, at 117-24;
178. Davis, supra note 88, at 580-82.
179. See AMERICAN LAW INSTITUTE, supra note 88, pt.IV introductory note ("Historically, courts have not applied duty of care standards harshly. Judges have recognized the dangers inherent in making post hoc judgments about the care exercised by directors and officers and have allowed them considerable leeway. Relatively few cases have imposed personal liability for damages.").
180. See also In re Caremark Int'l, Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996), explaining that: [C]ompliance with a director's duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through "stupid" to "egregious" or "irrational", [sic] provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule-one that permitted an "objective" evaluation of the decision-would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests.
181. Id.
182. See Roe, supra note 80, at 3 ("[C]orporate lawsuits are geared to handling observed 'stealing,' but less good at 'shrinking' or managerial error. (In fact, via the 'business judgment rule,' the American corporate judge won't listen to complaint about managerial error.)"). Judge Posner discussed the economic rationale of the business judgment rule: [The] rule expresses a sensible policy of judicial noninterference with business decisions made in circumstances free from serious conflicts of interest between management, which makes the decisions, and the corporation's shareholders. Not only do businessmen know more about business than judges do, but competition in the product and labor markets and in the market for corporate control provides sufficient punishment for businessmen who commit more than their share of business mistakes. Dynamics Corp. of Am. v. CTS Corp., 794 F.2d 250, 256 (7th Cir. 1986).
183. See Bainbridge, supra note 88, at 122;
184. Carl Samuel Bjerre, Evaluating the New Director Exculpation Statutes, 73 CORNELL L. REV. 786, 796-800 (1988);
185. Fischel & Bradley, supra note 85, at 291 ;
186. Roe, supra note 80, at 6-8.
187. Brudney, supra note 75, at 600 n.12 ("Behavior that the duty of care is designed to control.. . does not entail the conduct that is the principal concern of economists or organization theorists-optimizing performance and maximizing wealth. The duty of care addresses only the minimum level of required performance by an agent").
188. The Delaware Supreme Court has clarified the policy considerations that justify indemnification for due care violations: The invariant policy of Delaware legislation on indemnification is to "promote the desirable end that corporate officials will resist what they consider unjustified suits and claims, secure in the knowledge that their reasonable expenses will be borne by the corporation they have served if they are vindicated." Folk, on Delaware General Corporation Law sec. 145 (2001). Beyond that, its larger purpose is "to encourage capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve." Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002).
189. See DEL. CODE ANN. tit. 8, § 102(b)(7) (2003), under which certificates of incorporation may contain: A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) ... or (iv) for any transaction from which the director derived an improper personal benefit.
190. Id. The comment on the bill enacting the statutory provision providing for such discretion made it clear that the rule was the legislative response to recent changes in the market for directors' liability insurance .. . including the unavailability of the traditional policies . . . have threatened the quality and stability of the governance of Delaware corporations because directors. .. may be deterred by the unavailability of insurance from making entrepreneurial decisions. Legis. Council's Synopsis, 65 Del. Laws ch. 289 (1986).
191. DEL CODE ANN. tit. 8, § 145 (2003). Indemnification refers to a corporation's reimbursement of litigation expenses incurred by a directors or officer in an action brought against her or him "by or in the right of the corporation," or by a third party.
192. Id. § 145(a), (b). The law mandates indemnification whenever directors and officers have "been successful on the merits or otherwise
193. Id. § 145(c).
194. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 65 (Del. 2006) ("under Delaware statutory law a director or officer .. . can be indemnified for liability (and litigation expenses) incurred by reason of a violation of the duty of care, but not for a violation of the duty to act in good faith."); VonFeldt v. Stifel Fin. Corp., No. Civ. A. 15688, 1999 WL 413393, at *2 (Del. Ch. June 11, 1999) ("Delaware corporations lack the power to indemnify a party who did not act in good faith or in the best interests of the corporation.").
195. See also Mayer v. Executive Telecard, Ltd., 705 A.2d 220, 225 n.6 (Del. Ch. 1997);
196. Cochran v. Stifel Fin. Corp., No. Civ. A. 17350, 2000 WL 286722, at *18 (Del. Ch. Mar. 8, 2000);
197. Waltuch v. Conticommodity Servs., Inc., 88 F.3d 87 (2d Cir. 1996) (interpreting Delaware law); WILLIAM E. KNEPPER & DAN A. BAILEY, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS §22-8, at 286 (6th ed. 1998);
198. Kurt A. Mayr, II, Indemnification of Directors and Officers: The "Double Whammy" of Mandatory Indemnification Under Delaware Law in Waltuch v. Conticommodity Services, Inc., 42 VILL. L. REV. 223, n.82 (1987).
199. E. Norman Veasey et al., Delaware Supports Directors with a Three-Legged Stool of Limited Liability, Indemnification, and Insurance, 42 BUS. LAW 399, 415 (1987).
200. See RESTATEMENT (SECOND) OF CONTRACTS ch. 8, introductory note (1981), which clarifies that: In general, parties may contract as they wish, and courts will enforce their agreements without passing on their substance. Sometimes, however, a court will decide that the interest in freedom of contract is outweighed by some overriding interest of society and will refuse to enforce a promise or other term on grounds of public policy.
201. See also, generally, Paul L. Regan, Great Expectations? A Contract Law Analysis for Preclusive Corporate Lock-Ups, 21 CARDOZO L. REV. 1 (1999).
202. See RESTATEMENT (SECOND) OF CONTRACTS §§178(1)-(3) (1981). The same section indicates that: (2) In weighing the interest in the enforcement of a term, account is taken of (a) the parties' justified expectations, (b) any forfeiture that would result if enforcement were denied, and (c) any special public interest in the enforcement of the particular term. (3) In weighing a public policy against enforcement of a term, account is taken of (a) the strength of that policy as manifested by legislation or judicial decisions, (b) the likelihood that a refusal to enforce the term will further that policy, (c) the seriousness of any misconduct involved and the extent to which it was deliberate, and (d) the directness of the connection between that misconduct and the term.
203. Regan, supra note 99, at 86.
204. See also RESTATEMENT (SECOND) OF CONTRACTS §179(b)(iii) (1981).
205. RESTATEMENT (SECOND) OF CONTRACTS § 193 (1981).
206. Id. §193 cmt.a.
207. 818 A.2d 914, 936 n.74 (Del. 2003). In this controversial decision, the justices' disagreement centered on whether the directors had in fact violated their fiduciary obligations by entering into the merger agreement, which together with a shareholders' voting agreement locked up the deal, and does not impinge on the principle of law discussed here. Id.
208. Id. (citing Paramount Commc'ns, Inc. v. QVC Network, 637 A.2d 34, 51 (Del. 1994) (where the Court clarified that "the Paramount directors could not contract away their fiduciary obligations" and held unenforceable a so-called no-shop provision that prevented the directors from exercising their fiduciary duties in a sale of control setting)).
209. Omnicare, Inc., 818 A.2d at 939.
210. See Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. 1952) (explaining that "the limits of 'public policy' are ill-defined and changing. We do not attempt a definition; but we say that the stockholders of a Delaware corporation may by contract embody in the charter a provision departing from the rules of the common law, provided that it does not transgress ... a public policy settled by the common law . . . ."); McAllister v. Kallop, No. 12856, 1995 WL 462210, at **21, 24 (Del. Ch. July 28, 1995) (holding that "[t]o the extent that a contract.. . limits a director's exercise of his fiduciary duties, it is unenforceable" as it violates public policy), aff'd, 678 A.2d 526 (Del. 1996).
211. In questioning the validity of the Paramount Communications, Inc. holding, Professor Ellen Taylor posed the following question: If it is truly the law of Delaware that directors cannot enter into contracts that limit the exercise of their fiduciary duties, one wonders why section 102(b)(7) of Delaware's corporation law exists. If shareholders can agree to exculpate the directors for breaches of fiduciary duty, then the directors must have the power to breach. So why should directors not be able to enter into a contract that may limit their ability to exercise their fiduciary duties?
212. Ellen Taylor, New and Unjustified Restrictions on Delaware Directors' Authority, 21 DEL. J. CORP. L. 837, 838, 857-58 (1996). The availability of exculpatory provisions is perfectly consistent with the Delaware Supreme Court's precedents on contracts in violations of the fiduciary duties. Exculpation provisions do not eliminate the duty of care and the availability of equitable relief. As I have discussed in the previous section, the limitation of director liability for breaches of the duty of care is based on policing considerations. None of the rationales that justify limited enforcement of the duty of care under the business judgment rule as well as exculpatory and indemnification provisions apply when the board enters into an agreement that prevents it from exercising due care. There is no issue of ex-post determination of whether the board exercised due care. There is no risk of confusing a bad business decision with a negligent one. To the contrary, an agreement in violation of the duty of care violates the public interest underlying their fiduciary obligation.
213. See LAWRENCE E. MITCHELL, CORPORATE IRRESPONSIBILITY, AMERICA'S NEWEST EXPORT 193-207 (2001) [hereinafter MITCHELL, CORPORATE IRRESPONSIBILITY];
214. Lawrence E. Mitchell, The Fairness Rights of Corporate Bondholders, 65 N.Y.U. L. REV. 1165 (1990) [hereinafter Mitchell, Fairness Rights];
215. Mitchell, supra note 35.
216. They are vertical because arise within the hierarchical structure of the corporation, which "can be visualized as a vertical line running from managers to the corporation." MITCHELL, CORPORATE IRRESPONSIBILITY, supra note 109, at 193.
217. Mitchell, Fairness Rights, supra note 109, at 1190, 1206-13 (where in discussing bondholders and the duty of care, Professor Mitchell notes that "the latter is equally the concern of the bondholder as the stockholder, as the risk to each is the diminution of corporate assets resulting in the increased likelihood of bond default and the reduction of residual wealth . . . .").
218. See Mitchell, supra note 35, at 591 ("Examples of these conflicts are the expropriation of wealth from bondholders by stockholders and the layoff of employees as a cost-cutting measure designed to assure the repayment of debt assumed to finance a leveraged takeover."). Professor Mitchell also believe that horizontal conflicts are "between or among subordinate constituent groups really are conflicts between the board, acting on behalf of the stockholders, and other constituent groups whose interest are unrepresented within the corporate structure."
219. Id. at 592.
220. See supra Part II. B.
221. See Mitchell, supra note 35, at 593.
222. Legal articulations of the board's duty as being to the stockholders recognize and encourage these natural tendencies as well as protect the board from stockholder litigation at the expense of other constituencies by sanctioning this solicitude. Thus, the combination of rules restraining vertical conflicts and the limited mechanisms available to enforce these rules results in management exclusively for the benefit of stockholders. Mitchell, supra note 35, at 593 (footnotes omitted).
223. [F]iduciary rules meant to restrain vertical conflicts focus on the actions of the fiduciary rather than the interests of the beneficiary, with the correlative point that the identification of the beneficiary is relatively unimportant as long as it is clear that the fiduciary has no legitimate interest in the property entrusted to her. Id. at 603.
224. See also Smith, supra note 31, at 285 ("[O]nly horizontal conflicts of interest require specification of a beneficiary for director action and that the shareholder primacy norm usually performs this function in corporate law.").
225. Greenfield, supra note 52, at 299-303, 318 ("If the managers do not take care, or are stupid, or look after themselves, both the shareholders and the workers will be harmed.");
226. Blair & Stout, supra note 68, at 299.
227. In other words, the others constituencies suffer no harm as long as they receives the benefits they bargained for in their contractual arrangements.
228. See supra Part II.B.
229. See also Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 BUS. LAW. 247, 287-88 (1989) (noting that '"sophisticated proponents of the shareholder primacy goal' agree 'that framing the board's mission as maximizing shareholder welfare also serves to maximize the welfare of other corporate constituencies and society as a whole.'").
230. To be clear, I am not suggesting that the fiduciary duties be contractual in nature.
231. According to the RESTATEMENT (SECOND) OF CONTRACTS § 305(1) (1981): "[a] promise in a contract creates a duty in the promisor to the promisee to perform the promise even though he also has a similar duty to an intended beneficiary." Comment a to the section explains that "[t]he promisee of a promise for the benefit of a beneficiary has the same right to performance as any other promisee . . . ."
232. Id. § 305 cmt.a.
233. One would think that normally directors would not breach their duties by subordinating the interest of the shareholders to that of another constituency, as they would have no reason to expose themselves to legal and non-legal sanctions. Indeed, courts will most likely review fiduciary claims related to horizontal conflicts where the directors misuse their position by subordinating the interest of the shareholders to that of another constituency of which they are members. See, e.g., Cooke v. Oolie, No. Civ. A. 11134, 2000 WL 710199, at *12 (Del. Ch. May 24, 2000) (where the shareholders plaintiffs claimed that the directors/creditors had breached their duty of loyalty by choosing an acquisition proposal that advanced the interest of the creditors more than that of the shareholders).
234. See, e.g., infra Part IV.B.
235. See infra Part IV.
236. See HORACE GAY WOOD, A TREATISE ON THE LAW OF MASTER AND SERVANT § 134 (1877) ("[A] general or indefinite hiring is prima facie a hiring at will, and if the servant seeks to make it out a yearly hiring, the burden is upon him to establish it by proof. . . . [I]t is an indefinite hiring and is determinable at the will of either party. .. ."). Courts have recognized that under the American rule, "where an employment [is] for an indefinite term, an employer may discharge an employee for good cause, for no cause . . . ." Brockmeyer v. Dun & Bradstreet, 335 N.W.2d 834, 837 (Wis. 1983) (internal quotation marks omitted).
237. See National Labor Relations Act of 1935, 29 U.S.C. § 157 (2006).
238. While in the great majority of states this is an action in tort, some jurisdictions consider a wrongful discharge to violate the implied obligation of good faith and fair dealing. See 1 LEX. K. LARSON, UNJUST DISMISSAL § 6.07 at 6-35/6-37 (1985);
239. 10 LEX. K. LARSON, EMPLOYMENT DISCRIMINATION § 174.03 (2d ed.1994).
240. See also, e.g., Schuster v. Derocili, 775 A.2d 1029 (Del. 2001);
241. Mitford v. De Lasala, 666 P.2d 1000 (Alaska 1983). In New Jersey the plaintiff may bring the action either in contract or in tort.
242. See Pierce v. Ortho Pharm. Corp., 417 A.2d 505 (1980). Some jurisdictions have also limited the at-will doctrine through other implied contractual terms or quasicontractual means.
243. See LARSON, supra, VOL. 10 § 174.03.
244. See generally JOHN C. MCCARTHY, RECOVERY OF DAMAGES FOR WRONGFUL DISCHARGE (2d ed. 1990);
245. LARSON, supra note 127;
246. HENRY H. PERRITT, JR., EMPLOYEE DISMISSAL LAW AND PRACTICE (4th ed. 1998);; WILLIAM J. HOLLOWAY & MICHAEL J. LEECH, BUREAU OF NAT'L AFFAIRS, EMPLOYMENT TERMINATION: RIGHTS AND REMEDIES (2d ed. 1993);
247. PAUL H. TOBIAS ET AL., LITIGATING WRONGFUL DISCHARGE CLAIMS (Sharon J. Sobers ed., 1987).
248. 344 P.2d 25, 27 (Cal. Dist. Ct. App. 1959) (holding that while generally at-will employees can be discharged for "any reason whatsoeverf,]... the right to discharge an employee under such a contract may be limited by statute or by considerations of public policy.") (citations omitted).
249. Lawrence E. Blades, Employment at Will vs. Individual Freedom: On limiting the Abusive Exercise of Employer Power, 67 COLUM. L. REV. 1404 (1967).
250. Only few states do not recognize the common law exception either in tort or in contract: Alabama, Florida, Georgia, Louisiana, New York, and Rhode Island. See Seymor Moskowitz, Golden Age in the Golden State: Contemporary Legal Developments in Elder Abuse and Neglect, 36 LOY. L.A. L. REV. 589, 650 (2003);
251. CAUSES OF ACTION SECOND, TERMINATION AT-WILL, EMPLOYEE § 38, at 325-26 (1993).
252. Robert C. Bird, Rethinking Wrongful Discharge: A Continuum Approach, 73 U. CIN. L. REV. 517, 526 (2004).
253. See also 1 TOBIAS ET AL., supra note 128, § 5:1, at. 5-2 n.2 (noting that "the extremely wide variety of factual variations that courts have addressed and the lack of consistency in their analytical methods, make impossible any systematic and exhaustive classification of the decisions on a nationwide basis.").
254. See, e.g., Edmondson v. Shearer Lumber Prods., 75 P.3d 733, 737 (Idaho 2003);
255. Thibodeau v. Design Group One Architects, LLC, 802 A.2d 731, 735-36 (Conn. 2002).
256. See Frampton v. Cent. Ind. Gas Co., 297 N.E.2d 425 (Ind. 1973);
257. Sventko v. Kroger Co., 245 N.W.2d 151 (Mich. Ct App. 1976);
258. Kelsay v. Motorola, Inc., 384 N.E.2d 353 (Ill. 1978).
259. See Nees v. Hocks, 536 P.2d 512 (Or. 1975);
260. Reuther v. Fowler & Williams, Inc., 386 A.2d 119(Pa. Super. Ct. 1978).
261. See Thompson v. St. Regis Paper Co., 685 P.2d 1081 (Wash. 1984) (recognizing a cause of action in favor of an employee discharged for implementing an accounting procedure in compliance with foreign official corruption statute); Ludwick v. This Minute of Carolina, Inc., 337 S.E.2d 213 (S.C. 1985) (court reversed dismissal of wrongful discharge claim of employee fired for refusal to ignore a subpoena of the state Employment Security Commission).
262. See Glenn v. Clearman's Golden Cock Inn, Inc., 192 Cal. App. 2d 793 (Cal. Dist. Ct App. 1961);
263. Krystad v. Lau, 400 P.2d 72 (Wash. 1965);
264. Garavaglia v. Centra, Inc., 536 N.W.2d 805 (Mich. Ct App. 1995).
265. See, e.g., Sheets v. Teddy's Frosted Foods, Inc., 427 A.2d 385 (Conn. 1980);
266. Palmateer v. Int'l. Harvester Co., 421 N.E.2d 876 (111. 1981);
267. Harless v. First Nat'l Bank in Fairmont, 246 S.E.2d 270 (W. Va. 1978).
268. See, e.g., Gandy v. Wal-Mart Stores, Inc., 872 P.2d 859 (N.M. 1994);
269. Tate v. Browning-Ferris, Inc., 833 P.2d 1218 (Okla. 1992).
270. See, e.g., Hentzel v. Singer Co., 138 Cal. App. 3d 290 (Cal. Ct App. 1982);
271. Wheeler v. Caterpillar Tractor Co., 485 N.E.2d 372 (111. 1985);
272. Cloutier v. Great Atl. & Pac Tea Co., Inc., 436 A.2d 1140 (N.H. 1981).
273. See, e.g., Trombetta v. Detroit, Toleda & Ironton R.R. Co., 265 N.W.2d 385 (Mich. Ct. App. 1978) (employee discharged for refusing to violate state-pollution reporting requirements); Vermilion v. AAA Pro Moving & Storage, 704 P.2d 1360 (Ariz. Ct App. 1985) (refusal to participate in theft scheme); Johnson v. Kreiser's, Inc., 433 N.W.2d 225 (S.D. 1988) (refusal to permit the company's president to convert company's property to personal use); Sabine Pilot Services, Inc. v. Hauck, 687 S.W.2d 733 (Tex. 1985) (refusal to engage in illegal bilge-pumping in coastal waters).
274. See, e.g., LARSON, supra note 127, § 6.02 at 6-9/6-10 (indicating four categories of behavior protected, "(1) the refusal to engage in an illegal activity; (2) the exercise of a public duty; (3) the assertion of a legal right or privilege; and (4) whistleblowing.").
275. See also, e.g., Korslund v. Dyncorp Tri-Cities Services. Inc., 125 P.3d 119, 125 (Wash. 2005);
276. Hansen v. Am. Online, Inc., 96 P.3d 950, 952 (Utah 2004);
277. Thomas v. Med. Ctr. Physicians, P.A., 61 P.3d 557, 565 (Idaho 2002). Professor Perritt, for example, indicates the following as the elements of the cause of action: 1. The existence of a clear and substantial public policy 2. Jeopardy to that policy if employers are allowed to escape liability for terminating employees in circumstances such as those involving the plaintiff, and thus to chill policylinked conduct 3. Actual conduct by the employee promoting the public policy [which caused the dismissal] 4. The employer lacks a legitimate interest (other than the employment at will rule) to justify the dismissal.
278. PERRITT, JR., supra note 128, § 7.1, at 4 (footnote omitted). A number of Courts uses this analytical framework.
279. See, e.g., Korslund, 125 P.3d at 125; Davis v. Horton, 661 N.W.2d 533, 535 (Iowa 2003).
280. See, e.g., Payne v. Rozendaal, 520 A.2d 586 (Vt. 1986) (age discrimination);
281. Clipson v. Schlessman, 624 N.E.2d 220 (Ohio Ct App. 1993) (plaintiff discharged because of physical incapacities);
282. Lockhart v. Commonwealth Educ. Sys. Corp., 439 S.E.2d 328, 331 (Va. 1994) (race and gender discrimination);
283. City of Moorpark v. Superior Court, 959 P.2d 752 (Cal. 1998) (disability discrimination).
284. See, e.g., King v. Marriott Int'l, Inc., 866 A.2d 895, 901 (Md. Ct Spec. App. 2005) ("In order to establish wrongful discharge, the employee must prove by a preponderance of the evidence, that (1) she was discharged; (2) her discharge violated a clear mandate of public policy; and, (3) there is a nexus between the employee's conduct and the employer's decision to fire the employee."); Moustachetti v. State, 877 P.2d 66, 69 (Or. 1994) ("The elements of a wrongful discharge claim are simple: there must be a discharge, and that discharge must be 'wrongful.'").
285. See also Antinerella v. Rioux, 642 A.2d 699 (Conn. 1994). In that case, a sheriff, allegedly terminated a deputy sheriff to misappropriate his business of serving process and advancing the fee splitting arrangements made with other deputy sheriff. The Court held that "[amplication of [the wrongful discharge] doctrine [was] particularly appropriate under the facts and circumstances of [the] case."
286. Id. at 705. The Court also explained that: Had the plaintiff been the one to discover the defendant's illegal fee splitting scheme and the one to "blow the whistle" on the defendant, and had the defendant thereafter fired the plaintiff in order to continue his illegal conduct, undoubtedly, the plaintiff could bring an action for retaliatory discharge We see no reason to differentiate between that employee and this plaintiff, whose employment was also terminated in order that his employer could perpetuate a fee splitting arrangement, a scheme clearly prohibited by statute.
287. Id. at 706 (citations omitted).
288. See, e.g., Petermann v. Int'l Bhd. of Teamsters, 344 P.2d 25, 27 (Cal. Dist. Ct App. 1959) ("The term 'public policy' is inherently not subject to precise definition."); Strozinsky v. Sch. Dist. of Brown Deer, 614 N.W.2d 443, 454 (Wis. 2000) ("Public policy considerations invariably are vague and beg judicial caution."); Thibodeau v. Design Group One Architects, LLC, 802 A.2d 731, 736 (Conn. 2002) (recognizing "the inherent vagueness of the concept of public policy and the difficulty encountered when attempting to define precisely the contours of the public policy exception.").
289. See, e.g., Barr v. Kelso-Burnett Co., 478 N.E.2d 1354, 1356 (111. 1985) ("The common-law doctrine that an employer may discharge an employee-at-will for any reason or for no reason is still the law in Illinois, except for when the discharge violates a clearly mandated public policy."); Poterfield v. Mascari II, Inc., 823 A.2d 590, 602 (Md. 2003) ("To find that an employer acted in a manner such as to justify a claim for wrongful discharge, there must first be a clear mandate of public policy that was contravened by the discharge."); Hubbard v. Spokane County, 50 P.3d 602, 606 (Wash. 2002) ("In order to establish a claim for wrongful discharge in violation of public policy, a plaintiff must prove ... the existence of a clear public policy").
290. See, e.g., Cimochowski v. Hartford Pub. Schs., 802 A.2d 800, 812 (Conn. 2002) ("the employee has the burden of proving a violation of important public policy ....");
291. Ryan v. Dan's Food Stores, Inc., 972 P.2d 395, 405-06 (Utah 1998) ("Courts may determine whether the policy at issue is 'substantial' by 'examining] the strength of the policy as well as the extent to which it affects the public as a whole' and by determining whether we would allow an employer and an employee to nullify the policy by express agreement") (alteration in original);
292. Feliciano v. 7-Eleven, Inc., 559 S.E.2d 713, 718 (W. Va. 2001) ("[I]n order to sustain a cause of action for wrongful discharge, the public policy relied upon must not just exist; it must be substantial.... [T]o be substantial, a public policy must not just be recognizable as such but must be so widely regarded as to be evident to the employers and employees alike.").
293. See, e.g., Island v. Buena Vista Resort, 103 S.W.3d 671 (Ark. 2003);
294. Grzyb v. Evans, 700 S.W.2d 399 (Ky. 1985);
295. Harney v. Meadowbrook Nursing Ctr., 784 S.W.2d 921 (Tenn. 1990).
296. See, e.g., Poterfield, 823 A.2d at 590;
297. Tiernan v. Charleston Area Med. Ctr., Inc., 575 S.E.2d 618 (W. Va. 2002);
298. Thompson v. St. Regis Paper Co., 685 P.2d 1081 (Wash. 1984).
299. See, e.g., Thibodeau, 802 A.2d at 731;
300. Parnar v. Am. Hotels, Inc., 652 P.2d 625 (Haw. 1982);
301. Barr, 478 N.E.2d at 1354;
302. Rackley v. Fairview Care Ctrs., Inc., 23 P.3d 1022 (Utah 2001).
303. See, e.g., Rocky Mountain Hosp. & Med. Serv. v. Mariani, 916 P.2d 519 (Col. 1996);
304. LoPresti v. Rutland Reg.'l Health Servs., Inc., 865 A.2d 1102 (Vt. 2004).
305. See, e.g., Faulkner v. United Techs. Corp., Sikorsky Aircraft Div., 693 A.2d 293, 297-98 (Conn. 1997);
306. Wheeler v. Caterpillar Tractor Co., 485 N.E.2d 372 (111. 1985);
307. Insigna Residential Corp. v. Ashton, 755 A.2d 1080 (Md. 2000);
308. Fitzgerald v. Salsbury Chem., Inc., 613 N.W.2d 275, 285 n.4 (Iowa 2000).
309. See, e.g., Crawford Rehab. Servs., Inc. v. Weissman, 938 P.2d 540, 552 (Colo. 1997) ("Although public-policy wrongful discharge is not subject to precise definition, it has been variously described as an action that involves a matter that affects society at large rather than a purely personal or proprietary interest of the plaintiff or employer.");
310. Miller v. SEVAMP, Inc., 362 S.E.2d 915, 918 (Va. 1987) (clarifying that the action is "limited to discharges which violate public policy, that is, the policy underlying existing laws designed to protect the property rights, personal freedoms, health, safety, or welfare of the people in general.... The exception [is] not so broad as to make actionable those discharges of at-will employees which violate only private rights or interests.");
311. City of Green Forest v. Morse, 873 S.W.2d 155, 158 (Ark. 1994) ("[T]he exceptions to the at-will doctrine will be recognized to protect a well-established and substantial public policy and not merely to protect the private or proprietary interests of the employee.");
312. Stevenson v. Superior Court, 941 P.2d 1157, 1161 (Cal. 1997) ("[T]o support a tort action for wrongful discharge, 'the policy in question must involve a matter that affects society at large rather than a purely personal or proprietary interest of the plaintiff or employer ....'").
313. See, e.g., Fitzgerald, 613 N.W.2d at 283-84 ("Once a clear public policy is identified, the employee must further show the dismissal for engaging in the conduct jeopardizes or undermines the public policy.");
314. Rackley, 23 P.3d at 1026 (A plaintiff "must prove that... the plaintiffs conduct implicated that clear and substantial public policy . .. .");
315. Sedlaeek v. Hillis, 36 P.3d 1014, 1018 (Wash. 2001) ("The plaintiffs must prove that discouraging the conduct in which [the employee] engaged would jeopardize the public policy (the jeopardy element") (alteration in original).
316. See also 2 PERRITT, JR., supra note 128, § 7.17, at 42-48.
317. See, e.g., Korslund v. Dyncorp Tri-Cities Servs., Inc., 125 P.3d 119, 125 (Wash. 2005).
318. See 2 PERRITT, JR., supra note 128, § 7.12, at 28 (maintaining that that the contrary approach is wrong and that it "is too narrow a view of the public policy concept to reflect accurately the tenor of the mainstream . . . tort cases.").
319. See 2 PERRITT, JR., supra note 128,
320. See, e.g., Burnham v. Karl & Gelb, P.C., 745 A.2d 178 (Conn. 2000);
321. Ross v. Stouffer Hotel Co. LTD, Inc., 879 P.2d 1037 (Haw. 1994);
322. Dudewicz v. Norris-Schmid, Inc., 503 N.W.2d 645 (Mich. 1993).
323. See, e.g., Wheeler v. Caterpillar Tractor Co., 485 N.E.2d 372 (111. 1985);
324. Lockhart v. Commonwealth Educ. Sys. Corp., 439 S.E.2d 328, 331 (Va. 1994);
325. Gandy v. Wal-Mart Stores, Inc., 872 P.2d 859, 862 (N.M. 1994).
326. RESTATEMENT (SECOND) OF CONFLICTS OF LAWS §145 (1981).
327. 2 PERRITT, JR., supra note 128, § 1.64, at 65.
328. 1 TOBIAS ET AL., supra note 128, § 5:1, at 5-2 n.2.
329. See Good v. Good, 311 P.2d 756, 758-59 (Idaho 1957) ("The common law is not immutable. It is a flexible legal system capable of expansion and change necessary to meet new and changed problems and conditions, or to meet a new or altered public policy evolving from such changed conditions in an expanding and developing social order.");
330. Beech Grove Inv. Co. v. Civil Rights Comm'n, 157 N.W.2d 213, 224 (Mich. 1968) ("It is generally agreed that two of the most significant features of the common law are: (1) its capacity for growth and (2) its capacity to reflect the public policy of a given era.");
331. Wholey v. Sears Roebuck, 803 A.2d 482, 489 (Md. 2002) (holding that "our common law is not static; it may be modified by judicial decision when changing circumstances compel courts to 'renovate' outdated law and policy.").
332. Professor Winkler notes that: Despite the common conception of corporate governance as pertaining to shareholder-management relations, the actual decisionmaking of corporate officers is heavily constrained by legal rules from outside of corporate law. To understand what a corporate manager's decision matrix looks like, one must avoid succumbing to corporate law myopia: the exclusive focus on corporate law as the body of law that determines the options available to corporate decisionmakers. One must take into account environmental law, labor law, civil rights law, workplace safety law, and pension law, lest one be left with a distorted and incomplete view of how the law actually shapes those corporate decision matrices. Winkler, supra note 50, at 128 (footnote omitted).
333. See Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. REV. 547, 585-86 (2003) (in discussing whether fiduciary duties should be extended to other constituencies, professor Bainbridge notes that "[i]n regulating corporate conduct, the law has sizeable palette of options, including general welfare legislation or tort litigation, in addition to corporate law and its fiduciary duties.").
334. See supra Part II.
335. See supra Part U.C.
336. Cf. Norman v. Recreation Ctrs. of Sun City, Inc., 752 P.2d 514 (Ariz. Ct App. 1988);
337. Buelow v. Vocational Guidance Servs., No. 74965, 1999 WL 961482 (Ohio Ct App. Oct. 21, 1999). In these cases, the court rejected the plaintiffs claim that he had been wrongfully discharged as a result of a fiduciary breach because the alleged violation did not affect the public policy. Both in Buelow and Norman, however, the employer was a non-profit corporation. The economic activity of for-profit corporations entails policy considerations that are completely different from those raised by not for profit entities. The cases, therefore, can be easily distinguished from the cause of action that I am discussing.
338. Obviously, the individual violation has no real impact on the economy, but that is the case for any kind of wrongful discharge. What matters is the potential aggregate effect that similar violations could have.
339. See Jacoby, supra note 53, at 457 ("[Bjecause they are close to the action, employees often know more about what is going on inside the firm than do shareholders.").
340. See also Dana Muir, Grounding of Voice in Employee Rights, 36 VAND. J. TRANSNAT'L L. 485, 511-12 (2003):
341. Employees may be particularly effective in monitoring managerial self-interest in both the shirking and the sharking senses. At least when viewed collectively, one would expect the employee population to be familiar with the company's business and its competitors, as well as the day-to-day roles, activities, and commitments evidenced by management.... Day-to-day presence and knowledge of the firm may enable employees to identify more overt corruption and unethical activity even though organizational complexity and individual specialization may make this task increasingly difficult. Id.
342. Recognizing the cause of action could have an ulterior impact on the enforcement of fiduciary obligations. Lawrence Mitchell argued that the rules that apply to horizontal conflicts are the result of the shareholders' sole right to enforce the fiduciary obligations within vertical conflicts. See supra Part III.A. If that is correct, and if courts recognized the employees' ability to sue directors for their breaches within vertical conflicts, their fiduciary case law could develop to eliminate this, as professor Mitchell calls it, "fiduciary fallacy."
343. 2 PERRITT, JR., supra note 128, § 1.64, at 65.
344. See, e.g., Rebarchek v. Farmers Coop. Elevator, 35 P.3d 892, 903-04 (Kan. 2001) (limiting tort liability to the employer);
345. Buckner v. Atl. Plant Maint Co., 694 N.E.2d 565, 567-70 (III. 1998) (limiting tort liability to the employer);
346. Harless v. First Nat'l Bank in Fairmont, 289 S.E.2d 692, 698 (W. Va. 1982) (finding personal liability);
347. Ballinger v. Del. River Port Auth., 800 A.2d 97, 110 (N.J. 2002) (holding that in both New Jersey and Pennsylvania "an individual who personally participates in the tort of wrongful discharge may be held individually liable.").
348. See 3A FLETCHER CYCLOPEDIA CORPORATIONS § 1135, at 200-201 (2002).