Caremark's Irrelevance

Abstract

In re Caremark Int’l Inc. Derivative Litig. is commonly held out as the iconic corporate law case on liability for a failure of legal compliance, but the true source of corporate law as to legal compliance is the higher standard established by other sources of law. The expected cost of liability, both criminal and civil, for violations of federal healthcare regulations, for example, is a far stronger determinant of corporate compliance systems than potential liability under Caremark. Other areas of industry-specific regulation, such as for financial services, telecommunications and energy, similarly play a greater role than state corporate law in the design and operation of corporate compliance systems, as do regulations in the form of federal sentencing guidelines and employment and environmental law. The common exaggeration of Caremark’s significance illustrates a flawed pedagogical overemphasis on state corporate law as a legal determinant of corporate compliance and a broader misconception about the influence of regulatory law in corporate affairs. This article shows that federal regulatory law is a far more determinative source of law than Caremark in the design and operation of corporate compliance systems. Part II of this article compares Caremark to the parallel federal criminal prosecution of the firm to illustrate the influence of federal law in the design and operation of corporate compliance systems. Part III further discusses the determinative role of healthcare regulation in corporate compliance systems and regulatory trends, and uses recent litigation involving Pfizer Inc. to further elucidate the role of healthcare regulation. Part IV broadens the discussion by considering the role of prosecutorial and sentencing guidelines in corporate compliance generally. Part V suggests that corporate law pedagogy would be well-served by reducing its focus on state corporate law and giving greater prominence to the actual legal determinants of corporate conduct. Part VII concludes.