Research Categories: Law & Reputation

Conventional wisdom holds that lawsuits harm a corporation’s reputation. So why do corporations and other businesses litigate even when they will likely lose in the court of law and the court of public opinion? One explanation is settlement: some parties file lawsuits not to win but to force the defendant to pay out. But some business litigants defy even this explanation; they do not expect to win the lawsuit or to benefit financially from settlement. What explains their behavior?

The answer is reputation. This Article explains that certain types of litigation can improve a business litigant’s reputation in the eyes of its key constituents — constituents that help it succeed in the marketplace. It is their changed views of the litigant — and subsequent actions taken based on those changed views — that provide the financial benefit from a lawsuit that the court may not deliver. For example, technology companies use patent litigation to discourage employee flight, consumer products companies may use litigation to affect consumers’ opinions about competitors, and some corporate plaintiffs may even use litigation to address reputational harm following a crisis. In all these examples, business litigants may benefit from the reputational effects of the litigation even if they lose in court.

This Article makes two contributions. Descriptively, it challenges the conventional wisdom that lawsuits are always bad for business by revealing hidden incentives found outside the courthouse that are neglected in the standard explanation for litigant behavior. Specifically, it explains how litigation can contribute to reputation-building through signaling or framing strategies. It also describes how this reputation-building can result in different types of distributed gains: interparty, intertemporal, and interinstitutional. Practically, it highlights that the legal rules that could address this reputation-building may lack utility due to the timing of reputational effects in litigation.

Read the full article here.

When organizations act in ways that offend the public interest, parties seeking to change that behavior traditionally turned to litigation to force these 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, federal prosecutors have used agreements with large corporations to introduce significant structural reforms.

This Article identifies an alternative strategy for organizational change 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 informational effects of litigation: litigation transmits 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. This Article identifies and explains the operation of four reputational sanctions: financial, policy, regulatory spillover, 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 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.

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.

Read the full article here.