Jennifer Arlen


Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes

Jennifer Arlen, Reinier Kraakman

Corporations have historically been held to a standard of strict vicarious liability for the wrongdoing of their employees. However, several areas of federal and state law have shifted to new duty-based schemes that mitigate liability for companies that have implemented compliance programs or reported wrongdoing to the government. Some states even grant privilege to environmental audit reports.

Professors Arlen and Kraakman compare the norm of vicarious liability with various types of duty-based liability regimes, analyzing the benefits and costs of each approach. They conclude that social welfare is maximized by a mixed regime that includes elements of both strict and duty-based liability. The authors find that the mixed liability regime with the widest application is a composite regime, which imposes high penalties subject to mitigation for firms that engage in compliance activities. Under this regime, firms that satisfy all enforcement duties would nonetheless face substantial residual liability equal to the harm caused by wrongdoing divided by its probability of detection. They then examine the existing composite liability regimes embodied in the United States Sentencing Guidelines for corporate defendants and the evidentiary privileges that many states have adopted for companies’ environmental audit reports. They conclude that both current approaches are flawed, as they do not adequately create proper incentives for companies to monitor, investigate, and report employee wrongdoing.

Malpractice Liability for Physicians and Managed Care Organizations

Jennifer Arlen, W. Bentley MacLeod

This Article provides an economic analysis of optimal negligence liability for physicians and managed care organizations (MCOs), explicitly modeling the role of physician expertise (and inadvertent error) and MCO authority. Professors Arlen and MacLeod find that even when patients anticipate the risks imposed on them, physicians and MCOs do not take optimal care absent sanctions for negligence because markets and contracts cannot regulate their non-contractable, post-contractual actions that are essential to optimal care. Negligence liability can induce optimal care if damage rules are optimal. Optimality generally will require that MCOs be held liable for negligence by affiliated physicians, in addition to their own negligence. Moreover, Professors Arlen and MacLeod find that MCOs should be liable even when they do not exert direct control over physicians. Finally, they show that it may be optimal to preclude physicians and MCOs from obtaining liability waivers from patients, even when patients are fully informed and waive only when it is in their interests to do so at that moment.