Corporate America may face an unusual pairing in the fight over corporate responsibility for human rights and the environment: EU rules and US enforcement. The potential for this (unintentional) partnership is the subject of How the EU Sustainability Due Diligence Directive Could Reshape Corporate America. The article considers how the EU Directive on Corporate Sustainability Due Diligence (CS3D) will affect US companies, focusing on a “unique combination of the EU ambitious regulation and the US robust private enforcement landscape” (P.1).
The EU directive has a sweeping geographic reach, extending beyond EU boundaries. It requires “every large corporation operating in the EU market” to “conduct due diligence on how its operations affect human rights and the environment” (P. 8). US companies with significant EU revenue are pulled in. The directive’s influence also cascades down to smaller companies as these large multinationals must monitor their “activity chain” worldwide (P. 10).
The sustainability directive does not impose liability on corporate directors. In fact, Member States rejected a proposal that included such liability (P. 12). This is where US litigation comes in. The authors explore how the European mandate interacts with corporate director liability in the US.
Two developments in US corporate law make the authors optimistic about the pressure that potential fiduciary-duty litigation may exert on companies. First is the post-2019 change to Delaware corporate law that strengthens directors’ legal obligations to oversee the company, design reasonable compliance systems, and catch and act on red flags (“Caremark duties”). These duties, combined with increased access to corporate information through pre-filing “books and records” requests, are revitalizing litigation over directors’ oversight responsibilities.
As the authors acknowledge, liability imposed through court judgments remains unlikely. Reputation, settlement amounts, and shifts in attorney advice and compliance norms are more probable mechanisms of pressure.
In addition to legal developments in corporate law and about sustainability, the article engages with the concept of the “Brussels effect,” which describes the EU’s indirect regulatory influence beyond its borders through market mechanisms. (See Jotwell review of Anu Bradford’s work.) The authors note that this instance differs from the classic description because it involves direct regulation by the EU (P.6), helpfully testing the concept’s boundaries.
In a global context of fast and unpredictable shifts, reading this article can sometimes feel like receiving a letter from a past world or a distant land. Take, for example, the article’s calm contemplation of the potential to “catapult human rights and environmental issues to the top of [US] corporate boards’ agendas” (P. 5). Occasional otherworldliness does not, however, detract overall.
In part, the article is particularly timely because of its implications for questions about conflicting requirements and the role of litigation. It provides a concrete example of conflicting mandates faced by multinational corporations, a problem that becomes acute when the corporation is told both that it must do X and that it must not do X. How should a company comply if paying attention to sustainability is both mandatory and prohibited? Navigating such conflicts may very well depend on the type of discussion here: understanding, for instance, what sustainability “due diligence” specifically entails.
The centrality of litigation brought by private parties is also a timely focus. It is possible to be a skeptic about fiduciary duty litigation as an effective tool, even with expanded Caremark duties. Nonetheless, the article prompts even these skeptics to think about the enforcement role of private litigants and litigation, a role that has become particularly salient as some of the traditional government actors are constrained.
In sum, How the EU Sustainability Due Diligence Directive Could Reshape Corporate America offers concrete and thoughtful analysis, contributes to multiple literatures, and raises questions about conflicting requirements and the role of litigation that are at the heart of this dynamic moment.
