The Competitiveness of Nations

in a Global Knowledge-Based Economy

March 2006

AAP Homepage

Ted Nace

Gangs of America

The Rise of Corporate Power and the Disabling of Democracy


San Fransico, 2005



Chapter Fourteen

Judicial Yoga

The tangled logic of corporate rights


WHAT LEGAL RATIONALES has the Supreme Court relied on to establish corporate rights?  How well do those rationales stand up to an audit of their logical coherence?

At first glance, the Supreme Court’s development of corporate rights has the appearance of an orderly and careful progression.  It begins with the foundation decision in the 1886 Santa Clara case declaring corporations to be entitled to the same “equal protection” as persons under the Fourteenth Amendment.  Then, over the course of the following century, the Court examines first one case and then another, gradually expanding the set of corporate rights.  (The entire corporate bill of rights is shown in Table 1.1.)

That image of coherence and care is deceptive.  The judicial reasoning that underlies the creation of corporate rights has cracks - deep internal inconsistencies.  Unfortunately, the process by which the Supreme Court builds a body of jurisprudence out of multiple decisions does not serve to expose these sorts of cracks, but rather to hide them.  With the passage of time, the defective old bricks acquire a sheen of legitimacy, weathering into handsome, venerable foundations.


ALL LEGAL RATIONALES about corporate rights, whether supporting or opposing, must start with a basic question: What is a corporation?  From a legal standpoint, the answer is simple.  A corporation is a type of organization in which a separate legal identity is created from that of the owner or owners.  Legally, that separate identity comes into being when the government issues a charter of incorporation.

A business can exist without the blessing of the government.  A corporation, by definition, cannot.  This fundamental distinction lies at the basis for the oldest theory of the corporation, which was used to deny


corporations all but a few functional rights from 1789 until 1886, and which has continued to serve as the primary argument in recent dissenting opinions in corporate rights cases.

In the 1819 Dartmouth College decision, Chief Justice John Marshall wrote that a corporation is an “artificial being, invisible, intangible and existing only in contemplation of law.”  Thus, a corporation can’t assert rights against its creator, the legislature that issued its charter.  The legislature is free to pass laws and regulations as it sees fit - or even to revoke a corporation’s charter and end its existence.  In the Dartmouth case, the Supreme Court actually blocked New Hampshire’s bid to radically alter the charter of Dartmouth College, agreeing with Dartmouth’s contention that its charter should be considered a preexisting contract with King George and therefore protected by the Constitution’s contracts clause.  However, in the same decision, the Court made it clear that as long as a state legislature included a clause in future charters reserving its right to alter or revoke them, the legislature could do so with impunity.  Although the case did begin the process of creating a distinct legal status for corporations, it also established clearly that legislative power trumps corporate authority.

This artificial entity theory does not deny that corporations can have some rights, but it limits those rights to the functional ones necessary for the corporate entity to participate in the legal arena: the right to own property, the right to enter into contracts, and the right to defend its property and enforce its contracts in court.

Implicit in the artificial entity theory is the philosophy that legitimate power can only emanate from democratic institutions.  The theory reflects the wariness toward corporations inherited from the colonial period, a belief that corporations will inevitably seek power over their legislative masters.  Such fears have even older roots in traditional English law.  For example, mortmain (“dead hand”) clauses in church charters limited the amount of land that the congregation could own in order to prevent the accumulation of real property in immobile corporate hands.

Concerns about runaway corporate power induced legislatures to use the corporate charter as a restrictive tool, confining each corporation in a tight legal box.  Together, the artificial entity definition and the charter system provided the justification along with the means for strict state control of corporations.


THE FIRST SERIOUS EFFORT to create a theory of the corporation that would justify giving corporations constitutional rights was articulated by Justice Stephen Field in his ninth circuit court opinions in the San Mateo and Santa Clara cases.

Field argued that to deny corporations “equal protection” under the Fourteenth Amendment would have the effect of denying corporate shareholders their “equal protection” rights.  This approach called for looking past the corporate veil and seeing the rights of the shareholders.  On its surface, this approach has a simple appeal, especially as articulated by Field’s friend Professor Pomeroy, who wrote that “for purposes of protecting rights, the property of the corporation IS the property of the corporators.”

But does Pomeroy’s equation really make sense?  The entire point of the corporate form of organization was to create a category of property that could be different from individual or partnership property, both in terms of the privileges it affords and the accountability it demands.  For example, the meaning of limited liability is that investors in a corporation are safely beyond the reach of those who sue the corporation.

With ordinary property, the accountability of the owner is straight-forward.  If a horse knocks over your fence, you can sue the owner for damages, even if the horse is no longer alive.  But if sparks from a corporation’s train burn your barn, you can’t demand compensation from the bank accounts of the stockholders, only from the bank account of the corporation.  In other words, the very aspects of the corporate institutional form that create flexibility also create gaps in accountability.  So it seems reasonable for society to address those gaps with regulatory measures.


GIVEN SUCH PROBLEMS WITH Field’s and Pomeroy’s justification for corporate rights, a new rationale was eventually developed.  Legal scholars call this second approach the natural entity theory of corporate rights.

The natural entity theory involved looking not at the shareholders but at the corporation itself as an upstanding, respectable participant in society.  Given its central role in society, the corporation deserves the same rights as humans beings, even if the Constitution doesn’t actually say it does.

Unlike Field’s shareholder-oriented theory, the natural entity theory never had an articulate advocate on the Supreme Court.  Indeed, as legal


historian Morton Horwitz has argued, the natural entity theory did not even exist in America at the time of the Santa Clara decision.  And in later decisions, it was never presented in a straightforward way as a rationale.  Rather, the theory seeped into the Court’s decisions more indirectly, as a presumption rather than as an explicit argument.

What gave the natural entity theory a sheen of respectability was a wave of European scholarship that arrived on the American intellectual and legal scene during the 1890s.  In Germany, an academic movement known as organicism had been exploring the social meaning of groups and associations for a long time, and about a decade after the Santa Clara decision some of the key works produced by that movement were published in English for the first time.  The movement’s central figure was German medieval law scholar Otto Gierke (1841-1921), whose writings were translated into English by Frederic William Maitland in 1900 as Political Theories of the Middle Ages.  According to Gierke, under Pope Innocent IV in the thirteenth century, the church initiated a long and undesirable process of attempting to monopolize the organization of society, making every other institution subordinate to itself.  When the state replaced the church as the primary institution in society, it too sought to make its authority universal.

To Gierke, the democratic revolutions spawned by the Enlightenment were only partial successes.  Although they elevated the status of individual humans, they failed to elevate the status of the intermediate institutions that are also organic elements of society.  Democracies had worked out the relation between the individual and the state.  But the rich and lively web of organizations that constitute society - schools, churches, clubs, businesses, unions, and other entities - also required legitimacy and protection against the state, and that need remained unmet by political systems that only granted rights to individuals.  According to Gierke’s historical research, the “collective personality” of organizations was well established during early medieval times, when communities of various sorts asserted “organic” rights - that is, rights that reflected the needs of the community as a whole.  He proposed that such rights be resurrected.

Gierke’s arguments appealed to a diverse audience.  Some supporters were traditionalists concerned about the social fragmentation induced by the Industrial Revolution.  Others were socialists and anarchists who saw communal values buttressing their challenges to the bourgeois power


structure.  As the literature of the movement permeated the British and American intellectual worlds, legal scholars, historians, social theorists, and philosophers on both sides of the Atlantic pondered the question of “group personality.”  Initially they focused on premodern social and economic institutions, seeking to understand how industrialization had corroded those forms during the transformation of Western society from its medieval roots into its modern form.  Eventually they included modern organizations, including corporations, in the discussion.

Although Gierke’s ideas may sound appealing, they run into a simple problem when applied to the American context: the United States Constitution.  The natural entity theory holds that shielding associations from the state should be a fundamental principle of law - a right.  But the Constitution disagrees.  Organizations of various stripes, including corporations, did in fact exist at the time the Constitution and the Bill of Rights were enacted.  If the founding fathers had wanted to create special rights for groups such as corporations, they had every opportunity to do so in framing the Constitution.  In fact, the Constitution did confer special protection on two groups - the press and religious institutions - but not on any others.  The history of the East India Company, the Boston Tea Party, and the Constitutional Convention all reveal absolutely no desire on behalf of the framers of the American system to afford any rights whatsoever to corporations.  Indeed, they indicate the opposite: a bias toward restraining corporations.  (See again chapter 5 for a detailed discussion of this subject.)  Thus, it is fair to say that those who supported using Gierke’s theories of group personality as a rationale for corporate empowerment were essentially undertaking to transplant a European notion into a constitutional framework distinctly unsympathetic to it.


YET QUITE BY COINCIDENCE, the terminology of the organicist movement seemed tailor-made for the American debate over corporate rights.  Organicist scholars used the term corporate personality, which is confusingly similar to the legal notion of corporate personhood.  The relation between the terms is merely semantic, not substantive, yet it led to confusion.  Prior to the 1880s, it had always been clear that the legal personhood status enjoyed by corporations under English and American law was merely a functional category that referred to the fact that corporations can access the courts on matters of property and contracts.


The term “legal person” had never implied that corporations were entitled to a broader set of human rights.  Indeed, in England, as described in chapter 7, incorporation had never been a protectable property right.

As legal historian Morton Horwitz has pointed out, the ideas of the European organicists were never raised in the Supreme Court arguments in the Santa Clara case.  Only in the decade following Santa Clara, the 1890s, did these ideas become a justification for corporate rights.  From the 1890s until the 1920s, legal scholars, philosophers and others became caught up in a seemingly endless series of debates over the meaning of corporate personality and the connection between corporate personality and legal personhood.

These rarified and generally pointless debates finally drew to a halt after philosopher John Dewey argued convincingly in a 1926 essay that the whole discourse about corporate personality was too abstract to have any practical value.  After Dewey, proponents of corporate rights abandoned any further efforts to produce a coherent justification for granting corporations an ever-increasing body of rights.  In general, Supreme Court decisions have granted new corporate rights with virtually no supporting argument, or alternatively have used a strange medley of rationales.


FOR FORTY YEARS - from 1922 to 1962 - the trend by the Court toward creating a corporate bill of rights came to a halt, and no new rights were granted to corporations.  During this period two justices, Hugo Black and William O. Douglas, sensed an opening, and they wrote stinging dissents advocating the reversal of the Santa Clara decision.  In a dissent to the 1938 Connecticut General Life Insurance Company v. Johnson decision, Justice Black wrote:

Both Congress and the people were familiar with the meaning of the word “corporation” at the time the Fourteenth Amendment was submitted and adopted.  The judicial inclusion of the word “corporation” in the Fourteenth Amendment has had a revolutionary effect on our form of government.  The states did not adopt the amendment with knowledge of its sweeping meaning under its present construction.  No section of the amendment gave notice to the people that, if adopted, it would subject every state law and municipal ordinance, affecting


corporations, and all (administrative actions under them) to censorship of the United States courts.  No word in all this amendment gave any hint that its adoption would deprive the states of their long-recognized power to regulate corporations.

Similarly, in a 1949 dissent to Wheeling Steel v. Glander, Justice Douglas wrote:

It may be most desirable to give corporations this protection from the operation of the legislative process.  But that question is not for us.  It is for the people.  If they want corporations to be treated as humans are treated, if they want to grant corporations this large degree of emancipation from state regulation, they should say so.  The Constitution provides a method by which they may do so.  We should not do it for them through the guise of interpretation.

But Santa Clara was not reversed.  By now, the concept of corporate rights had become deeply embedded in American law and had gained a momentum of its own.  And beginning in 1962, the Court resumed expansion of corporate rights, giving corporations:

·        The Fifth Amendment right against being tried twice for the same offense (Fong Foo, 1962)

·        The Seventh Amendment right to a jury trial in a civil case (Ross v. Bernhard, 1970)

·        The First Amendment right of “commercial free speech” (Virginia Board of Pharmacy v. Virginia Citizens Consumer Council, 1976, and Central Hudson Gas, 1980)

·        The Fourth Amendment right against unwarranted regulatory searches (Marshall v. Barlow’s, 1978)

·        The First Amendment right to spend money to influence a state referendum (Bellotti, 1978)

·        The First Amendment right of “negative free speech” (Pacific Gas & Electric Co. v. Public Utilities Commission, 1986)


In all these cases, the Supreme Court seemed to carefully avoid citing any of the defective rationales that had earlier been used.  Instead, it began using two new methods of justification: one based on history, the other based on the intended purpose of a particular constitutional right.

The Supreme Court used the historical argument in Marshall v. Barlow (1978).  The Court ruled that government safety inspectors could not enter corporate property without a search warrant, under the Fourth Amendment’s protection of “the right of the people to be secure in their persons, houses, papers, and effects.”  Though corporate property would seem to fall under none of those categories, the majority decision in the case relied on the assertion that at the time of the American Revolution a prime cause of colonial anger was British searches of colonists’ shops.  The dissenting justices in the case objected that equating major corporations with colonial shops made little sense.  (They might have added that a true reading of history would reveal that colonial attitudes were quite distinctly anticorporate and would hardly have lent corporations any such constitutional protection.)

The Supreme Court made the argument based on the intended purpose of a right in extending First Amendment “free speech” rights to corporations.  The Court faced a dilemma.  Such rights are intrinsically associated with human qualities such as “will” and “conscience.”  Only in a metaphorical sense can such qualities be ascribed to business organizations.  But in the Bellotti decision, the Court found a way to get around this objection by adopting an approach that didn’t depend at all on the nature of the corporation.  Rather than claiming that a corporation has any intrinsic human qualities that would entitle it to human rights, it came up with the roundabout rationale that the protections of the First Amendment were protections of speech, not of the speaker.  In the Bellotti decision, Justice Powell wrote, “The inherent worth of the speech in terms of its capacity for informing the public does not depend upon the identity of its source, whether corporation, association, union, or individual.”

Similarly, in striking down a state law that sought to limit corporate advertisements promoting electrical consumption during a period of energy shortages (Central Hudson Gas, 1980), the majority decision stated that its purpose was not to protect the rights of the corporation, but rather to protect the right of the public to receive the maximum amount of information possible on a given issue.


But if the goal is to maximize speech rather than to protect a particular speaker, what happens when the rights of two different speakers come into conflict?  The answer, of course, is: “Management decides.”  This became clear in the case of Pacific Gas & Electric v. Public Utilities Commission.

In Pacific Gas & Electric (1986), the Court established a novel new corporate right, that of “negative free speech.”  In this case, the management of an electrical utility company had a newsletter expressing one set of political views on energy policy, but the state regulatory body, wishing to increase the diversity of opinions, passed a rule requiring the utility company to enclose the newsletter of a consumer group four times each year in its billing envelopes.  The utility company objected to the newsletter, and the U.S. Supreme Court ruled in favor of the company.

Under the principle of protecting “speech” rather than the rights of the corporate “speaker’ one would have expected the Supreme Court to support the Public Utilities Commission’s rule.  After all, the effect of the rule was to increase the amount of information available to the public by forcing the company to disseminate a newsletter with views different from those of the management.  But the Court ruled in favor of management, contradicting its own rationale in the Central Hudson decision.  In the majority opinion, written by Justice Powell, the Court concluded that forcing an electric utility to enclose a message from a ratepayer group in its billing envelope violated the utility’s First Amendment free speech right not to be associated with statements it disagreed with.  According to the Court’s decision, being required to enclose such a message would violate the corporation’s rights, because it would implicitly force Pacific Gas & Electric “to respond to views that others may hold.”

How can the Pacific Gas & Electric decision be explained?  Since it clearly contradicts the Supreme Court’s own previous rationale for extending First Amendment rights to corporations - the notion of increasing the amount of information available to the public - some other rationale must be sought.  Evidently, the Supreme Court concluded that corporate managers deserved a higher level of constitutional protection than other corporate stakeholders, such as ratepayers or employees.  To give First Amendment protection to an official newsletter while denying it to a rate-payer newsletter, an employee newsletter, or a stockholder newsletter is in effect to grant constitutional protection to management over and above other groups involved with the corporation.


A few members of the Supreme Court recognized the fundamental flaw in the Pacific Gas & Electric decision.  Justice William Rehnquist dissented forcefully from the decision:

Extension of the individual’s freedom of conscience decisions to business corporations strains the rationale of those cases beyond the breaking point.  To ascribe to such artificial entities an “intellect” or “mind” for freedom of conscience purposes is to confuse metaphor with reality.

What appears to have happened is that the Court came to a gradual acceptance of the privileged status that corporations had gained in American society.  And that rise in status was created, at least in part, through Court decisions that had created the “corporate bill of rights.”  Ironically, the justices who might have been expected to be the philosophical heirs to the dissenting tradition of Black and Douglas, liberals like Justice Brennan and Justice Marshall, had now emerged as leading advocates, along-side avid pro-corporate advocates such as Lewis Powell, of granting First Amendment rights to corporations.

Like a myopic Dr. Frankenstein, the Court had worked piecemeal and haphazardly, grafting a finger here, an eyebrow there, until the result was a full-fledged legal superperson.  Only sporadically, in dissents interspersed across the decades, was there an explicit recognition that the cumulative impact of the growing body of corporate rights was to tie the hands of legislative bodies seeking to control corporate power.  In general, the justices displayed no awareness that the Supreme Court’s creation of a corporate bill of rights amounted to an immense transfer of power from democratic institutions to private ones.  The process was not driven by any overarching theory - to this day, the Court has yet to sustain any consistent rationale to support its creation of the corporate bill of rights.  On the contrary, the process has been a perfect illustration of the Orwellian ability of large, unaccountable institutions to bend even ordinary language into a tool to serve their own needs - the gravitational force exerted by power.  Far from laying orderly tracks, that force of power seemed to operate between the cracks of reason, leaving in its wake only muddied, blurry traces.


ONE OF THE MOST disappointing aspects of the dramatic expansion of corporate rights since 1970 has been the acquiescence and even support for that process by the leading advocate for an expansive interpretation of constitutional rights: the American Civil Liberties Union.  Generally, the role of the ACLU in the judicial process is to seek the protection and expansion of human freedoms.  But on the issue of corporate rights, its position has actually served to diminish human rights by expanding corporate ones.

Take the example of Pacific Gas & Electric v. Public Utilities Commission.  The ACLU has cited this Supreme Court decision approvingly as an example of the Court blocking “compelled speech.”  According to the ACLU, compelled speech is speech in which “the government has compelled someone to support a particular message through word or action.”  Such compulsion, according to the ACLU, “violates the principle of individual conscience that is central to the First Amendment.”  To the ACLU, a utility company that objected to being required to insert a consumer group newsletter in its billing statement has the right to block such a newsletter - just as a student has a right to refuse to say the pledge of allegiance.

But isn’t a corporation different from a student?  After all, a student really does have a conscience.  But where is the conscience of a corporation?

As Adolph Berle and Gardiner Means pointed out in their landmark work The Modern Corporation and Private Property, the essence of a corporation is the fragmentation of accountability among various internal groups.  Those who occupy the key leadership position (the professional managers) aren’t necessarily its owners; those who are owners (the stockholders) are generally neither in charge nor legally liable; and those who are supposed to be exercising strategic direction on behalf of the owners the board of directors) are rarely sufficiently informed nor sufficiently empowered to actually fulfill their theoretical function.

With such intrinsic fragmentation, a core feature of the corporation is the absence of any discernable mind or conscience.  That void makes the theories of corporate rights that rely on the qualities of individuals meaningless.  If the Berle and Means analysis of the corporation makes sense, then none of the views of the corporation out of which constitutional rights precedents have developed stand up to scrutiny, because all of them turn on the assumption that a corporation is capable of behaving within


the same moral and legal framework as a person or a community of people.  All of them assume that some group inside the corporation - generally either the owners or the managers - is ultimately in charge and can be used as a morally accountable proxy for the corporation as a whole.  Without a someone, or at least a coherent group of someones, in charge of the corporation, it becomes a phenomenon without any moral agency - like a hurricane or a beehive.  Thus, to dignify a profoundly non-human entity by awarding it rights was to confuse basic categories - like trying to control the behavior of animals by handing them pamphlets, or trying to make a machine operate more reliably by promising it a ticket to the movies.

In practice, the ACLU’s protection of corporate free speech rights actually boils down to protection of management speech.  But it is questionable whether even management speech is the expression of a human conscience.  After all, fiduciary responsibility requires managers to pursue a course of advocacy on behalf of the corporation that maximizes the corporation’s profits - and it is not infrequently the case that such advocacy violates a manager’s own conscience.

Such realities are all ignored by the “can’t see the forest for the trees” nature of the ACLU’s approach to corporate rights.  The forest is the reality that the structure of American society limits the opportunity to communicate in the public arena to those with sufficient resources.  Day in and day out, corporations use their financial resources to drown out other points of view.  Thus the institutions of democratic government may attempt at times to carve out zones in which noncorporate voices can be heard.  For example, in the case of Pacific Gas & Electric, the fact that a single corporation monopolizes all electrical and gas supplies to a large region containing millions of people, as well as monopolizes all communications with electrical customers within that region, was believed by the Public Utilities Commission to create an unhealthy bias in the information available to customers.  The Public Utilities Commission took the reasonable step of requiring the company to occasionally enclose a consumer newsletter in its monthly billing statement.

Instead of focusing on the “trees’ the ACLU would serve the goals of the Constitution better if it considered the constitutionality of actions by the government that have ceded vast tracts of the public’s media to corporate interests.  Perhaps the most crucial example of that sort of concession to corporations has been in the area of telecommunications


policy.  In his seminal book Rich Media, Poor Democracy, University of Illinois professor Robert McChesney recounts the respective histories of the United States and Canada during the 1920s and 1930s in allocating control of the radio spectrum.  In the United States, federal regulatory agencies quickly marginalized public broadcasting channels, resulting in an overwhelming domination of the airwaves by corporate interests.  In Canada, the government carefully reserved a portion of the spectrum for noncommercial broadcasting.

Were the ACLU to consider broadly the goals of the First Amendment, it might apply its resources to challenging the overall structure of telecommunications policy, toward the goal of providing access to as broad an array of voices as possible.

The ACLU’s position on First Amendment issues has led it to oppose a number of attempts to institute campaign finance reform.  Here, the issues of “forest and trees” are similar to those in the Pacific Gas & Electric decision.  In its decision in Buckley v. Valeo, the Supreme Court appeared to open one eye - to see at least one part of the forest of contemporary reality.  Thus, the Buckley decision recognized that the expenditure of money is intrinsically intertwined in modern society with the ability to disseminate a political message through the commercial media.  But the Supreme Court avoided the obvious corollary to its own “speech money” insight: if the expenditure of money is intrinsic to disseminating a political message, then doesn’t that leave those without financial resources essentially speechless?  Doesn’t this imply the need to make the First Amendment meaningful by increasing noncommercial channels for those whose financial resources don’t rise to the level of the threshold needed to “play ball” in the commercial system?


IN EFFECT, THE SUPREME COURT, with the blessing of the ACLU, has accepted the ground rules of a system where corporations can dominate the airing of issues - the control of media by a limited number of large corporations, as established by federal telecommunications policies.  Once it has accepted the underlying setup, where most of society is rendered speechless and invisible, the ACLU falls into the trap of seeing only the actors who remain in the game.  Thus it is the rights of these actors - corporations and the relatively few wealthy individuals who can match the resources of corporations - that the ACLU ends up defending.


Not surprisingly, corporate America was delighted with the ACLU position on free speech.  According to one document released by the U.S. House of Representatives’ Commerce Committee, “Strategy to Combat Advertising Content Restrictions and Counter-Advertising Requirements” the tobacco industry considered the ACLU to be the “most prominent and valuable of our constitutional ad ban allies.”

Why did the ACLU capitulate so easily to the corporate framing of First Amendment issues?  It seems that the ACLU is motivated by a “slippery slope” notion, believing that restricting the First Amendment rights for one segment of society will inevitably undermine the protection for other segments.  Speech should be protected, no matter what the source.  After all, if the speech of pariahs such as porno graphers or Nazis deserves protection, then why should not the speech of a mainstream element such as the corporation?

The problem with the ACLU position is that it bases its rationale on the wrong metaphor.  Protecting corporations is not a way of avoiding the slippery slope, analogous to protecting the speech of an unpopular speaker.  After all, a corporation is not a speaker at all - speaker is entirely the wrong metaphor.  More aptly, the corporation might be compared to a megaphone.  Suppose you go to a PTA meeting, and you notice that one of the other parents has brought along a megaphone that allows him to drown out everyone else.  By asking that person to put the megaphone down, you’re not depriving him of the opportunity to speak.  You’re merely protecting the ability of other speakers to be heard.

Similarly, campaign finance laws that restrict corporate political expenditures have the effect of protecting First Amendment rights.  How?  They prevent the corporate megaphone from drowning out other points of view.  When such regulations are not in place, a large corporation is often capable of using its superior financial resources to overwhelm other opinions.  With regulations in place, corporate managers remain free to express their own opinions, either personally or on behalf of the company.  But other points of view are protected too, including those of employees, stockholders, dissenting managers, and the public at large.


THE FALLACY OF SEEING THE CORPORATION as a speaker is illustrated by a recent case involving Nike, Inc.  In 1996, Nike began to face serious charges of sweatshop conditions in the Asian factories operated by its


subcontractors.  Three hundred thousand to five hundred thousand people, mostly young women, work in those factories, located primarily in Vietnam, China, Indonesia, and Thailand.  Reports in the news program 48 Hours and in the New York Times, Financial Times, San Francisco Chronicle, Kansas City Star, Oregonian, Buffalo News, and Sporting News contained a wide range of allegations.  The Times reported “grim conditions” and widespread human rights abuses in factories where Nike shoes were made.  A spot audit of one Vietnamese factory found 77 percent of workers suffering respiratory problems.  An investigator for Vietnam Labor Watch found a pervasive “sense of desperation” based on interviews with the young women making Nike shoes there.  In China, the Hong Kong Christian Industrial Committee found workers subjected to eleven- to twelve-hour days, compulsory overtime, and violation of minimum wage laws.  Other reports described physical, verbal, and sexual abuse, and exposure of young workers to toxic chemicals, noise, heat, and dust without adequate safety equipment.

In response to the allegations, Nike mounted a publicity blitz in which it denied the charges and asserted that its workers were paid double the minimum wage, on average; its workers received free meals and health care; its workers were not subjected to corporal punishment or sexual abuse; and its products were made in accordance with health and safety regulations.

Marc Kasky, a San Francisco resident, became convinced that much of the information being used by Nike in its publicity campaign was false.  Kasky decided to take action, and coming to the conclusion that Nike’s statements did not even agree with the company’s own internal audits, he flied a false advertising lawsuit in state court under California’s Business and Professions Code.

In response to Kasky’s lawsuit, Nike’s lawyers used an interesting legal strategy.  Rather than argue that the company’s advertisements were factual, the lawyers asserted that factuality was irrelevant in the case because Nike was protected by the First Amendment.  Thus, the company could publicize any sort of information it wanted - even “facts” that it knew to be completely false.

As the case worked its way to the Supreme Court (which ultimately refused to hear the case, leading the parties to settle out of court), the legal arguments became complex.  Kasky’s attorneys argued that Nike’s statements constituted “commercial speech’ which is subject to a lower


level of First Amendment protection because of the need to ensure public safety from misrepresentations about product safety and ingredients.  Nike’s lawyers, on the other hand, argued that the sweatshop issue was a political debate, and that the entire purpose of the First Amendment was to ensure that no one in such a debate could be subjected to governmental restriction.

Once the debate was set in these terms, Nike enjoyed a tremendous advantage.  The ACLU rushed to defend the company’s freedom of speech, as did a number of corporations, editorials in major newspapers, and even the AFL-CIO.  Typical of the arguments was that of the ACLU’s amicus brief, which cited “the fundamental First Amendment principles that protect the rights of those on both sides of a debate to speak their minds freely.”

Here is the crux of the issue: the corporate mind.  When a corporation issues a press release or runs an advertising blitz, who is actually speaking its mind?  Obviously, a corporation itself does not have a mind.  It is merely a collection of papers - the name on a financial statement.  There are, of course, managers, directors, employees, lawyers, and public relations firms involved in such campaigns.  But do the statements issued by a corporation actually reflect the personal opinions of any of those people?  Perhaps, perhaps not.  But what is certain is that holding a company accountable for the accuracy of its advertisements and official statements about safety conditions, worker pay, incidents of verbal or sexual abuse by factory supervisors, or other such information hardly seems a restriction on anyone’s freedom of speech.  Kasky’s suit was not directed at after-hours statements made by human beings who happened to work for Nike - rather, the suit aimed at official statements of the company.

The situation might be compared to the responsibilities of a corporation in the financial arena.  In official representations about its financial status, a corporation is accountable for the truthfulness of all representations.  On the other hand, if an executive wants to go to a cocktail party or a family reunion and brag about how successful her company is, she should have every right to do so.

Ultimately, society must be able to make a distinction between the rights and prerogatives of a $10 billion corporation such as Nike and an ordinary human being like you or me.  No one would ever propose that a machine that emits words is entitled to free speech.  It is human speakers


that the First Amendment protects, not machines.  Contrary to the fears of the ACLU that requiring corporate statements to be truthful puts society on a slippery slope toward restricting human speech, the actual slippery slope is different.  The real slippery slope is the ever-increasing tendency to treat corporations as though they were human beings.

But what about the other rationale for extending First Amendment rights to corporations - the notion that protecting corporate speech is not so much about protecting the corporation as a speaker as about protecting society as a listener?  According to this listener-oriented rationale, society depends on the lively, unimpeded flow of information, the “free market of ideas.”  Truth and falsehood, it is thought, can best be sorted out if all providers of information, no matter who or what they might happen to be, are afforded the maximum leeway to say whatever they want, whether truthful or not.

The problem with applying this rationale to corporate speech is that in many cases only the corporation is in a position to know the facts about its own operations.  For that reason, few people would argue against requirements that corporate representations about finances and product ingredients be truthful.  But why should the truthfulness of corporate statements about the treatment of workers in Third World factories be any less important?

It must be remembered that in China and other countries where many companies, including Nike, manufacture their products, it remains difficult and even dangerous to independently ascertain what goes on inside the workplace.  Thus, the “free market of ideas” can’t be relied upon to reveal the truth.  The only way society will know how the workers who make Nike shoes are paid and treated is if Nike, Inc. is required to report such matters truthfully.

As the following chapter shows, the pressures on corporations to paint a false picture to the outside world are significant and pervasive.  For that reason, the idea that giving corporations “the right to lie” under the First Amendment is a way of maintaining the “free market of ideas” is wrongly conceived.  Indeed, just as laws against fraud and monopoly are needed to maintain the integrity of markets for goods and services, so likewise laws against deliberate corporate deception are actually quite vital to protect the “free market of ideas.”


The Competitiveness of Nations

in a Global Knowledge-Based Economy

March 2006

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