A couple of years ago, I taught Administrative Law at the University of California, Irvine School of Law. One of the many theories that we covered was the idea of "regulatory capture". This is a "term coined by public choice economists to indicate when members of a regulated occupation also dominate the regulatory and law-making process in their field". Brown v. Hovatter, 516 F. Supp. 2d 547, 553 (D. Md. 2007) aff'd in part and rev'd in part 561 F.3d 357 (4th Cir. 2009). Although familiar with the theory, I had never seen it used as a basis for director liability, until now.
City of Birmingham Ret. & Relief Sys. v. Good, 2017 Del. LEXIS 522 (Dec. 15, 2017) involved a derivative suit against certain directors and officers of Duke Energy Corporation after the company had pled guilty to nine misdemeanor criminal violations of the Federal Clean Water Act and paid a fine of over $100 million. After the directors moved to dismiss for failure to make a pre-suit demand, the plaintiffs argued that "demand was futile because the board's mismanagement of the Company's environmental concerns rose to the level of a Caremark" [In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)]. Under Caremark, the plaintiffs must allege that the directors intentionally disregarded their oversight responsibilities such that their dereliction of fiduciary duty rose to the level of bad faith. The plaintiffs conceded that they were required to plead sufficient facts showing that Duke Energy's board knew that its state regulator was a "captive regulator" with whom the company was "colluding".
The Delaware Supreme Court agreed with the Court of Chancery's description of the plaintiffs' pleading target:
As the Court of Chancery found, it is not enough to allege cooperation with what plaintiffs describe as a too-friendly regulator. Instead, the plaintiffs must allege in sufficient detail that Duke Energy illegally colluded with a corrupt regulator. And then, plaintiffs must tie the improper conduct to an intentional oversight failure by the board. The complaint falls short of these pleading requirements.
(Footnotes omitted). The Supreme Court affirmed the Court of Chancery's conclusion that the plaintiffs' had missed their mark.
If Robert Mueller is looking for collusion, he need not go any further than the following footnote to the Supreme Court's opinion:
In re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975, 2005 WL 5756357, at *31 n.50 (Del. Ch. 2005) (quoting Merriam-Webster's Online Dictionary (10th ed. 1993)) (defining collusion as "a secret agreement or cooperation, especially for an illegal or deceitful purpose"); see also Dickerman v. N. Tr. Co., 176 U.S. 181, 190, 20 S. Ct. 311, 44 L. Ed. 423 (1900) ("Collusion is defined by Bouvier as 'an agreement between two or more persons to defraud a person of his rights by the forms of law, or to obtain an object forbidden by law,' and in similar terms by other legal dictionarians."); Sidman v. Travelers Cas. & Sur., 841 F.3d 1197, 1206 (11th Cir. 2016) (quoting Collusion, Webster'S 3d New Int'l Dictionary 446 (2002)) "Dictionary definitions of collusion include a 'secret agreement,' 'secret cooperation for a fraudulent or deceitful purpose,' 'a secret agreement between two or more persons to defraud a person of his rights often by the forms of law,' an 'agreement between parties considered adversaries at the law,' and 'a secret agreement considered illegal for any reason.'").
If we trace the etymologic roots of the word, it is derived from a Latin word, collusio, which means a secret agreement. The Latin word itself is derived from two words (cum and ludere) meaning to play together.