Wentong Zheng has published Corporations As Private Regulators, 55 U. Mich. J.L. Reform 649. The paper can be downloaded here. Below is an excerpt.

In August 2018, technology giant Microsoft made headlines by announcing that it would soon require its suppliers and contractors with more than fifty employees to offer workers at least twelve weeks of paid parental leave.¹ Microsoft’s new policy closely mirrors a Washington state law requiring that workers in the state receive twelve weeks of paid family leave; it is an effort to extend that same level of benefit to workers outside of the company’s home state.²

While groundbreaking for the world of paid family leave, Microsoft’s move was only one example of an increasingly common trend of corporations weighing in on public policy through corporate action. Following the 2018 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida, Dick’s Sporting Goods banned sales of assault-style weapons and raised the minimum age for purchase of firearms and ammunition in its stores to twenty-one.³ Citigroup placed restrictions on their new retail business clients, prohibiting them from selling guns to customers who have not passed a background check and are under the age of twenty-one.⁴ Bank of America announced that it would stop lending money to gun manufacturers that make military-style firearms for civilian use.⁵ In addition to gun control, banks are taking meaningful action on immigration. In March 2019, JPMorgan Chase & Co. announced its plan to stop financing private operators of prisons and immigration detention centers.⁶ JPMorgan’s move was followed by Wells Fargo, which in the same month told Congress that it was exiting its business relationship with the private prison industry.⁷ *651 As a final example, banks are facing increasing pressure from politicians and advocacy groups to stop funding oil pipelines, a major source of greenhouse gas emissions widely believed to cause climate change.⁸ In March 2020, UBS Group said it would no longer finance certain fossil fuel projects, including new offshore oil projects in the Arctic, thermal coal mines, and oil sands on undeveloped lands.⁹

In a sense, this trend of corporate action on public policy issues is a continuation of the corporate social responsibility (CSR) movement that dates back to at least the 1950s.¹⁰ As opposed to the traditional corporate model, CSR “refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.”¹¹ The earlier forms of CSR, however, featured mostly voluntary action on the part of willing corporations, be it charitable donations or corporate action to improve employee, customer, or shareholder relations.¹² For instance, during the civil rights movement, many corporations in the South hired and served African American employees and customers before the practice was widely accepted.¹³ Another example is when corporations offered employment benefits to LGBTQ employees before they were legally required to do so.¹⁴ These corporate actions were mostly voluntary, with little coercion involved.

By contrast, the recent corporate action on public policy issues heralds a fundamentally different mode of corporate activism. Instead of relying on voluntary action, corporations impose their preferred policies *652 on their suppliers, contractors, and customers. Parties on the receiving end of such corporate action are forced to either comply with the action or discontinue their business relationship with the corporation.¹⁵ More importantly, this corporate action goes above and beyond the law–parties on the receiving end of such action are required to undertake activities not required by law, or barred from activities that they are legally entitled to do.¹⁶ Through this kind of coercive action, corporations are assuming the role of regulators and are drastically changing the scope of permissible and impermissible business conduct in the marketplace.¹⁷

This scholarship is the first to discuss this new phenomenon–referred to as “Corporations as Private Regulators” (CPR) in this Article–which signifies a new mode of corporate participation in public policymaking in the United States. Traditionally, corporations affect public policy through lobbying or industry self-regulation.¹⁸ Under either of these two modes, corporations attempt to capture, manipulate, or avoid the sovereign power of the government in an effort to shape public policy in their favor.¹⁹ CPR, however, departs from these traditional modes by disregarding the sovereign power of the government and relying instead on corporations’ own private regulatory power.²⁰ This changing role of corporations in public policymaking is another manifestation of the complex relationships between private businesses and government in the modern economy. Whereas governments increasingly conduct business affairs as market participants, private businesses increasingly exercise power akin to the government’s regulatory power.²¹

Indicating the nuanced nature of corporations’ private regulatory power, many politicians decry corporations’ economic power in general but are nonetheless comfortable encouraging corporations to exercise their regulatory power–which is predicated upon their economic power–to achieve desired political outcomes.²² Political convenience aside, *653 one reason for this apparent contradiction is that the consequences and broader implications of corporations’ private regulatory power have not been thoroughly scrutinized….

[T]there are no perfect solutions to the CPR problem. Tackling the problem within the existing legal framework faces serious limitations. Whether antitrust, property, or constitutional law, existing laws do not provide a natural fit for corporations exercising CPR power. A general CPR law that would prohibit large corporations from exercising CPR power on any issues is too inflexible to be practicable. For the time being, an ad hoc approach that allocates the right of refusal on a case-by-case basis appears to be the most realistic way to discipline the CPR power.

Of course, before deciding how to deal with the CPR power, society must first decide a threshold question: whether the CPR power is a problem to begin with. If society does not consider corporations wielding CPR power to be problematic and desires that corporations exercise that power, society more likely than not will embrace the status quo. If society considers the CPR power a threat to citizens’ rights, it is conceivable that society will gravitate toward reformed legal arrangements in effort to reign in the CPR power. The greater the threat society considers the CPR power to pose, the more radical the legal solution society will be willing to adopt. On the far end of this spectrum is a completely revamped constitutional order under which private corporations are made subject to constitutional constraints.

A while back, I blogged about a securities fraud case where the only lead plaintiff applicant was rejected on the grounds that he had sent harassing letters to the defendants.  Ultimately, in that case, no alternative lead plaintiff ever completed a new application, and the case did not proceed as a class.  Instead, several investors proceeded on an individualized basis, and their claims were eventually dismissed.

Well, it happened again: in Bosch v. Credit Suisse Group, 22-cv-2477 (ENV), Magistrate Judge Roanne Mann held that the only proposed lead plaintiff – with a $621 stake – simply did not have enough interest in the case to justify appointment as lead. 

This is a bit more unusual than the earlier case I blogged about, though, because the denial wasn’t based on misconduct, but simply dollar value of losses.  The judge reasoned that, according to the PSLRA, the lead plaintiff must make a “prima facie showing that its claims satisfy the typicality and adequacy requirements of Rule 23,” and then held that a $621 loss rendered the plaintiff inadequate: “This Court is not satisfied that Jimenez has a sufficient interest in the litigation to vigorously pursue the claims of the class.”

The problem is, it’s pretty well established that a small financial stake by itself is not sufficient to render a plaintiff inadequate under Rule 23.  See Federal Practice & Procedure § 1767.  In other words, though Judge Mann purported to rely on Rule 23(a)’s adequacy requirement, she in fact created a much more stringent adequacy requirement that seems more to be rooted specifically in the PSLRA.  As she put it:

under the PSLRA, the lead plaintiff must have a substantial stake in the litigation to ensure it has the ability and incentive to control counsel. Institutional investors, in particular, were thought by Congress to have the sophistication and ability to control complex litigation.  Indeed, the principal focus of the PSLRA, as reflected in its legislative history, was that large institutional investors, and not class action counsel, would make the strategic decisions in the litigation….Although an institutional investor need not always be chosen as lead plaintiff, an individual investor should have comparable ability and motivation to control the litigation.

Though she cited other decisions where courts rejected small-dollar investors for the lead plaintiff spot, in all of those cases, there were other plaintiffs available; I am unaware of other decisions that simply refused to appoint any lead due to the perceived small stake of the only applicant.

As I mentioned in my prior post, this reveals one of the critical ambiguities in the PSLRA: it is unclear what the relationship is supposed to be between the lead plaintiff and the class representative, and it is concerning that class treatment might be denied without a full class certification hearing, and in the face of an available plaintiff who apparently satisfies Rule 23’s standards.

I am somewhat sympathetic to the idea that if there’s no one with a real interest in the case who wants the lead plaintiff spot, the case simply should not proceed as a class action, but on the other hand, the literal point of the class action device – its highest and best use – is to aggregate small dollar claims that would otherwise be impractical to bring. 

That said, Judge Mann did highlight an additional fact, beyond the applicant’s small stake, suggesting inadequacy:

in response to the Court’s Order of September 8, 2022, directing the movant to file a copy of his retainer agreement with Pomerantz LLP, see Scheduling Order (Sept. 8, 2022), Jimenez filed a retainer agreement bearing the same date as the Court’s Order, with a fee provision strongly favoring counsel over the putative class, see [Sealed] Retainer Agreement, DE #20. It may reasonably be inferred that no retainer agreement existed until the Court directed its production and that Jimenez failed to negotiate a fee arrangement that favors the class he seeks to represent. Simply put, Jimenez has not demonstrated that he would adequately represent the interests of class members.

And maybe that’s enough to tip it over the edge.