Current Issue

  • Volume 70,
  • Number 7 -
  • April 2021


The Agent’s Problem
Asaf Eckstein & Gideon Parchomovsky

The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had a long-lasting impact on corporate-law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem has surfaced: what we call the “reverse agency problem.” The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms, including pretrial diversion agreements and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach settlements with law enforcement authorities as expeditiously as possible. This phenomenon is the mirror image of the agency problem—the agent’s problem.

Although such settlements are in the best interests of companies and shareholders, they can have devastating effects on individual directors and officers. When they agree to settle a criminal prosecution, suspect companies collectively attribute wrongdoing to a large group of directors and managers without distinguishing between the guilty and the innocent. As a result, directors and officers implicated in settlements often suffer severe reputational losses, regardless of their culpability. Furthermore, the wrongdoing attributed to directors and officers in settlements exposes them to derivative lawsuits for breaches of their fiduciary duties. Unfortunately, extant law does not provide directors and officers with a means to prove their innocence or clear their names. In fact, it does not even give them a voice in the negotiations leading to the drafting of settlements. Thus, it dooms many directors and officers who have done no wrong to live with the mark of Cain and endure the economic consequences thereof.

Four legal reforms could remedy the plight of nonculpable individual officers and directors. The first seeks to amplify the voices of individual corporate officers in settlement negotiations by giving them the right to a hearing prior to the completion of a settlement. The second gives directors and officers implicated in settlements the right to bring an action for a declaration of innocence that would clear their names and preempt derivative actions against them. The third solution recognizes a horizontal fiduciary duty between directors and officers, thereby allowing innocent directors and officers the right to sue their guilty colleagues for breaching such duty. The fourth, which should only become available in rare cases, is to let directors and officers sue the corporation for which they worked for the harms they suffered as a consequence of the corporation’s actions and admissions.

Follow-Up Enforcement
Andrew K. Jennings

Firms sometimes break the law. When they do, a host of government agencies have power to bring enforcement actions against them, which serve to punish past wrongs, compensate victims, disgorge unlawful gains, deter others, and prevent recidivism. Each of these purposes but one—preventing recidivism—is either met or not once the case reaches settlement. Whether recidivism will occur, however, remains uncertain at the time a case is settled. In light of that uncertainty, this Article takes a critical look at how enforcers currently address recidivism prevention—what it dubs the “clawback” approach—under which defendant firms receive penalty credit today in exchange for remedial efforts that, it is hoped, will prevent recidivism tomorrow. This Article examines the incentives and constraints of the two parties—the enforcer and the firm—and concludes that an alternative “follow-up” approach that credits only firms’ demonstrated results would be more effective and efficient at recidivism prevention.


Scalpels Over Sledgehammers: Saving Diagnostic Patents Through Judicial Intervention Rather Than Legislative Override
Elaine H. Nguyen

Diagnostic tests have become indispensable in the rapidly growing field known as “precision medicine.” Precision medicine tailors treatments to individual patients by using these diagnostic tests to identify how a patient may respond to different therapies. Diagnostics are expensive to develop but show promise in optimizing patient treatment and creating healthcare savings. Even as the medical community has heralded precision medicine as the way of the future, the Supreme Court and Federal Circuit have handed down a dizzying array of decisions regarding attempts to patent diagnostics and precision medicine techniques. Subsequently, courts have struggled to apply the test for patent eligibility, leaving the interpretation of patentable subject matter under § 101 of the Patent Act in a state of chaos.

This chaos has created concerns that diagnostics may be unpatentable, providing minimal protection or incentive for pharmaceutical companies to invest in their development. To rectify this confusion, legislators have proposed overhauling the longstanding Patent Act and rewriting the patent-eligibility statute altogether. This Note argues that these legislative attempts are misguided. Though some remedy for the current patent-eligibility test is required, that solution should come from the courts, not the legislature. Courts can use a dynamic and nuanced common law approach to create a standard that can adapt to the continuously evolving technologies and scientific advancements that seek patent protection. A legislative override, on the other hand, could leave the patent statute in as much chaos as before. A judicial refinement of the patent-eligibility test would allow for the patenting of meritorious diagnostics, providing the necessary innovation incentives for their continued development.

The Law of Lenity: Enacting a Codified Federal Rule of Lenity
Maisie A. Wilson

The rule of lenity is an ancient canon of statutory construction that requires courts to find in favor of criminal defendants charged under ambiguous statutes. Traditionally, lenity endorses important constitutional concerns regarding due notice, consistent enforcement of law, and legislative supremacy. In modern courts, if lenity were regularly—and properly—applied, it could combat important social problems that plague our criminal justice system. Ambiguous laws allow government actors to arbitrarily target disfavored groups. And more generally, ambiguity within criminal law contributes to overcriminalization, wanton punishment, and capricious enforcement. As the volume of federal criminal law continues to expand, this overcriminalization leads to extreme mass incarceration in the United States. Lenity, if applied more potently in the federal courts, could help combat these serious social issues by supplying a safety valve against the multitude of ambiguous statutes written by Congress.

The problem with lenity today, however, is that courts are rarely clear where lenity should fit within criminal statutory interpretation. Federal courts, including the Supreme Court, alter how they apply lenity case by case. This Note argues that lenity should be codified federally as a clear statement rule, as several states have already done. Specifically, to achieve a consistent and strong application of lenity in the federal courts, Congress should direct the federal courts to apply lenity immediately after an initial textual analysis fails to clarify an ambiguous statute. Codified lenity would guide courts in lenity’s application and underscore its fundamental importance to the criminal justice system.