Wendel on Punitive Damages for Corporate Wrongdoing

Bradley Wendel has posted to SSRN Malice or Snafu?  Punitive Damages and Organizational Culture Defects.  The abstract provides:

This paper was written for the annual Clifford Symposium on Tort Law and Policy at DePaul Law School. The theme for this year is tort law as a response to corporate wrongdoing. The paper was part of a panel on the Boeing 737-MAX disasters.

In engineering or risk-management (not tort) terms, the root cause of the Lion Air and Ethiopian Airlines crashes involving 737-MAX aircraft can be understood as a failure of Boeing’s organizational culture. A certain narrative has become accepted as conventional wisdom, described in journalistic accounts, reports of House and Senate investigative committees, and the Netflix documentary Downfall. For the purposes of this paper, let’s stipulate to the story: Boeing enjoyed a well-deserved decades-long reputation as a solid, engineering-driven company in which safety concerns were always paramount. Then came the merger with McDonnell-Douglas in 1996 which led to the adoption of an organizational culture that prioritized maximizing stock prices and shareholder value, subordinated engineering values to cost-cutting concerns, and reoriented internal reporting relationships to place bean-counting MBAs in charge of teams of engineers. Then the company was confronted by a market shock when Airbus introduced a fuel-efficient variant on its popular A320 narrowbody jetliner, risking a further loss of market share to Boeing’s European rival. Rather than develop a clean-sheet design to compete with the A320neo, Boeing hastily updated its venerable 737 airframe by adding new fuel-efficient engines. In order to attract customers who had an existing fleet of 737NG aircraft, Boeing committed itself to a goal of a redesign that would not require extensive additional training for flight crews. Thus, when a relatively minor aerodynamic issue – one that would not arise during normal airline operations – was discovered during flight testing, Boeing adopted a software fix known as MCAS for the purpose of certifying the design. However, it decided not to disclose the operation of the system in the Flight Operation Manual for the aircraft, for fear that the FAA would require simulator training for pilots transitioning from the 737NG to the MAX. The MCAS system proved to have significant design defects (in products liability terms), and these defects were the proximate cause of the Lion Air and Ethiopian Airlines accidents.

The dynamics of organizational cultural failures are by now fairly well understood. In some cases the failure is the result of top-down directives from senior leadership, sometimes driven by market pressures. Other situations, however, are more subtle, and sometimes are the result of the unintended consequences of either neutral or well-intentioned organizational decisions. There is a folklore version of the Challenger launch story, in which an engineer for Thiokol, one of the contracting firms, heroically tried to prevent the launch, but was shot down by managers at NASA and Thiokol, one of whom notoriously told the engineers to take off their engineering hat and put on their management hat. In fact the story is quite a bit more complicated, involving subtle psychological factors at work at the level of both individual and collective decisionmaking. As detailed in a report by Jenner and Block commissioned by company’s board of directors, the GM ignition switch response is almost entirely a story of dysfunctions in the company’s organizational culture that were the result of well-intended procedures and reporting structures that had the unintended effect of diffusing responsibility so thoroughly within the organization that no one really had any ability to respond effectively.

In my judgment Boeing is an intermediate case between GM, which I would characterize as a true SNAFU (emphasis on “situation normal” in a gigantic, decentralized organization), and the conscious imposition by upper management of unrealistic goals that foreseeably would reorient lower-level managers and employees away from goals like safety and social responsibility. Even granting the truth of some of the most damning allegations, such as reports by flight-test crews that MCAS behaved in surprisingly aggressive ways and calls by some engineers to include information about MCAS in the FAA-approved Flight Operation Manual for the plane, the ultimately fatal decisions did not arise from a state of mind that traded lives for dollars or ignored safety concerns. Rather, there were mistakes, miscommunications, perhaps excessive optimism (e.g. that flight crews would handle an inadvertent MCAS firing as an ordinary trim runaway), failures to be more proactive in managing risks, and above all a kind of blinkered obsession with not having to retrain flight crews which may have led to unconscious framing of some of the judgments regarding MCAS. In order words, the explanation is more in line with the findings of behavioral psychology, beginning with Kahneman and Tversky, than with an assumption that Boeing was a rogue actor that was consciously indifferent to safety. The damage is real – both the lives lost and the financial and reputational losses to the company. However, the underlying explanation bears more similarities to the Challenger launch decision or the GM ignition switch recall than to cases like Enron or Wells Fargo.

In doctrinal terms, the argument of this paper is that Boeing’s conduct, in the conventional wisdom story recounted above, does not rise to the level of malice, as required by the common law of punitive damages, or the reprehensibility required by the constitutional test from Gore and Campbell. The theoretical argument is that most defects in organizational cultures, although capable of producing serious harms, are not private wrongs that can justify the imposition of punitive damages in tort. They are governance failures or occasions for regulation, but not private wrongs. Obviously the second argument takes a position on a much-debated issue, so I will address briefly the New Private Law approach, with which I have some sympathy.

The company definitely screwed up and squandered a reputation earned, at least since World War II, for being a pilot’s and engineer’s kind of company. The conclusions of the paper should have implications beyond the case study of Boeing, however. To me at least, the most interesting question is how to understand the common law malice standard as applied to corporate actors where the explanation for wrongdoing rests largely on subtle effects known to social psychologists but very difficult to counteract. Good organizational cultures are extremely difficult to maintain, given the often-unconscious tendencies that underlie cultural declines. NASA and Thiokol weren’t bad actors in the Challenger case; they were pretty good organizations full of conscientious engineers and managers who just happened to get caught by some very sneaky psychological effects. Most failures of organizational cultures do not count as reprehensible private wrongs, however devastating the consequences of these failures.