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The New Purpose of Companies

There’s a world beyond shareholder returns, and forward-thinking business leaders are figuring out how to navigate it.

Henri Campeã for Quartz
YOU ARE WHAT YOU BUY

Why it’s so hard to hold companies accountable when they break their ethical promises

By Marc Bain

As an ice-cream maker, Ben & Jerry’s relies on cow’s milk, but not from just any cows. For four decades, the company has built a reputation for ice cream that does good while tasting good. Its core values, which consumer-goods giant Unilever says it has maintained since acquiring Ben & Jerry’s in 2000, are supposed to extend to the cows supplying its milk. The company publishes a set of “caring dairy” standards on its site, and its pint containers, which feature cartoons of black-and-white milk cows amid green fields and blue skies, assure shoppers its milk and cream come from “happy cows.”

So what if you’ve been buying Ben & Jerry’s for years with the belief its milk came from happy cows, and then learned only a fraction of it came from farms that met its caring dairy standards, while the majority came from animals on factory farms? The question isn’t just hypothetical. Ben & Jerry’s is currently defending its practices in a lawsuit that seems tailor-made to test a new theory of law aimed at holding companies to account for their unmet promises.

It’s not the only example of a company whose customers may have felt it made a moral commitment it didn’t keep. In the “Dieselgate” scandal a few years back, Volkswagen admitted to cheating emissions tests of diesel engines it marketed in the US with a big campaign about their low emissions, prompting an outcry from regulatory agencies and consumers alike. US consumers have also tried unsuccessfully to bring cases against chocolate giants Hershey and Nestlé over child labor in their supply chains, despite the companies having pledged to avoid child labor.

When such scenarios arise, consumers can feel more than just duped. In the capitalist economies of the global West, our identities are tied up in how we consume. For a growing number of “conscious consumers,” choices about what we buy—and don’t buy—are a means of exerting some control, however minimal, over powerful corporations and their effect on the world, including the people and animals in it. They can reflect deeply held personal beliefs as much as needs or wants.

When consumers feel a corporation has misused their trust, they can take it to court and try to get the company barred from continuing the practice. They can maybe get some money too, if they’ve been physically or financially harmed. But what if a payout isn’t the point, and the best remedy is for the company to right the wrong?

In Washington University Law Review last year, Sarah Dadush, a professor at Rutgers Law School in New Jersey who focuses on the intersection of business, consumer law, and human rights, wrote that under current consumer law, customers who bring civil cases against corporations have “virtually no chance of obtaining the restorative remedies they need to be made whole.” To fix the problem, she’s proposed a new concept that would hold corporations to the moral standards they claim and force them to live up to them. She thinks it’s something even investors could wield when companies behave badly. The question is whether a US court will ever recognize it.

Identity harm

Dadush calls her concept “identity harm.” In her writing, she describes it as “the anguish experienced by a consumer who learns that her efforts to consume in line with her personal values have been undermined by a company’s exaggerated or false promises about its wares.”

Plenty of corporations today make what she calls “virtuous promises” about their products. Beyond the usual claims about an item’s safety for the user, its performance, or its ingredients, these promises generally emphasize how the product is benign to others: No people or animals suffered in its making, for instance, or it doesn’t contribute to environmental destruction.

AP/Joy Asico

Consumers may not always feel companies are living up to their commitments. For example, the suit against Ben & Jerry’s by James Ehlers, an environmental activist who ran unsuccessfully for governor of Vermont in 2018, claims less than a quarter of the farms in the Vermont cooperative supplying the company’s milk and cream are verified under its caring dairy standards. According to the suit, the rest comes from “factory-style, mass-production” farms, which have been known to “employ intensive cow confinement practices and extensive antibiotic use.” The suit alleges the cooperative doesn’t separate milk and cream from caring dairy farms and those that aren’t verified under the program either.

Ben & Jerry’s didn’t respond to our request for a comment. It has told various news outlets it doesn’t discuss pending litigation, but has said its caring dairy program is “the most progressive in the industry.”

Dadush believes if Ehlers’ claims prove true, the case offers a good example of identity harm.

“People’s expectations about the goods they purchase are about more than just the price tag”

“People’s expectations about the goods they purchase are about more than just the price tag,” she says. “We’re looking more at things like the process by which the good was made. Their expectations are evolving, in fact, to exceed the price or even the physical attributes of the goods they bring into their homes.”

She argues corporations are too often allowed to slide when they fail to stick to their word and the law has fallen behind the times. Government regulators don’t adequately police the ethical promises they make, leaving consumers to hold companies accountable. Except the available laws—whether tort, contract, or state consumer statutes—don’t give consumers adequate means to bring legal claims against companies that break their ethical promises.

Her fix is for the courts to recognize identity harm as grounds for legal action. She’s been writing about her idea in law journals, but the next step, she says, would be to actually bring a case against a company.

Dadush believes there could be ways to litigate it through contract or tort law, but consumer law might be identity harm’s best legal home. It deals in protecting consumers from unfair or deceptive acts or practices (or UDAP) under state statutes. California’s Consumer Legal Remedies Act, one of the most comprehensive sets of consumer protections in the US, already has protections against false advertising that include misrepresenting the source of goods, for instance.

Because many identity harm claims would focus on corporate supply chains, it does raise questions about what sorts of corporate statements would count as an enforceable promise. Right now, Dadush says, “you can maybe hold them to something that they say directly on an advertisement. But what about stuff they say in their corporate social responsibility report? What about stuff that’s just on their website? What about the codes of conduct they have for their suppliers? Those kinds of things have historically been treated [by courts] as very loose aspirational statements about what the company hopes to achieve, not what it is achieving.”

It also risks a chilling effect, where corporations stop making specific promises to avoid any sort of liability. But going silent would bring risks of its own, as consumers continue demand more transparency from businesses, particularly in areas such as fashion relying on opaque international supply chains.

Perhaps the most intriguing part of Dadush’s idea, though, is the penalty a corporation would face if it lost an identity harm case. A financial payout isn’t really the intent. “It has to bring the good into compliance with the promise it had made about the good,” Dadush says.

A remedy beyond a payout

A court can issue an injunction to block a company from spreading information found to be misleading or from carrying on with some problematic activity. It may also order compensatory damages paid to the aggrieved party that brought the case. But the remedy for identity harm would require an offending company paying up in a different way. If the court decided the corporation destroyed natural habitat, for example, the company might have to fund projects to restore that habitat. Some financial compensation could be involved, but not as the sole or even main remedy.

Dadush isn’t the first to conceive such an idea. She cites Lauren Willis, a professor at Loyola Law School in Los Angeles, who has advocated “performance-based remedies” in cases of false or misleading advertising that would compel a defendant to “eliminate the confusion and ill consequences” created by its fraud. Dadush also points to the work of Omri Ben-Shahar at University of Chicago Law School and Ariel Porat at Tel Aviv University, who argue courts don’t give enough consideration to emotional harm. They propose a “restoration measure of damages,” where the wrongdoer in a case would have to “restore the underlying interest that was impaired and gave rise to the emotional harm.” They also offer thoughts on how a court could measure emotional harm and verify plaintiffs aren’t just faking emotional injury in hopes of a pay out.

But the whole concept of identity harm, let alone how a court would redress it, is unorthodox in US law.

“That’s quite at odds with the traditional individual justice notions that most judges, most [Supreme Court] justices, view as at the base conception of American law,” says Brian Wolfman, who runs Georgetown Law’s Appellate Law Immersion Clinic and previously worked 20 years in consumer law at the Public Citizen Litigation Group.

In Wolfman’s view, identity harm is a more “communitarian” idea of harm. Conservative judges in particular, he explains, wouldn’t think of the injury involved as the kind the framers of the US Constitution would have allowed people to sue over.

It’s “at odds with the traditional individual justice notions that most judges … view as at the base conception of American law.”

There are emotional harms the courts recognize: defamation, for example, a harm to one’s reputation. Dadush even posits identity harm as a kind of defamation. In addition to lowering a person’s esteem in the eyes of a community, defamatory statements can cause mental anguish. Identity harm, she says, is a modern variation on these injuries. “Particularly today, when citizenship and consumption are so deeply intertwined, being protected from identity harm is as important as being protected from reputational harm,” she wrote in Washington University Law Review.

But according to Wolfman, US courts recognize defamation because it has roots in English common law. It was part of the tradition the authors of the US Constitution were drawing on. Otherwise US courts might not acknowledge it today. “I think it’s an uphill battle,” he says of the likelihood of a court recognizing identity harm as grounds for a case.

The current limits of the law

The aftermath of Volkswagen’s Dieselgate scandal offers a good example of how a court could penalize companies for identity harm, while also demonstrating the limits of current US law in addressing these issues. The settlement required Volkswagen to pay $2.7 billion to fund projects that would mitigate the pollution of its falsely advertised “clean diesel” cars, and to make another $2 billion in investments in infrastructure, access, and education to support and advance zero-emissions vehicles.

It’s exactly the sort of penalty one could imagine in an identity harm case. But there’s a reason Volkswagen faced these penalties. Its emissions cheating violated the Clean Air Act, a federal law. The Environmental Protection Agency (EPA) stepped in to make sure Volkswagen suffered the consequences.

Without those circumstances, according to Dadush, it’s unlikely Volkswagen would have had to undertake any efforts to make up for its emissions cheating. In fact, she wrote in the Washington Law Review, consumers relying only on UDAP statutes would almost certainly not have been able to compel Volkswagen to take those steps.

For the consumers who were involved, the court could focus only on the financial harm they suffered. When the scandal broke, the Volkswagen cars at the center of it became illegal to sell or drive in the US. Their value plunged to zero, a big loss for anyone who still owned one. Volkswagen ultimately agreed to buy back about 500,000 of its falsely advertised vehicles at their pre-scandal trade-in price, for a total of about $10 billion.

But say you happened to sell your Volkswagen before the scandal broke. You didn’t lose any money from the scandal. But if you had purchased the car specifically because you thought it was a way to limit your impact on the environment, only to discover it was emitting up to 40 times the pollutants allowed, weren’t you still harmed? Shouldn’t you be able to sue Volkswagen and get it to take some steps to undo the damage it caused in the world?

It’s a tricky question, and one that isn’t just relevant to consumers. It arguably applies to investors, too.

Investing for good and not just for money

A few years back, Bruce Campbell was looking to invest in a retailer or clothing company. But Campbell, an attorney with Blue Dot Law, a Colorado firm specializing in researching and setting up investments in private companies that offer social or environmental benefits, didn’t want to put his money into just any company. “I decided some time ago that I wanted my investments to, I suppose, reflect my values,” he says. “That meant I only wanted to invest in companies where I felt like the company was not only not doing harm, but there was some positive social or environmental outcomes from the company’s business.”

After doing some research, he settled on H&M. “They seemed to be doing lots of interesting things from a social and environmental standpoint,” he explains. The fast-fashion chain had a clothing-recycling program, and while it had issues with working conditions and pay in its contract factories in the past, Campbell says the company portrayed itself as having committed to not letting these issues continue. In 2013, for instance, it made a public commitment to ensure workers at its contract factories in Bangladesh and Cambodia received a living wage.

But after he invested, he says he saw reports from labor-rights groups that H&M wasn’t keeping its word on worker’s rights. One group later called H&M’s living-wage commitment a publicity stunt after the company failed to meet the deadline it set for itself. (Greenpeace and others also criticized H&M’s recycling project as misleading, though Campbell didn’t mention this point specifically.) He wondered if H&M’s statements counted as misrepresentation, which is why he first got in contact with Dadush. They ultimately determined he had no recourse unless he’d lost money because of a drop in H&M’s stock price due to false statements.

AP Photo/Kathy Willens

Campbell believes the scenario represents a failure in the law to keep up with society. Recent years have seen a movement toward impact investing, where investors funnel their capital toward companies they believe will generate social or environmental benefits. Financial services firm KPMG has described it (pdf) as a “rising force in the global economy,” and while tallies of its size can vary, the Global Impact Investing Network estimates 1,340 organizations currently manage some $500 billion (pdf) in impact investments globally.

These investments may not be solely, or even primarily, about profit. Yet in the US, that’s effectively the measure US securities law judges them by. The consequences don’t just determine what an investor can sue over. They affect what data public companies have to disclose.

Companies only have to provide information deemed material to investors. The US Securities and Exchange Commission (SEC) judges that standard by whether a “reasonable investor” would see the disclosure as altering the total mix of information available. At the moment, environmental, social, and governance (ESG) issues generally aren’t covered unless they present a material risk to the company’s business.

Last year, two law school professors along with a group of institutional investors petitioned the SEC to require companies to disclose select ESG information. They noted that even though more companies are voluntarily releasing sustainability reports, “[t]here are substantial problems with the nature, timing, and extent of these voluntary disclosures,” calling them “episodic, incomplete, incomparable, and inconsistent.” It mostly highlighted companies’ disclosures on greenhouse-gas emissions and strategies for addressing climate change, but it’s not hard to see how it could apply in other areas too.

Even if the SEC did change what it requires companies disclose, that’s still a long way from courts accepting identity harms as grounds for a lawsuit.

An uphill battle

Dadush admits her idea faces a big challenge. “[Identity harm] is definitely not an easy sell!” she replies by email when asked about US courts not historically recognizing anything like identity harm. But, she contends, legal minds beside herself, such as the scholars she cites in her work, believe there’s a need for greater protections, including remedies beyond compensatory damages.

“Identity harm is definitely not an easy sell!”

More cases are coming before courts in the US and elsewhere on grounds that sound a lot like identity harm. In addition to the suit against Ben & Jerry’s over its happy cows, or those against Hershey and Nestlé, a recent case against Samsung in Paris alleges it uses Asian suppliers that employ under-age workers in dangerous conditions, in violation of the supplier code of conduct on its own website. Just this October, the attorney general of Massachusetts, Maura Healey, filed a suit against Exxon Mobil alleging it deceived investors about the risks climate change poses to its business and consumers about the role fossil fuels play in causing it.

Wolfman says his views of the challenges identity harm faces as a criticism of the idea itself. “I think it’s important people come up with ideas,” he says, pointing out that notions which seem untenable at one time may be accepted by a court 20 years later. It’s how the law changes, he says.

Maybe the winds will shift in identity harm’s direction, one day soon or years from now. If that happens, corporations will need to look out.