During the past few decades the use of consent decrees by federal and state enforcement agencies to resolve enforcement actions has become more pervasive and extensive than many business leaders may realize. Although the use of these decrees is well-documented, the long-term effects of the decrees are less understood.
This article seeks to explore one long-term effect associated with the use of consent decrees—the direct and indirect costs imposed by the use of injunctive or nonmonetary relief terms. In exploring these costs, this article highlights and scrutinizes some common problems associated with the use of injunctive or nonmonetary relief terms. Because these terms often impose costs on consumers and business which outweigh their benefits, enforcement agencies should rethink their approach to the use of these terms. This article concludes by offering agencies some considerations for reducing the costs associated with such decrees.
Nonmonetary Relief in Consent Decrees
Enforcement agencies of all stripes have expanded their use of consent decrees in recent decades. Some federal agencies now rely almost exclusively on them to resolve enforcement actions.1 At the state level, state attorneys general regularly use consent decrees to obtain various forms of relief.2
Although the terms of the decrees vary widely on a case-by-case basis, both federal and state enforcement agencies frequently include terms for injunctive or nonmonetary relief.3 This form of relief is the focus of this article and for shorthand will be referred to as a “structural term” of a consent decree.
To understand the extent of the costs imposed by structural terms, it is helpful to first understand common types of structural terms in consent decrees. Structural terms available in consent decrees are significantly broader and more expansive than the type of nonmonetary relief that might otherwise be available in a judicial proceeding. As a result, and as discussed further below, the costs of these structural terms can be significant.
Here are a few of the most common structural terms:
- Compliance – Enforcement agencies often require a targeted entity to explicitly state it will comply with certain or all applicable laws. These types of requirements are seen across enforcement agencies and can impose a variety of requirements on targeted entities.4
- Reporting – Reporting requirements mandate targeted entities or independent parties to provide information to the agency on a regular basis.5
- Inspection – Regulators may require the target entity to hire an independent expert to inspect its products.6 Alternatively, an inspection term may require the target entity to allow the enforcement agency to inspect its files and records.7
- Testing – A variation of the inspection requirement is a testing requirement, which requires the entity itself to test its products in the future to ensure compliance with applicable laws.8
In short, consent decrees can include a wide range of structural terms, which can exceed and surpass traditional forms of nonmonetary relief available through the court systems.
Structural Terms and Citizen Welfare
It is important to first consider how these costs can be measured. Although the costs of these terms could theoretically be calculated in multiple ways, their costs should be assessed broadly according to their overall impact on citizen welfare.
A citizen-welfare-focused approach is justified given the mission and purpose of many enforcement agencies.9
With this metric in mind, before an enforcement agency negotiates, drafts, or enforces a structural term in a consent decree, the agency should first consider whether the benefits of the term outweigh the potential costs to citizen welfare. Given the mission and purpose of many enforcement agencies, citizen welfare should be defined broadly to include considerations of costs to the targets of the enforcement actions, the targets’ competitors, the business community generally and, of course, consumers.
To do a cost-benefit analysis, an agency must first be able to identify, understand, and quantify the costs associated with a given structural term. The remainder of this article attempts to aid agencies and business in this task, outlining some of the known and hidden costs structural terms impose on various citizen stakeholders.
Negotiation and Drafting Costs
The processes for negotiating and drafting these terms itself can impose costs on businesses.
First, with respect to negotiation costs, a defining feature of the negotiation process in any enforcement action is the unequal bargaining power between the government agency and the target of the enforcement action.10 This unequal footing necessarily gives enforcement agencies greater control over the scope and extent of potential remedies in a consent decree. This power necessarily imposes greater costs on the target of the enforcement action, many of which may be passed along to third parties.
Second, with respect to drafting costs, agencies should be aware that the drafting process itself can contribute significantly to the costs of a structural term. At many agencies, the drafting process for a consent decree is driven by lawyers, many of whom lack detailed familiarity with the target entities (and the industries to which they belong). These lawyers may lack detailed familiarity with the business model of an entity and its products. As a result, agency lawyers may unwittingly seek to impose inappropriate, unreasonable, or arbitrary structural terms in a consent decree, the costs of which can pose lasting consequence for target entities.
Direct Costs to Businesses
The most obvious direct cost imposed by a structural term in a consent decree is the cost to comply with the terms of the decree. These costs vary widely depending on the nature of the structural terms at issue and the number of jurisdictions in which a business operates and to what degree.
The presence or absence of a “sunset provision” in a consent decree will impact compliance costs. Sunset provisions limit the duration of the terms of a consent decree. After the passage of the amount of time provided for in the sunset provision, the decree expires. The length of sunset provisions varies by agency and some decrees, surprisingly, contain no sunset provision at all. In the absence of a sunset provision, decrees can continue to be in effect for extended periods of time. In extreme cases, these decrees can last for decades.11
Further, entities who operate in multiple states and decide to enter into consent decrees with enforcement agencies in one or more of those jurisdictions, find themselves in a costly compliance nightmare trying to track inconsistent and various structural terms across multiple states for several years. Complying with a web of structural terms in multiple jurisdictions is a cost entities bear in addition to their routine compliance efforts in those jurisdictions where no consent decrees exist.
Indirect Costs to Businesses
Structural terms also impose indirect or hidden costs on businesses, many of which are ultimately and necessarily passed on to consumers and shareholders. These indirect costs include valuation costs, lost opportunity costs, competition costs, and chilling-effects costs.
Valuation costs occur when the costs imposed by a consent decree are so significant that they affect the overall value of a business. For example, in 2010, industry reporters speculated that a consent decree entered into by Genzyme Corporation affected its stock price at the time.12 Valuation costs are particularly problematic because they are borne by shareholders. In the case of large publicly traded companies, these costs will be inflicted on a variety of entities and individuals, including institutional investors such as pension funds.
Lost opportunity costs occur when a business is forced to forego productivity in order to comply with the terms of a consent decree. In extreme cases, these costs can lead to bankruptcy. This was the case in a 2018 settlement between the Department of Justice and Cantrell Drug Company. Because the company was forced to forego certain activity until it remediated its past deficiencies and proved compliance, the company was forced to declare bankruptcy.13
Competition costs occur when a business is placed at a competitive disadvantage due to the terms of a consent decree. In recent years, various entities within the music industry have sought modifications to existing decrees on the grounds that these decrees place the entities at a competitive disadvantage.14
Chilling-effects costs occur when other businesses refrain from engaging in certain conduct out of fear of a similar enforcement action.15
Direct and Indirect Costs to Consumers
Structural terms also impose direct and indirect costs on consumers. In certain circumstances, a structural term’s cost to consumers may be obvious. For example, in a 2010 settlement with Intel Corporation, the Federal Trade Commission restricted Intel’s ability to issue certain discounts to its customers.16 This posed a clear and direct cost to consumers, who were forced to forego certain discounts. In other cases, costs are passed on to consumers indirectly. Indirect consumer costs are often hidden but can arise whenever an entity’s costs of operation directly or indirectly increase as a result of structural terms.
Other Community Costs
In addition to costs to a specific entity or business, structural terms can impose additional costs on the community. If the structural terms of a consent decree are costly enough to an individual business, that business may be forced to forego new hiring, eliminate existing jobs, and in extreme cases, shut down. In the case of Cantrell Drug Company, discussed above, the effect of the consent decree in that case arguably led to all three results.17
Considerations for Reducing Costs
As enforcement agencies grapple with the scope and extent of costs imposed by consent decrees’ structural terms, they should consider the following cost-reduction measures:
- Perform a cost-benefit analysis. Although cost-benefit analysis has been a hallmark of federal regulation for decades, it is less frequently used in the context of drafting and negotiating consent decrees. Both state and federal enforcement agencies should make formal cost-benefit analyses mandatory components of drafting structural terms in consent decrees.
- Remember the mission. In performing a cost-benefit analysis, agencies should remember their mission and examine whether the use of structural terms aid their overall purpose. As demonstrated above, in many circumstances, structural terms can indirectly and unintentionally conflict with or undermine an agency’s mission statement. The agency’s leader should clearly state the factors he or she expects the agency to consider, consistent with its mission, in determining when and what structural terms are appropriate for consent decrees.
- Appropriate sunset provisions. In recent decades, agencies have shifted away from indefinite consent decrees and toward sunset provisions. However, far too many agencies continue to use arbitrary standards in defining the sunset period. Agencies should examine their applicable sunset provisions and justify the proposed time period in each provision. In doing so, they should provide a reasoned analysis to justify the proposed sunset period. The costs discussed herein should factor into the length of the period, as well as whether there should be any structural terms at all.
- Justify structural terms. Finally, and perhaps most importantly, agencies should provide a justification for their inclusion of structural terms in a consent decree. Structural terms are not used in all consent decrees and in many cases, are unnecessary.
- See, e.g., Douglas H. Ginsburg and Joshua D. Wright, Antitrust Settlements: The Culture of Consent in William E. Kovacic: An Antitrust Tribute (“The trend [of settling by consent decree] has continued, with the [Antitrust] Division resolving nearly its entire antitrust civil enforcement docket by consent decree from 2004 to present.”).
- See, e.g., Margaret H. Lemos, Aggregate Litigation Goes Public: Representative Suits By State Attorneys General, 126 Harv. L. Rev. 486 (2012).
- See, id. at 527 (“[P]rovisions for nonmonetary relief, focused on reforming how the defendant does business, are common in state settlements, even when the state is also seeking damages or restitution for injured individuals.”).
- See, g., United States v. Delta Pharma, Inc., No. 3:18-cv-127-NBB-JMV (requiring compliance with various federal provisions for drug labeling, facility registration, use of bulk drug substances, drug reporting, and adverse event reporting); Office of the Attorney General v. KB Home, No. 2016-CA-300 (requiring compliance with various state laws, including licensing requirements and building code requirements).
- See, g., United States v. Colonial Pipeline Company, NO. 1:00-cv-3142-JTC (requiring an independent monitoring contractor to submit quarterly reports to the Environmental Protection Agency).
- See, g., Office of the Attorney General v. KB Home, No. 2016-CA-300 (requiring the target entity to hire a third-party inspector to inspect current and future new construction); United States v. Invacare Corp., No. 1:12-cv-3086 (requiring the target entity to hire an expert at their own expense to ensure compliance with the Federal Food, Drug, and Cosmetic Act).
- See, e.g., Ginsburg, supra note 1. (noting that the Antitrust Division of the Department of Justice required the target companies to allow the division to inspect its document and interview its employees on a continuing basis).
- See, g., In re Chrysler-Dodge-Jeep Ecodiesel Marketing, Sales Practices and Products Liability Litigation, No. 3:17-md-02777-EMC (requiring target entity to conduct emission testing to demonstrate compliance with terms of consent decree).
- See, e.g., U.S. Food & Drug Administration, What We Do, FDA.Gov (“The Food and Drug Administration is responsible for protecting public health . . .”); The Federal Trade Commission, The Federal Trade Commission’s (FTC) Mission, FTC.gov (“To prevent business practices that are anticompetitive or deceptive or unfair to consumers; to enhance informed consumer choice and public understanding of the competition process; and to accomplish this without unduly burdening legitimate business activity.”); Florida Attorney General (“The Division protects consumers by pursuing individuals and entities that engage in unfair methods of competition or unconscionable, deceptive and unfair practices in trade or commerce.”).
- See, e.g., Danné L. Johnson, SEC Settlement: Agency Self-Interest or Public Interest, 12 Fordham J. Corp. & Fin. L. 627, 658–60 (2007) (“Unlike settlements between private parties who may be in equal positions of strength, during an SEC settlement the SEC has more bargaining power than most of its opposition. The parties are not equals. SEC investigations exhaust the resources of the respondent(s) or defendant. The strength of the SEC comes from the nature of the investigative process as well as the SEC’s statutes. These factors serve to embolden the SEC and the Staff in the negotiation process.”).
- See, e.g., Department of Justice, Division Update Spring 2019: Terminating the Interminable, justice.gov (“[T]he Division sought and obtained termination of a ninety-two-year-old judgment that prohibited defendants from activities related to the sale of amusement tickets and allocation of amusement ticket customers.”).
- See, e.g., Fierce Pharma, For Genzyme, consent decree causes $3 B+ value hit, fiercepharma.com (“In calculating the cost of a manufacturing-driven consent decree, there are more factors to consider than FDA fines, consultant fees and training and equipment costs. In the case of Genzyme, there is also the $11 gap between what Sanofi has offered for the company ($69 per share), which likely contains some consent decree adjustment, and how Genzyme CEO Henry Termee (photo) values the company, in which the consent decree is perhaps viewed as a temporary matter and therefore removed from the equation ($80).”).
- See Beth Weinman, Josh Oyster, and Jessica Band, Deconstructing the Consent Decree: A Primer and Recent Trends for FDCA Injunctions, Food And Drug Law Institute.
- See, e.g., Public Comments of the American Society of Composers, Authors and Publishers Regarding Review of the ASCAP and BMI Consent Decrees.
- See Ginsburg, The Culture of Consent at 4 (“The adverse welfare consequences of abusive settlements are not bounded by the transaction-specific costs imposed upon the parties to the consent decree and upon their customers. An abusive settlement can also have a chilling effect upon non-parties, whether in the same or other industries, who glean the agency’s enforcement position from the terms of the settlement.”).
- See, e.g., Ginsburg, supra note 1. (“The FTC also implemented restrictions upon the terms on which Intel could deal with its customers, including prohibitions upon applying a percentage discount across all units purchased when the customer purchases a number of units beyond a given threshold and upon the bundling of discounts across purchases of several products if, when all discounters are attributed to one product, the price of that product falls below a specified measurer of incremental cost.”).
- See Weinman, supra note 13.