Reputational Regulation

When organizations act in ways that offend the public interest, parties seeking to change that behavior traditionally turned to litigation to force these organizations to reform, whether by command or consent. For example, following Brown v. Board of Education , “structural reform litigation” forced large-scale organizations, from school boards to prisons, to change their practices. Similarly, federal prosecutors have used agreements with large corporations to introduce significant structural reforms. This Article identifies an alternative strategy for organizational change that relies on the indirect reputational effects of litigation. Under this approach, organizational change does not result from court order or parties’ settlement but from the informational effects of litigation: litigation transmits information about an organization into the public space; this information has reputational consequences for the affected organizations; voluntary organizational change is a response to that reputational shaming. Critically, these reputational sanctions can accompany all types of litigation and not just those specifically seeking structural reform remedies. This Article identifies and explains the operation of four reputational sanctions: financial, policy, regulatory spillover, and barriers to entry. We are most familiar with the financial sanction, where consumers adopt “naming and shaming” boycotts to punish corporations for their behavior, thereby encouraging the latter to change their practices. But reputational sanctions also take the other three forms and can encourage large organizations to change their practices even when financial sanctions are weak or inoperative. Collectively, these reputational sanctions—operating outside the boundaries of traditional legal and regulatory processes—are employed by both public and private actors and play an increasing role in the decisions that organizations make