It's often said that Caremark claims are the most difficult corporate law claims for a plaintiff to win. It's not immediately apparent why that should be the case. After all, Caremark claims are premised on the board doing a lousy job of monitoring management. In turn, monitoring management is the board's primary--although not exclusive--function.
There are lots of reasons why we want courts to be hostile to Caremark claims. One was called to mind by, of all things, Daniel Henninger's column in the WSJ today on the way rules still are mostly followed in sports but not in politics.
Boston lawyer Harvey Silverglate argues in a forthcoming book, "Three Felonies a Day," that federal law has become such a morass that people in business routinely violate statutes without a clue. Modern law lacks what sports provides lucidity.
Human capacity is inherently bounded. No system of internal controls reasonably can be expected to ensure corporate compliance with the "morass" of laws to which modern businesses are subject. Nor would it be reasonable to expect corporate directors to oversee such an exhaustive system of controls. It would swamp their attention span and preclude them from doing anything else.
This is why corporations should only be expected to focus on the laws they are most likely to violate and that are likely to result in the most serious sanctions. In turn, it is also why boards of directors should be liable only when they have missed obvious red flags that would have alerted them not to one of the three felonies a day, but to felonies that are repeated over and over again.
