Abstract

The European region regulates more than any single country in the world, and such over-regulation, along with higher taxes and labor and environmental standards, has increasingly caused European industry to lag behind its Asian and American competitors. As a result, a growing

competitiveness and technology gap has arisen in a number of important advanced industrial and high technology industry sectors between European and American and Asian companies. Naturally, European industry is extremely concerned that it has become less globally competitive. In response, it has actively sought to 'level the global economic playing field' by working with regional and global environmental and social activists, grant-seeking academics, risk-averse European politicians and United Nations bureaucrats to export the systemically higher European costs of doing business throughout the world. It has proceeded to do so by promoting sustainable development as a broad new international legal paradigm premised largely on the Precautionary Principle.

The Precautionary Principle is a non-scientific 'better safe than sorry' European regulatory philosophy that favors banning or severely restricting particular substances, products and activities if it is merely possible that they or the processes used for their manufacture, formulation or assembly might, sometime in the uncertain distant future, cause potentially serious health or environmental harm. The Precautionary Principle is inconsistent with World Trade Organization law because it does not require governments to provide scientific and economic justification before they regulate to block or severely restrict the market access and/or use of new foreign products and processes. The European Commission has worked to bind foreign exporters by incorporating the Precautionary Principle into a number of international environmental treaties. And, where the Precautionary Principle does not expressly appear, the European Commission has sought to interpret the treaty and general customary international law as including it.

In order to establish it as absolute international law, the EU Commission must first secure United States adoption of and compliance with the Precautionary Principle as a matter of 'state' (U.S. national) law and business practice. For this reason, the EU Commission and several EU member state governments have waged an all-out campaign, with the help of misguided American politicians, activists and academics, to inject the Precautionary Principle within the U.S. at the federal, state and local levels, as well as, up and down U.S. global industry supply chains. Europe's ultimate goal is to reform the very same U.S. law and business practices that have served as the cornerstone of the U.S. national economy and the source of America's comparative advantage in international trade since the end of World War II. This article documents precisely how Europe seeks to accomplish its objective, how it significantly threatens the American legal and free enterprise systems, and why Americans should endeavor to prevent the Precautionary Principle from ever becoming U.S. law.

I. INTRODUCTION: EUROPE AS THE NEW GLOBAL REGULATOR

U.S.-based businesses of all sizes, but especially small and medium sized businesses will, over time, likely be subject to more stringent environment, health and safety ('EHS') regulations and related technical product standards. Whether they know it or not, many of these rules will have originated within the European Union ('EU') without their constructive input or consent--'regulation without representation'. According to a 2002 Wall Street Journal article,

   Americans may not realize it, but rules governing the food they
   eat, the software they use and the cars they drive increasingly are
   set in Brussels, the unofficial capital of the EU and the home of
   its executive body, the European Commission. Because of differing
   histories and attitudes toward government, the EU ... with the
   world's second-largest economy, regulates more frequently and more
   rigorously than the U.S., especially when it comes to consumer
   protection. So, even though the American market is bigger the EU,
   as the jurisdiction with tougher rules, tends to call the shots for
   the world's farmers and manufacturers ... EU rules often cause
   particular friction in high-tech fields, such as software,
   electronic commerce and biotechnology ... The EU requires any
   product that contains even 1% of a genetically altered ingredient
   to say so on its label ... pending European recycling rules, which
   are tougher than U.S. standards ... would require electrical
   equipment makers to eschew certain hard-to-recycle plastics and
   chemicals, such as brominated flame retardants ... the EU is
   considering requiring companies to test 30,000 chemicals already on
   the market to see whether they are hazardous, as well as thousands
   of products that use some of the chemicals in question ... another
   EU initiative targets auto makers ..." (1)

Indeed, as reflected in official EU policy documents, the products covered by these regulations, directives (2) and standards (3) "represent a large proportion of [all] products that are placed on the market. It is estimated that, as of 2003, the trade of products covered only by the major [agricultural and industrial] sectors regulated ... largely exceeds the volume of 1500 billion euro (1.5 trillion euro) [(or approximately $2.25 billion) (4)] per year." (5)

Given the breadth and reach of these regulations and standards, the U.S. business community should be alarmed, no matter the sector (goods or services) in which they operate and no matter where they design and manufacture their products. These rules will affect small and medium-sized companies operating within specialized market niches that serve as catalysts for research and development in areas of new technology or processing techniques (e.g., information technology, nanotechnology, biotechnology, pharmaceuticals, processed foods, vitamins, etc). They also will affect small and medium-sized businesses providing valuable inputs for larger manufactures (e.g., parts and component suppliers, industrial chemical manufacturers, electrical and electronic equipment manufacturers, etc.).

In addition, they will affect U.S. small and medium-sized businesses operating within more 'downstream' product sectors that incorporate or use substances or products developed by much larger companies within their own manufacturing processes or final products (e.g., cosmetics, paints, textiles, plastics, automotive, agriculture, etc.). (6) These downstream companies are likely to comprise the largest group of businesses that will be adversely impacted by overly stringent European EHS regulations. Downstream service sector companies will also be potentially affected by such rules to the extent they utilize banned or severely restricted substances in rendering their services to third parties (e.g., dry cleaners, auto garages, lodging, catering services, transport services, printing, farming, etc.). And, services companies operating within the construction and real estate development industries will also likely encounter these rules, both here and abroad, to the extent their land use activities are deemed to threaten the environment.

A growing number of these EHS regulations and product standards are based on an evolving international legal norm known as the 'precautionary principle'. The precautionary principle is essentially a non-scientific, 'better safe than sorry', risk-averse philosophy of regulation. It has already assumed the status of regional law within Europe, and European regulators and environmental groups are eager to establish it as an international and a U.S. legal standard.

The aim of this article is to highlight how European environmental, health and safety regulators have imposed hundreds of precautionary measures and controls on business conduct, the nature of these regulations, and how they affect U.S. enterprises doing business internationally (within Europe and third countries, including China). It also discusses how such hazard-based, rather than science/risk-based, regulatory controls are becoming increasingly popular in the US, as well as, how our economic competitors would benefit from the widespread export of the precautionary principle to America. The paper begins by explaining what the precautionary principle is and how it has assumed a central role in Europe's grand global strategy of achieving 'sustainable development'.

It then explains what American companies can expect if precautionary principle-based regulations were adopted within the United States. It does so by pointing out the high business and legal costs borne by European companies in comparable industry sectors, as well as, the chilling effect these regulations have had on European research and development, capital investment and technological innovation. This article also discusses how precautionary principle-based regulatory changes would profoundly impact, in a negative way, several areas of U.S. law beyond environmental, health and safety, namely tort, insurance, corporate, and securities law.

Furthermore, the study discusses how the EU, with assistance from European and American environmental non-governmental organizations ('ENGOs'), has already begun to inject similar rules into U.S. law. Thus far, they have been limited mostly to state and local initiatives, though a number of state attorneys general have filed suit against the U.S. Environmental Protection Agency over the issue of global climate change. There are also various efforts underway to review federal environmental, food, drug and chemical regulations that precautionary principle advocates believe fail to ensure a high enough level of public safety. These reviews will likely be critical of current rules and procedures and be brought into the public spotlight for purposes of inducing consumer fears and concerns. This way, enough public pressure can be generated to force regulators and the U.S. Congress to replace the benchmark federal standards of sound science and economic cost-benefit analysis with the precautionary principle.

In addition, the article identifies how U.S. companies have increasingly fallen subject to the relatively new but growing ENGO discipline of 'supply-chain management', which is an outgrowth of the global corporate social responsibility ('CSR') movement. With guidance and assistance from the EU and the United Nations Global Compact Office, Environment Program, and Commission on Sustainable Development, European-based ENGOs and social groups have developed and imposed on U.S. multinational companies and their small and medium-sized suppliers the duty/obligation to comply with Euro-style CSR standards. These standards generally demand that companies act in a socially and environmentally responsible manner consistent with the precautionary principle, in excess of legal requirements, no matter where they conduct their business. These standards also require that multinational companies and their suppliers submit to audits and verification by private third parties--'global stakeholders' (ENGOs and social groups, not stockholders or debt-holders)--and that they publicly report their CSR activities annually.

Lastly, this paper urges U.S. industry and government to draw an unwavering 'line in the sand' beyond which no extraterritorial EU environmental, health, and safety rules may pass, unless scientifically, technically and economically justified. In other words, U.S. industry and government must quickly join ranks to protect the American enterprise system, its current comparative advantage in international trade and technological innovation and its longer-term national economic prospects. And, the U.S. must accomplish this without falling down the slippery slope of trade protectionism. All of these interests are now under threat from a European Union with grand ambitions--one that is endeavoring to shape the 21st century global agenda through its involvement in the United Nations as it aspires to become a global political and economic power in its own right. In essence, U.S. industry and government must not permit the new global regulators and their civil society allies to unilaterally impose on America EU cultural preferences and legislative mandates by employing the precautionary principle under the guise of European enlightened altruism, i.e., sustainable development.

II. WHAT IS THE PRECAUTIONARY PRINCIPLE?

A. Evaluates Hazards Rather Than Risks

The European Commission has increasingly employed the precautionary principle to identify and manage uncertain future risks to the environment and human health and safety deemed posed by modern agricultural and industrial activities and technological innovations. It favors banning or severely restricting particular substances, products and activities if it is merely possible that they or the processes used for their manufacture, formulation or assembly might, sometime in the uncertain distant future, cause potentially serious health or environmental harm.

Pursuant to the precautionary principle, government regulators need not prove objectively through empirical scientific risk assessment, actual exposure data, and probabilistic computations (extrapolated safety factors) that a particular substance or product is likely to cause actual harm within a foreseeable period of time to a specifically identified population or ecosystem. Rather than focus on the probable occurrence of actual risks under real life circumstances (i.e., with reference to use and exposure), the EU Commission and European environmentalists have promoted a new framework that effectively shifts the subject of evaluation from actual risks to hypothetical hazards. Pursuant to this new paradigm, which arguably shortcuts the scientific process, regulators need simply to identify a product's or substances' inherently dangerous characteristics or intrinsically harmful qualities and to rely upon an administratively-created presumption of possible harm. That presumption is itself based on abstract categorizations of broad classes of products or substances with similar hazard profiles.

B. Dispenses With Economic Cost-Benefit Analysis

In addition, EU regulators who employ the precautionary principle and their environmental and political allies have dismissed the need to undertake an economic cost/benefit analysis that is required by U.S. law for many types of regulations. Cost-benefit analysis is utilized by the U.S. government (7) as a safeguard to ensure an equitable balancing of important societal interests, including those of industry. In fact, the legal adviser to the EU Commission has spoken out strongly against the use of economic cost-benefit analysis, alleging that "[c]ost benefit analysis and other influences can lead to undue delays in precautionary action and further losses." (8) Perhaps this is due to the fact that there is no provision currently within European Community law requiring regulators to evaluate the economic impact or costs of assessing and managing public risks in a systematic manner. (9)

C. Generates Fear and False Perceptions that Lead to Risk Aversion

A review of Commission and Parliament activities reveals that European regulators are indeed focusing less on objective scientific evidence when evaluating public risks and more on subjective nonscientific criteria based on abstract notions of 'morality', 'social justice' and 'quality of life' rooted in unfounded perceptions of risk. These perceptions are generated by politically active and ideologically motivated environmental and consumer groups and like-minded politicians, who demand that regulators eliminate from society all health and environmental risks. The ideological 'concerns' of these influential non-governmental organizations ('NGOs') are raised to the level of 'public' consciousness via misinformation and fear campaigns (10) that so exaggerate the presence of hypothetical hazards that perceived risks have become more important than actual risks in the public's mind. (11) Indeed, some leading activists have referred to the precautionary principle in the media as "the most radical idea for rethinking humanity's relationship to the natural world since the 18th-century European Enlightenment", and as presaging a "great shift from a risk-taking age to a risk-prevention era." (12)

While Europe's resort to the precautionary principle to prevent emerging public hazards may sound appealing and provide surface level comfort, especially to older risk-averse citizens, (13) it is simply not possible, in the real world, to eliminate all risks, no matter what these groups claim. But, risk aversion is precisely the foundation underlying the precautionary principle, which "asks how much harm can be avoided rather than how much is acceptable." (14) In essence, the precautionary principle effectively states that industry must demonstrate to governments' satisfaction that a product, substance or activity deemed inherently hazardous is 'safe' or 'harmless' before it can be authorized for sale, distribution or marketing. This is equivalent to imposing upon industry a negative burden of proof or a zero-risk threshold that will severely curtail economic growth, technological innovation and societal well being and quality of life.

III. HOW DID THIS OCCUR?--IT BEGINS WITH HEALTH AND THE ENVIRONMENT AND ENDS WITH TRADE

A. The Crafting and Packaging of a Regional EHS Policy Message

Europe's regulatory and standards juggernaut can be traced, in part, to a philosophical skepticism towards the limits of contemporary empirical (evidentiary) science and technology and to a political need to calm public fears, whether justified or not, about a growing number of uncertain but perceived risks associated with modern life. These fears have been largely induced by European nongovernmental organizations (ENGOs) which, time and again, have launched particularly damaging media campaigns against European companies. Because of the significant political influence wielded by these civil society groups within Brussels and European capitals, EU regulators have had to respond to their concerns. In fact, pro-environment EU regulators have enlisted the assistance of these groups to develop a regional public policy premised on notions of morality that calls for higher regional and global EHS protections.

The Brussels institutions have funded and delegated quasi-legislative authority to such groups in order for them to disseminate and justify this policy to the European public (including industry). That policy essentially rejects U.S. scientific and technical innovations, economic efficiencies and free markets (i.e., globalization) in the name of establishing a regional (and global) democracy 'of and for the people'. It emphasizes that the desired high level of European public protection cannot be attained if scientific risk assessment is used as a legal benchmark. It argues that risk assessment is a primitive discipline that is unable to identify a great number of uncertain modern risks that can trigger catastrophic human and social losses. It also rejects the U.S. legal benchmark of economic cost-benefit analysis, which it claims has become a politically charged, illegitimate process that American industry has adeptly manipulated to prevent the adoption of necessary U.S. EHS regulation.

Over time, European civil society also enlisted the aid of politically-minded European scientists in search of research grants, who successfully helped them to translate this policy message into a series of regional legislative frameworks premised on the new legal and scientific benchmark of 'hazard'-based analysis. (15) Hazard-based analysis looks to the inherent characteristics and intrinsic qualities of substances and products to determine whether they may pose possible future harm to health and the environment. Hazard-based analysis does not require that regulators undertake an economic cost-benefit analysis, or the painstaking process of risk assessment that requires empirical proof of harm based on actual exposure. Hazard-based analysis has a less technical and scientific name--it is otherwise known in European political circles as the 'precautionary principle'. And, it has been established as a norm of EC Treaty law.

B. Incorporating Regional EHS Policy into the International Trade System

In order to exploit this regional policy for purposes of international trade, European regulators have endeavored to promote on a global level the same very close link between EHS regulation (government policymaking) and 'top-down' (rather than industry-driven) product, process and service standardization that they have already established at the European regional level. The process of standardization serves an important role within Europe--it helps to translate essential environment, health and safety regulatory and policy requirements into understandable technical guidelines which businesses may then use to design, manufacture, formulate, assemble and dispose of their products. In light of this important link, the EU Commission has emphasized the need to involve 'all relevant stakeholders', including European civil society, in the EU standards process to ensure that European EHS policy considerations are fully taken into account. (16) This practice has been self-reinforcing, insofar as, it has resulted in more and more environmental, health and safety requirements being promulgated and incorporated into EU regional regulations and standards.

To broaden and strengthen the impact of European regional regulation and standardization globally, the EU Commission has promoted the use of cooperative agreements (17) between the European political and technical communities and the relevant international bodies referenced in the World Trade Organization ('WTO') Agreements. (18) These bodies are held responsible for developing globally harmonized, science-based, and economically-efficient international standards. They are also entrusted with ensuring that while divergent national and regional regulations and standards may incorporate an appropriate level of EHS protection consistent with national and/or regional policy objectives, those protections are not used as disguised barriers to international trade. To this end, the EU has argued that the appropriate level of protection is that which reflects the use of the precautionary principle to adequately safeguard important European public EHS interests and cultural values.

Until recently, American policymakers and standards development organizations did not fully appreciate the extent of the Commission's use of these agreements to 'bootstrap' EU regional standards and preferences to international standards. They also did not realize how this fluid mechanism effectively enhances the EU's ability to incorporate their precautionary principle within international standards and the international standards-making process at the expense of U.S. industry. (19) In the words of former EC Enterprise Commissioner Erkki Liikanen, standards have "offered [the EU] a systematic framework to take over international standards and/or to contribute to the international standards-making process" (emphasis added). (20) Apparently, Germany is largely the source behind Europe's drive to dominate international standardization.

   As the export "world champion", and the leading exporter of
   technology, Germany needs an effective standardization body.
   Standards play an extremely important role both economically and
   politically ... Standardization helps the rapid dissemination of
   technical knowledge and innovation, increasing the business
   competitiveness ... [S]tandardization is also extremely relevant
   for the individual participants in economic processes, since
   whoever makes the standards controls the market. In times of
   increasing globalization and rapid technological development, the
   role of standardization in opening up new markets will become
   increasingly important (emphasis added). (21)

C. Establishing the Political and Moral Legitimacy of European EHS Policy

Given the technical and arcane nature of international standardization, U.S. observation of EU Commission and European civil society advocacy activities has, until recently, been largely focused on the higher profile political dimensions of international regulation. Europe has been most vocal and has played an increasingly influential role in the policymaking activities of the better known intergovernmental bodies. A number of these bodies are related to the United Nations and the Organization for Economic Cooperation and Development (OECD). (22) Evidence more than suggests that, the EU Commission and European civil society are attempting to use these bodies as vehicles to establish the international political and moral legitimacy of their precautionary principle.

In an effort to link the political and moral dimensions of international trade policy with the real economic dimensions of international trade, the EU Commission has sought to update WTO rules. European civil society believes they must undertake such changes because the institution of the WTO is no longer legitimate. In their view, its rules no longer reflect the evolving needs and expectations of a global civil society that transcends national borders and that seeks to protect the global environment ('commons') which all humankind shares. As previously noted, however, these rules also prohibit the use of technical regulations and standards as disguised trade barriers, and arguably prevent the incorporation of (EU) cultural values (the precautionary principle) into regional and national EHS regulations and standards if they result in arbitrary or discriminatory trade restrictions.

Hence, the EU has endeavored to convince other WTO members of the political expediency of incorporating their own societal and environmental values/ preferences within national and regional regulations and standards even if they may have the effect of restricting international trade. Thus far, this has permitted the EU to justify its imposition of precaution-based regulations and standards upon EU trading partners. In doing so, it has relied on the position articulated last year by former EU Trade Commissioner (now WTO Director General) Pascal Lamy. He argued that mutual respect for national cultural preferences falls within the notion of 'mutually balanced concessions' that underlies the quid pro quo achieved long ago under the General Agreement on Tariffs and Trade (GATT). (23)

D. Using EHS Policy as a Disguised Trade Barrier

It has become increasingly clear, however, that Europe's strict EHS policies based on the precautionary principle have an added economic dimension. (24) Ailing, lagging or underdeveloped European industries, overwhelmed by significantly higher regional regulatory, standardization, labor and energy costs and starved from a steady reduction in regional research and development investment, are no longer globally competitive. Because European industry has been unable to prevent the proposal and adoption of precaution-based regulations, it has chosen instead to appease and collaborate with their regulatory-minded and risk averse national and regional governments and the politically active European social and environmental movement. To this end, they have agreed also to assist these protagonists in establishing the precautionary principle, which implicitly rejects U.S. scientific and technical innovations, economic efficiencies, intellectual property and free markets, as an absolute global legal standard by exporting it around the world, (25) especially to the United States. Coincidentally, this effort has also served to 'protect' European industry's global economic interests by generating high business and legal costs, which all industry supply chains throughout the world must bear.

IV. EXAMPLES OF EUROPEAN PRECAUTION-BASED EHS REGULATIONS

There are numerous examples of European precaution-based regulations that reflect the use of an administrative presumption of hazard to ban or severely restrict the manufacture and use of certain products, substances and activities. As previously noted, this presumption arises even without scientific evidence showing actual harm or an ascertainable risk of harm posed by a specific product, substance or activity.

A. Biotech Products

The recently lifted EU seven-year moratorium against genetically modified ('GM') food, feed and seed (which has blocked approximately $300 million per year of U.S. agricultural exports since 1998 (26)) is one such law. Also included are the GM pre-market authorization directive and the farm-to-table traceability and labeling regulations recently enacted to replace it. (27) These rules, in part, implement the political treaty obligations assumed by EU Member States under the Biosafety Protocol, a multilateral environmental agreement ('MEA') governing the transfer, handling and use of certain GM products. The EU interprets that treaty as requiring the application of the precautionary principle. (28) These rules effectively discriminate between otherwise identical products solely on the basis of their process or production methods (PPMs), even though how they were made has not been shown to have any negative impact on the safety or performance of the final product or on the condition of the environment. (29) In fact, the EU has even admitted that, "GM foods do not cause any harm to consumers. There is no evidence that this food is any more unsafe than conventional foods." (30)

B. Toxic and High Volume Chemicals

Another good example is the proposed EU regulation on high volume chemicals known as the Registration, Evaluation and Authorization of Chemicals ('REACH'). REACH is a complex, three-level, volume-based system that mandates the registration of over 30,000 existing chemicals presumed to be hazardous. Also requiring evaluation of substances which 'give rise to a particular concern' and authorization for substances deemed to be 'of high concern', REACH does not consider, via a scientific risk assessment, the potential for actual human or environmental exposure (risk of harm) until after all industry testing has been completed. (31) REACH would impose on U.S. exporters a broad legal duty of care, satisfaction of which requires compliance with an extensive, rigorous, costly and largely unnecessary pre-market authorization and information sharing process that requires disclosure of proprietary company data without adequate protection of intellectual property. (32) Although REACH was drafted as a regional regime, the EU has all but admitted that it is intended to serve as a global template for the management of chemicals, and to impact virtually all product sectors at all levels of the global products supply chains. (33)

C. Cosmetics

REACH dovetails with other related EU regulations like the Amended EU Cosmetics Directive. This directive bans the use of phthalates (known to be carcinogenic to mice) in cosmetic products even though scientific tests (risk assessments) have thus far found "no evidence to suggest that consumer exposure to phthalates in cosmetics and personal care products poses a human health risk." (34) In addition, it bans the animal testing of most cosmetics prior to consumer use, even though failure to conduct such tests may expose humans to greater health risks. (35) If strictly applied, the ban would not only run counter to U.S. food and drug law mandating the animal testing of cosmetic products classified as 'over-the-counter drugs', but also would effectively require the reformulation by industry of all current cosmetics products. (36) This directive, furthermore, mandates full ingredient identification, which effectively requires disclosure of proprietary company data without adequate intellectual property protections. And it requires the labeling of all cosmetic substances which, as European industry has already found, is a very costly and unworkable requirement considering that fragrance compositions used in cosmetics typically contain numerous ingredients that can themselves be comprised of hundreds of individual substances. (37)

D. Biocides

The REACH regulation is also complimented by the EU Biocidal Products Directive and accompanying regulations, which apply a similar presumption of hazard to broad classes of chemicals and/or biological agents (e.g., disinfectants, chemical preservatives, non-agricultural pesticides, etc.) with similar intrinsic properties. The EU biocides regime covers twenty-three different product types overall. (38) These rules require companies to obtain formal authorization of all existing 'active' substances (39) and preparations in which they are contained before they can market them. To obtain formal authorization, biocide producers and formulators must first prepare and submit very detailed active substance dossiers indicating that they have assessed the risk of their products in advance. Such costly and onerous burdens are imposed upon industry before any government scientific risk assessment identifying a particular risk of exposure or harm has been performed, and even though the authorization process itself could eventually take up to ten years to complete. (40) And, once companies have complied, they are not even assured that the risk assessment data they provide will be honored by regulators who are more concerned with hypothetical hazards than with probable risk exposure scenarios. What is most disturbing, however, is that EU regulators have gone so far as to dictate how industry should formulate its products, even where it has positively satisfied the relevant regulatory safety requirements. (41) American companies should be very concerned about these rules considering how unworkable European companies have found them to be. (42)

E. Product Stewardship, Life Cycle Management and Waste Disposal

Furthermore, the EU has adopted precautionary principle-based regulations mandating that companies employ 'design for the environment' or 'life cycle management' principles when conceptualizing, manufacturing, formulating, assembling and ultimately disposing of products. These rules incorporate a very burdensome requirement known as corporate 'take-back'--namely, industry's obligation to reclaim and dispose of all new products put onto the market upon their obsolescence, mostly at individual company expense. (43) These obligations are based on preliminary conclusions drawn within the EU Green Paper on Integrated Product Policy ('IPP') (44) that were formally adopted by the EU Commission during June 2003. (45) It reflects an official EU environmental regulatory policy blueprint created largely with the assistance of European environmentalists, which would unilaterally impose on the world's manufacturers, importers, marketer-distributors and business 'users' an expanded obligation of producer responsibility and product stewardship. They are reflected, in part, in the EU's Proposed Framework Directive on Eco-Design for Energy-using Products ('EuP)', (46) the EU Directive on End-of-Life Vehicles ('ELV'), (47) the EU Directive on Waste from Electrical and Electronic Equipment ('WEEE') (48) and the EU Directive on Restrictions on the Use of Hazardous Substances ('RoHS'). (49)

It is quite revealing that each of these pieces of legislation presumes and effectively treats the waste from these categories of products, as well as the products themselves, as being potentially 'hazardous' to human health and the environment. However, the EU has failed to substantiate its administrative presumption via an objective science-based risk assessment. In other words, it has not demonstrated that the substances utilized in the manufacture of these products or the methods currently employed to dispose of them (which these rules seek to change) have generated ascertainable risks of harm or have resulted in actual identifiable incidences of exposure. In adopting and enforcing these rules, the EU Commission apparently believes that a scientific risk assessment and economic cost-benefit analysis are unnecessary, or perhaps even detrimental to their political objectives. It also apparently believes that it has helped EU Member States satisfy their political obligations under the Basel Convention, (50) an international environmental treaty negotiated largely with the assistance of several large ideological ENGOs such as Greenpeace, Friends of the Earth and the Basel Action Network.

F. Climate Change

The EU has also recently adopted a combination of directives, regulations and decisions designed to reduce what Europeans perceive as a threat progressive warming of the climate poses to human health and the global environment. While many environmentalists and scientists believe that some sort of global climate change is underway, there is no global scientific consensus regarding the pattern, magnitude or timing of such a change, or concerning the degree to which that change is being caused (51) by man-made, rather than natural activities and processes. And, despite even the most recent of reports alleging that the warming of ocean currents off southern California reflects global warming attributable to human activities, (52) these remain only 'soft' hypothetical assessments of possible climate change hazards rather than any 'hard' scientific assessment of probable health or environmental exposure risks. Indeed, it has been shown, thus far, that policy-motivated computer 'modeling inputs' championed both by the EU Commission and politically influential environmentalist groups (53) have been devoid of a rigorous scientific foundation. (54) Perhaps, as some have suggested, "Kyoto activism and the global warming campaign have less to do with saving the world and more to do with new forms of European protectionism." (55)

The 2002 Economic Report of the President candidly discussed the continued state of scientific uncertainty surrounding global climate change.

   We are uncertain about the effect of natural fluctuations on global
   warming. We do not know how much the climate could or will change
   in the future. We do not know how fast climate change will occur,
   or even how some of our actions could affect it. Finally, it is
   difficult to say with any certainty what constitutes a dangerous
   level of warming that must be avoided. (56)

Despite these uncertainties, however, the Bush Administration proposed a gradual and flexible approach that identifies realistically achievable goals at reasonable economic cost to address the perceived problem of climate change.

   [C]urrent uncertainty surrounding climate change implies that a
   realistic policy should involve a gradual, measured response, not a
   risky, precipitous one ... concepts such as a worldwide tax on
   greenhouse gas emissions or a worldwide tradable permit system,
   sometimes advertised as solutions, are at best useful theoretical
   benchmarks against which to measure alternative, practical
   approaches. At worst, they can be a distraction from meaningful,
   realistic steps forward. Why are such proposals impractical?
   Because they fail to recognize the enormous institutional and
   logistical obstacles to implementing any sweeping international
   program. Institutionally, it is important to learn to walk before
   trying to run ... The uncertainty surrounding the science of
   climate change suggests that some modesty is in order. We need to
   recognize that it makes sense to discuss slowing emission growth
   before trying to stop and eventually reverse it ... (emphasis
   added). (57)

Since at least 1997, many within the American scientific, economic and political communities have recognized that the U.S. would incur prohibitively high economic and social costs if it imposed regulatory limits on U.S. industrial, agricultural, commercial and household greenhouse gas ('GHG') emissions consistent with those required by the Kyoto Protocol. (58 59) Although members of the European business and intellectual communities have continued to cite the detrimental impact that the high costs of European compliance with the Kyoto Protocol would have upon European industrial competitiveness, employment and consumer prices, (60) these concerns have been largely 'drowned out' by the powerful European environmentalist lobby. At the same time, there has been a growing economic and scientific realization, even in Europe, that the absorption of those costs by industry and consumers would yield only slight global environmental benefits, even if all nations, including the U.S., enforced GHG emission caps at Kyoto Protocol 2008-2012 prescribed levels:

   Despite the uncertainty over how much Kyoto would cost ... one
   thing is sure: Kyoto will cost and the environment will not benefit
   from it ... The economic cost of Kyoto is very high and its
   environmental benefits are dubious to say the least ... Dr. Hans
   Labohm explained that 'The net cooling effect will be
   infinitesimal. According to the proponents of Kyoto' Labohm added,
   'the cooling effect of the whole Kyoto, comprising all developed
   countries as initially planned, was not more than 0.02 degrees
   Celsius in 2050. A European mini-Kyoto will produce a net cooling
   that is proportionally less (emphasis added). (61)

The President's 2002 Economic Report also explained this negative cost-benefit scenario:

   ... There is an unfortunate tendency to treat greenhouse gases--
   especially carbon dioxide (CO2)--in a manner analogous to SO2
   [sulphur dioxide] and NOx [nitrous oxide] [two known pollutants],
   for which strict quantitative limits have been imposed. SO2 and NOx
   can be controlled by adding equipment to existing facilities. CO2,
   however, can only be reduced by either reducing energy use or
   replacing fossil fuel facilities, equipment, and transportation
   fleets with ones that use fuels with lower or zero emissions (that
   is, unless and until capture and sequestration of CO2 become
   feasible). This is vastly more expensive than the end-of-pipe
   treatment appropriate for SO2 and NOx , and it raises concerns
   about fuel diversity, national security, and the ability to sustain
   our economic strength and quality of life.

      ... [R]educing U.S. emissions to 7 percent less than their 1990
   level (the Kyoto target) over the next 10 years could cost up to 4
   percent of GDP in 2010--a staggering sum when there is no scientific
   basis for believing this target is preferable to one less costly.
   Worse yet, by imposing such high economic costs and diverting
   limited resources, the Kyoto targets could have reduced our
   capacity to find innovative ways out of the environmental
   consequences of global warming.

   ... A modest, near-term goal to mitigate greenhouse gas emissions
   [is needed] ... The Kyoto Protocol focused on rather dramatic
   short-term reductions with unclear environmental benefits. Those
   reductions risked damaging economic consequences and, in turn,
   jeopardized the ability to invest in long-run scientific and
   technological solutions. A reasonable goal offers insurance
   consistent with existing climate science without putting the
   economy at risk. A gradual approach balances the need for
   mitigation with the need for economic growth to power future
   innovation. A gradual approach also allows us to adjust as we learn
   more from the science and are able to take advantage of
   technologies as they develop. Finally, a gradual goal provides time
   to develop stronger institutions for a long-term, global solution.
   (emphasis added). (62)

In essence, the Bush Administration, in contrast to the EU Commission, has stressed that it sees technology, rather than stringent regulation, as the long-term solution to any climate change problem, and that it is spending $4 billion a year on incentives for research and development to this end. Even environmental groups have conceded that the

Kyoto Protocol will have no impact on preventing what they believe to be an impending global warming catastrophe. "The groups themselves concede that the Protocol will only have 'symbolic' effect on climate because they believe it is too weak." (63)

Notwithstanding these sobering assessments, however, the EU climate change rules, better known as the EU Greenhouse Gas (GHG) Emissions Trading Scheme ('EU ETS'), proceeded to go into effect on January 1, 2005. (64) The scheme incorporates each EU Member State's annual GHG emission 'cap' (limit), as established by the Kyoto Protocol, and requires that such limit be enforced at the national level with respect to emissions generated by specific industrial activities undertaken by plants burning fossil fuels such as petroleum and coal.

The EU ETS currently covers energy producers (oil and petroleum refineries and power utilities); ferrous metal (iron, steel and metal ore) producers and processors; mineral processors (cement, lime, glass and ceramic producers); and 'other' industrial producers (mainly pulp and paper producers). (65) Pursuant to this scheme, GHG emitting plant operators must purchase from their governments GHG emissions permits covering their 'installations' that grant them the right ('allowances') to emit a limited amount of GHGs (one ton of carbon dioxide equivalent) within a specific period. (66) It is believed that emissions trading will provide companies within these industries with the ability either to earn revenues from selling their 'below-the-allowance' GHG emissions (GHG 'credits') to other companies or to offset the regulatory 'costs' (67) associated with their 'above-the-allowance' GHG emissions (GHG 'excesses') by purchasing other companies' credits. It has been reported that there are now emissions trading permits covering 12,000 installations in the 25 EU Member countries. (68)

The EU ETS also subjects these EU industry sectors to GHG monitoring and reporting/ registration requirements. (69) Further complicating the legal landscape, a number of EU Member States have created their own national trading schemes which go further than the regional program and include additional greenhouse gases (the EU covers only carbon dioxide) and sources of emissions. And, the EU is now contemplating GHG emissions reduction and energy efficiency proposals and related environmental fiscal incentives deemed necessary to satisfy the Kyoto Protocol's 'post-2012' period. They focus on the transportation (automobiles, vessels and aircraft), agriculture, small business, housing (e.g., builders and personal households) and waste disposal sectors. (70) Notwithstanding the recent nuanced appeals of European politicians (71) for the U.S. to join with Europe in addressing what is perceived as a threat to international peace and security, (72) it is certain that these laws will adversely affect the cost of living and quality of life for all Europeans and Americans.

V. THE HIGH COSTS OF PRECAUTIONARY PRINCIPLE-BASED REGULATION

A. Compliance, Intellectual Property and Misrepresentation Costs

As is clearly evident, precautionary principle-based regulations, directives and related product standards engender significant compliance costs. They require companies to develop and submit detailed information dossiers about the composition and processing of products in which sensitive technical information and formulae and intended product uses are disclosed. In addition, they require the sharing of such confidential information among all producers, intermediaries, and distributors present along a product's vertical supply chain. In each case, there is little regulators have afforded in the way of intellectual property right protection for valuable company intangible assets.

Furthermore, these regimes require that technical information be contained on detailed product labeling, consistent with national and regional 'consumer right-to-know' laws, whether or not consumer safety issues are involved, and irrespective of whether the environmental performance claims made on those labels can be scientifically/technically achieved. Supporters of such labeling rules argue that they will help European consumers choose the 'correct' products by better understanding the health and environmental hazards accompanying that product's processing or chemical composition. However, it is more likely that the added information will lead to absurdly long, cryptic and misleading labeling that confuses consumers and creates opportunities for consumer fraud and misrepresentation.

B. Eco- and Social Labeling and the Costs of Brand Reputation

What seems obvious, in any event, is that the EU is fostering artificial product and process distinctions and creating consumer expectations in the marketplace that will negatively affect the competitive conditions of non-EU products. In other words, Brussels is acting as a market 'maker' (73) rather than as a market 'facilitator' of European consumer preferences in the absence of a general market demand for environmentally friendly products and services:

   In its simplest form, [product and process] branding can involve
   both product differentiation and firm reputation. Brands have
   special utility for signaling intangible societal attributes, such
   as animal welfare and non-genetically engineered products. In such
   cases the consumer has difficulty assessing quality based on
   consumption and determining whether the product complied with its
   stated claim ... Branding does not mean that the differences are
   well defined' only that differences exist ... [T]he brand allows a
   separation (differentiation) in the marketplace by quality in the
   form of intangible societal attributes ... Customers may not be
   able to measure the quality of a product, say the environmental
   impact of the Bt event in corn, [b]ut ... [they can measure
   whether] ... due diligence and prudent safety measures have been
   employed" (emphasis added). (74)

One need only survey the EU Commission's many eco-labeling initiatives to realize the extent of European governments' indirect involvement in the commercial markets.

The EU's labeling rules concerning GMOs, electronics and electrical equipment, toxic chemicals, cosmetics and biocides provide such an example. (75) The recent EU furniture eco-label program arguably provides another example of a governmental attempt at product branding. A preliminary report prepared for the Commission on the feasibility of a new EU furniture eco-label recommends that sustainable forest management (SFM) certification be included as an indispensable criterion for award of the label. The report however recognizes that, because "Purchasers ... have shown themselves to be profoundly uninterested in Eco-labels, [as] we know [of] no real demand for an EU Eco-label on furniture" (emphasis in original), (76) it is likely that private demand needs to be created at the EU level. "[I]f [private] demand does not exist, it can be created through awareness activities or through procurement requirements in the case of public procurements." (77)

According to the report, this would be possible by harnessing the 'fashion' dimension of the furniture market through creation of premium-branded products that would appeal to consumers because they reflect "fitness for use linked to ethical values" (emphasis in original): (78)

   [On the one hand,] [t]he furniture industry is a fashion industry
   where fashion will never be governed by a label ... [Yet, on the
   other hand,] ... [t]he market shares of furniture that are clearly
   identifiable as fashionable goods should be identified in a market
   study. Ecological design can to a certain degree pick up changing
   trends and adopt to them. At least one of the documented best
   practice-examples indicates that new design and environmental
   product qualities are compatible aims (emphasis in original). (79)

In fact, the report's authors believe that such a premium brand eco-label could effectively "compete with all existing brand names of big retailers or manufacturers":

   Only about 20% of all furniture in the EU is sold under a brand
   name, the rest are no-name products. Brand names have a high
   attractiveness in the market and generate higher revenues. Thus the
   new EU label will compete with all existing brand names of big
   retailers or manufacturers ... 'An eco-label can be a success if
   associated with a brand or a high developed environmental policy
   and communication (EMAS, ISO 14000 ...)'.... The Eco-label as a
   premium ... [can be] display[ed] [by] firms ... on a product or
   product line [to] thereby indicate their responsibility and
   contribution in the environmental field. This strategy may be
   useful when attracting new, or retaining and reassuring existing,
   'green' consumers (emphasis added). (80)

By use of this approach, EU companies would be able to differentiate their wood and furniture products from, and thereby effectively compete against, lower priced foreign exports. "Price competition from outside the EU can be offset by strategies that closely couple product and image value of furniture. 'Differentiate from non-EU imports, particularly those from low wage rate economies'" (emphasis in original). (81) However, there would be no requirement to scientifically prove the environmental claims made on such a label.

C. Tort Liability Costs

If the precautionary principle became a formal U.S. legal standard, companies would be obliged to satisfy a broad, affirmative, forward-looking legal 'duty of care' as a precondition to securing market authorization and market access for their products. This "duty of positive obligation ... requires ... industry actors to be fully informed about the possible consequences of environmental change;" (82) i.e., companies are put on advance notice that they must not engage in activities currently that may potentially trigger unascertainable but serious risks of harm sometime in the future. The precautionary principle applies to commercial participants at all levels of the global product supply chains, each of which must show that they have followed 'best practice' in designing new products from conception even if 'best practice' is never really known because it is still in the process of evolving. This has been interpreted to mean that an economic actor would be deemed not to have satisfied its duty of care "even if best practice and appropriate regulatory rules [were] followed." (83) Companies must endeavor to ensure that the manufacturing methods they employ and the potential uses to which their products or substances are ultimately placed, even if presently unknown, will have as minimal a health and environmental impact as possible (without regard to 'reasonableness'), irrespective of the costs to industry. (84)

Within the transformed U.S. tort system precautionary principle advocates envision, legal liability would be triggered merely as the result of a prima facie breach of a broader obligation/responsibility imposed by civil law, and the failure to satisfy a greater evidentiary burden of proof normally imposed under the criminal law. Thus, liability for violation of precautionary principle-based regulations would be premised on, but would go beyond the U.S. common and statutory law of negligence, strict liability, 'products liability' and public nuisance.

A case in point is Articles 5 ('Preventive Action') and 8 (Prevention and Remediation Costs') of the recently enacted Commission Directive on Environmental Liability, (85) which implements the EU 'polluters pay' principle. Article 5 provides that, "Where environmental damage has not yet occurred but there is an imminent threat of such damage occurring, the operator shall, without delay, take the necessary preventive measures." Article 8 provides that, "The operator shall bear the costs for the preventive and remedial actions taken pursuant to this Directive. Judging from its other provisions, strict liability would be favored over fault-based liability (negligence) (86) to prevent 'environmental damage' from "certain high-risk activities [such as] manufacturing, transport and storage of dangerous substances, waste management, discharges of substances into ground or surface water, etc." (87) "Businesses primarily affected are those involved in traditionally polluting activities, such as plants releasing heavy metals into water or into the air, installations producing dangerous chemicals, landfill sites and incineration plants." (88)

The White Paper upon which this directive was based, further explains the objective and scope of this liability regime, as follows:

   The objective of nearly all national environmental liability
   regimes is to cover activities that bear an inherent risk of
   causing damage ... [,i.e.,] (dangerous) activities ... [and to] ...
   link ... the liability regime ... with the relevant EC legislation
   on protection of the environment ... The activities to be covered,
   with respect to health and property damage and contaminated sites,
   could be those regulated in the following categories of EC
   legislation: legislation which contains discharge or emission
   limits for hazardous substances into water or air, legislation
   dealing with dangerous substances and preparations with a view
   (also) to protecting the environment, legislation with the
   objective to prevent and control risks of accidents and pollution,
   namely the IPPC Directive and the revised Seveso II Directive,
   legislation on the production, handling, treatment, recovery,
   recycling, reduction, storage, transport, trans-frontier shipment
   and disposal of hazardous and other waste, legislation in the field
   of biotechnology and legislation in the field of transport of
   dangerous substances ... some of these activities, such as
   activities with respect to genetically modified organisms (GMOs),
   are not dangerous per se, but have the potential, in certain
   circumstances, to cause health damage or significant environmental
   damage. This could be the case, for example, in the event of an
   escape from a high-level containment facility or from unforeseen
   results of a deliberate release. For this reason it is considered
   appropriate for such activities to come within the scope of a
   Community-wide liability regime. (89)

Furthermore, it emphasizes how the strict liability regime envisioned would "mak[e] people realise that ... [in addition to being responsible] ... for the possible negative effects of their operations ... on other people's health or property ... they are also responsible for possible consequences of their acts with regard to nature. This expected change of attitude should result in an increased level of prevention and precaution" (emphasis added). (90) Moreover, it would encourage public interest (environmental and consumer) groups to commence actions directly against defendants "as if [they] were taking over the role of the public authority for the specific case ... where the public authority is thought to be in default." (91)

Were the precautionary principle to become U.S. law, it would shift the legal burden of proof from government to industry by requiring that industry produce a sufficient quantity of testing evidence that also qualitatively persuades government regulators of a product or substance's 'safety' or 'harmlessness.' (92) In essence, industry must overcome a higher threshold of persuasion (legal standard of proof) than that currently called for in civil litigation within the U.S. (i.e., 'proof beyond a reasonable doubt', as found in U.S. criminal litigation, rather than 'proof by preponderance (or balance) of the evidence'). "Precaution means, in effect ... that one is guilty until proven innocent when tampering with the environment in ... [potentially] ... risky ways." (93) This would, in effect, create a rebuttable presumption (an inference) of negligence in favor of the plaintiff with merely the presentation of circumstantial evidence of the defendant's failure to act reasonably, consistent with the disputed legal doctrine of res ipsa loquitor. (94)

One need only look to the proposals contained within the EU Commission's Green Paper on Products Liability--(which reviewed how an earlier EU Directive on Products Liability (95) had been implemented in the Member States)--to see how the precautionary principle would likely impact producer liability in U.S. tort litigation.

One of the proposals says that if the plaintiff proves that he has been hurt and that the product is defective, causation should be inferred. The burden should be on the defendant to show that his product didn't cause the harm. There has not been anything exactly like this in the United States. There is a doctrine called res ipsa loquitur which allows circumstantial evidence to be used to infer defectiveness of a product, and sometimes logical contortions have been made to jump over causation issues, but that proposal has never really taken root. [A] young professor from England who was championing this proposal ... said, "We need this change because we do not have adequate provision for discovery from defendants. We do not have the system that you have in the United States where, in a personal injury case, a victim can obtain relevant documents from the defendant. So in light of that, let the defendant prove that his product didn't cause harm" (emphasis in original). (96)

Moreover, American technology developers, product manufacturers and designers and substance formulators would be prevented from claiming that they had exercised reasonable care by following then-prevalent 'customary industry practices' (97) or 'state-of the-art' technical/scientific standards, when responding to a products liability or toxic tort action based on negligence or strict liability. (98) The so-called 'state-of-the-art' defense provides that, "There is no liability for the producer if the state of scientific or technical knowledge at the time the product was marketed made the defect in the product undiscoverable:" (99)

   State-of-art or "development risk really has two parts. One part is
   ... where you could have known about a risk ... But there's another
   part. Suppose ... you know what the risks are but there is no way
   to avoid that risk under current technology. Yet it's a lawful
   product. It's a product that is lawfully sold. In the United States
   and most of our courts, that is a defense as well. It really means
   that under science there's a product that has certain risks but
   there is no knowledge of how to avoid them. It would seem helpful
   in Europe to have that concept in the law, too, but it is not there
   under the black letter, as development risks are currently defined
   in the code, because when the code was established those who were
   crafting it did not want to address that issue". (100) "[S]ome
   [American] states [,in fact,] have established statutory
   presumptions that a product is not defective (101) if its design
   conforms to the 'state of the art'", which would no longer be
   available (emphasis added). (102)

As the EU White Paper on Environmental Liability (2000) indicates, however, although the 'development risk' defense (or, at least, one part of it) was previously provided for in Article 7(e) of the EC Products Liability Directive, political pressure later mounted to abolish it, consistent with the precautionary principle. (103) The prior 1999 Green Paper on Products Liability had also "proposed abolishing the development risk defence ..." (104) Apparently,

   Back when [that] code was established, there had been "a very
   strong feeling that manufacturers of products should be liable even
   if they neither knew nor could have discovered a risk, particularly
   with respect to pharmaceuticals and chemicals. On the other hand,
   people from those industries and others said it was unfair to
   impose liability on a producer that neither knew nor could have
   discovered a particular risk. It would deter innovation and
   willingness to put new products on the market, particularly in the
   pharmaceutical area. In Europe they sort of split the baby. They
   put a development risk in the code, but said if a certain country
   didn't like it they didn't have to take it. Most of the countries
   adopted the development risk defense, and it continues to be under
   attack with the same fundamental policy issues." (105)

Following removal of this defense, producers would again be held liable "for defects in their product that could not be discovered at the time the product was marketed." (106) Since this defense incorporates economic cost-benefit analysis, its loss would systematically predispose the legal and economic outcome (107) of tort cases in favor of plaintiffs, and thereby stifle innovation: (108)

   We can show in the United States that our experiment in getting rid
   of that defense failed. The Supreme Court of New Jersey, in a case
   called Beshada v. Johns-Manville Products Corporation, in the
   eighties got rid of it. In the context of an asbestos case the
   Supreme Court of New Jersey said that a manufacturer could be
   subject to liability if it neither knew nor could have known about
   a risk. The Supreme Court of Louisiana, in a case called Halphen v.
   Johns-Manville Sales Corporation, said the same thing. There was a
   decision in Montana and a decision in Hawaii that said the same
   thing. Most of the cases were either retracted or confined to
   asbestos by the courts themselves, or legislatively overruled. The
   Supreme Court of New Jersey pulled back and confined it to
   asbestos, and then its legislature came in and overruled it. The
   same thing happened in Louisiana where a lower court attempted to
   apply the rule of Halphen to escalators, and all escalators in
   Louisiana came to a halt, and people who had difficulty climbing
   stairs had difficulty climbing stairs. We have learned from our
   experience that abolishing the development risk defense has social
   consequences. We shared that experience with the Commission that
   put out the Green Paper" (emphasis added). (109)

The duty to exercise 'precaution' during the course of one's activities to the extent they involve a foreseeable risk to foreseeable parties seems already firmly entrenched within the U.S. case law on negligence. In addition, courts have imposed on parties a duty to exercise precaution to prevent the negligent acts of third persons from causing foreseeable harm to others, especially if serious risks of harm are likely to occur. The adoption of the precautionary principle by U.S. federal and state regulators, however, would arguably serve to overrule U.S. case law. It would extend the duty to exercise precaution to new activities and parties for purposes of preventing suspect substances, products and technologies from causing unforeseeable harms to the public at large.

The prospect of greater economic and social costs resulting from more prolific regulation and more frequent litigation and damage awards induced by these changes should not be underestimated:

   [I]n Europe, little thought is given to the possibility that adding
   more regulation and liability might not be in consumers' interests.
   Obviously, in the case of regulation, when you increase regulation,
   roughly speaking, you increase costs and decrease choices, which
   might not be what the consumers would particularly prefer.
   Similarly, in the case of liability, Europe has gone through the
   same trends that the United States has--i.e., a shift towards
   strict liability over the last fifty years. However, it is not
   clear that strict liability advances consumers' interests, and it
   is not clear that it lives up to its advance billing of cost
   internalization. For example, strict liability does not deter any
   better than fault liability, because you cannot deter what you
   cannot know or foresee. Strict liability does of course decrease
   activity levels, providing less of the products or services that
   consumers may want. Similarly, strict liability is not particularly
   good at risk spreading, one of its other principal justifications.
   It is basically a very inefficient one-size-fits-all insurance
   policy." (emphasis added). (110)

One need only recall the "massive liabilities [previously] imposed on Dow Chemical because of silicon breast implants to see how the changes in U.S. law called for by precautionary principle advocates will impact the tort liability of American companies. [In that case,] liability was imposed despite the almost complete lack of evidence meeting traditional scientific standards that the implants in fact caused the chronic fatigue syndrome and other ailments they were accused of causing" (emphasis added). (111)

Even without regard to the precautionary principles' challenges, U.S. manufacturing, refining, extracting, energy and waste-related services companies and their downstream suppliers are already reeling from the current tort litigation 'lottery' created by ambitious American trial lawyers. If, then, the Bush Administration is to take the pragmatic approach to tort reform it has advertised, it must also prevent a formal precautionary principle from hijacking American risk regulation and tort law.

Given Europe's aversion to risk, it is not surprising that the EU White Paper on Environmental Liability concluded that the overall economic impact that precautionary principle-based environmental regulation has had on the international competitiveness of European industry, especially small and medium-sized businesses, has been minimal. The Commission has never professed to be knowledgeable about how businesses operate, let alone how difficult it would be for businesses to recover high regulatory, administrative and liability costs in the pricing of their products. What this reaffirms, however, is the enduring political influence of ideological environmental and consumer groups in the European policy-making process. Indeed, a review of other EU Commission documents and the anecdotal evidence provided by European industry tells a decidedly different story.

D. Insurance Costs Related to Development Risk

Insurance law experts also have noted the potentially adverse impact that the precautionary principle would have on the current U.S. insurance system. That system is based on the late nineteenth century social paradigm of 'solidarity-based governance', which has prevailed in the U.S. since the New Deal era. The solidarity approach arose in place of what was then the 'providence' or 'act of God' paradigm. (112) It sought to address the problem of industrial work accidents by providing truly innocent victims with compensation without regard to assessment of fault. It also promoted the "sharing of risks across society in the name of reducing the overall suffering of the population[,] ... recognized accidents as ordinary features [risks] of modern life to be actuarially predicted[,] ... and ameliorate[d] systematic losses through technology and [balanced (113)] regulation." (114) In other words, the solidarity approach "placed great emphasis on scientific knowledge to predict the extent of losses and craft regulatory approaches toward ameliorating them." (115)

Precautionary principle advocates seek to replace that system with a new 'safety' paradigm of prevention. The safety paradigm focuses on new types of catastrophic environmental threats that loss spreading and balanced regulation would arguably be unable to address. These include global warming and the potential impact of hazardous chemicals and biotech foods:

   In place of the repetitive accidents, e.g., industrial injuries and
   automobile accidents, the developed world is increasingly
   politically focused on what Ewald calls 'the return of disasters'.
   These new threats, ... advanced technology disasters and medical
   errors ... do not lend themselves to the dominant strategy of
   solidarity, i.e., compensating victims regardless of fault ...
   [T]he safety paradigm is informed by awareness of the uncertainty
   of scientific knowledge and the inability to predict certain kinds
   of catastrophic events. This lends itself to what has been called
   in environmental policy the 'precautionary principle' i.e., the
   notion that when catastrophic losses are possible and scientific
   knowledge is uncertain the most appropriate risk policy is not to
   take the risk at all (emphasis added). (116)

Proponents of this new paradigm dismiss probabilistic risk theory as unreliable to predict and control catastrophic harms in advance. They argue that the actuarial bases underlying risk prevention and control do not apply to certain catastrophic hazards, which, because of their irreversible and/or irreparable nature are fundamentally different than industrial and auto accidents. Such bases require clear, relatively certain and available information upon which risk management decisions can be made, and the legal and social deterrent effect of after-the-fact liability for harm. (117) Consequently, in their view, risk theory cannot provide the "efficient" level of prevention or advanced prediction of future costs of harm necessary to address the financial and social dimensions of uncertain future catastrophic events.

According to at least one insurance law expert, such thinking "threatens an U.S. insurance system that is based on the idea that insurance" involves fixed premiums paid in advance for guaranteed benefits in the event of loss." (118) In his opinion, this would precipitate a fundamental systemic change that would entail the incorporation by insurers of 'post-loss assessments' into their insurance contracts:

   Early insurance arrangements addressed the problem of uncertainty
   by incorporating post-loss assessments, so that the premiums paid
   by members of the insurance pool were adjusted to reflect recent
   losses. The precautionary principle counsels us to return to this
   old-fashioned approach. Assessment insurance is tailor-made for the
   uncertainties upon which the precautionary principle rests. (119)

This means, in effect, that the cost of insuring against possible future catastrophic losses would no longer be based solely on fixed premiums. Rather, they would also depend on the levy of an additional charge following the occurrence of an inevitable and non-preventable catastrophic event that is determined based on a final assessment of the resulting damages. And, these costs could conceivably multiply in the absence of a reliable post-loss assessment mechanism, if those who are forced to suffer the losses on their own (i.e., the uninsured) demand that industry be subject to increased liability and/or that government clamp down on entrepreneurial activity via increased regulation.

Considering that government's competence in post-loss assessment is relatively untested, this insurance law expert believes that "the result of clamping down will be a series of expensive Maginot lines against risk, each of which ... protect[s] society against a known risk, while doing nothing to protect society from the unknown." (120) It is quite possible, therefore, that "the efforts taken in the name of the precautionary principle may even increase our vulnerability to the unknown." (121)

According to this expert, drugs and other health technologies present two cases where the current insurance system's failure to adequately address 'development risk' will ultimately result in greater regulatory and insurance costs. "Development risk [is] the risk that a product will produce a kind of harm that is not foreseeable at the time of design but for which the manufacturer is liable under the principle of strict liability." (122) In his opinion, liability insurers are likely to design insurance contracts covering such activities in a manner that avoids development risk (i.e., through exemptions or limitations in coverage). As a result, the pool of insurance monies available to cover catastrophic losses suffered by society will be correspondingly reduced. If, the partially insured businesses operating within these sectors are then forced into bankruptcy because the catastrophic liability claims they face exceed their policy coverage amounts, there will be even fewer funds available to compensate society's victims for losses suffered as the result of such events.

The real concern, however, is that the public and media hysteria created by successful environmental NGO fear campaigns will exacerbate the losses already suffered, and cause the "uncompensated victims to clamor for criminalization of environmental law and to call for [more] extreme [regulatory] efforts to prevent loss in the future." (123) In the words, of French insurance expert Francois Ewald: "'The appearance of the precautionary principle is registered in the context of victims who are no longer satisfied with compensation, no matter how large, but who are only satisfied when those responsible are held criminally liable.'" (124)

Other legal academics have proposed an alternative mechanism to facilitate the shift from public risk bearing to private risk bearing (internationalization of potential environmental externalities) called for by the precautionary principle--the requirement of costly assurance bonds.

   In application, a bond is a declaration of ex-ante liability rather
   than the current practice of the burden placed on harmed parties to
   raise claims ex-post. The bond would be held to compensate those
   affected by the (ex-ante) immeasurable harm or until the
   uncertainty of risk had been reduced to commercially viable levels.
   (125)

In effect, companies would be obliged to post a bond in advance in an amount equal to the 'worst case scenario' losses, in order to later engage in an economic activity deemed by regulators and/or civil society to pose uncertain environmental or health risks. Over time, the bonding level would decline if the presumed losses failed to materialize or the uncertainty factor was reduced. But, in the end, the burden will be placed on all companies "to provide evidence that the expectation of harm has declined and that their capital should be returned." (126)

According to these experts, bonding serves several purposes:

   First and most importantly it pushes incentives ahead in time.
   Funds are posted ex-ante. Second, bonding is [an] incentive ...
   [different from the threat of litigation and large fines] ...
   compatible [with] making the producer of the risk bear the risk.
   Third, bonds are insurable creating a market for the risk and
   reducing the cost on the firm. Fourth, bonding rates are dynamic.
   As information is revealed, through additional research or
   post-market surveillance, over time and risks are reduced, bonding
   levels would be ratcheted down reducing the burden on the firm.
   Finally the firm adapts its capital plan because of the explicit
   and ex-ante identification of the risk. Theoretically, the design
   is to reduce cavalier behavior by the firm without destroying the
   incentives for innovation. (127)

Although multinational corporations could arguably absorb the expense of posting an assurance bond, small and medium sized companies would likely be devastated if compelled to do so. The cost of bonding would likely be disproportional to the size of most SMEs in terms of employment, sales revenues generated and the contract value of activities engaged in. And, it would also likely consume hard-to-come-by working capital funds that are indispensable to research and development and maintaining essential business operations and employment and a positive community reputation. Once again, one need only look at the evidence to discern how the EU will soon incorporate the requirement of purchasing financial security instruments such as assurance bonds into its 'polluters pay' liability directive. (128)

E. Insurance Costs Related to Climate Change

Apart from product development risk, the inability of the current insurance system to address many of the uncertain possible future economic and social losses arising from global warming-induced climate change presents another such example. The consulting arms of international reinsurance companies such as Munich Re, Swiss Re and Marsh McLennan are busily advising multinational companies of the need to mitigate their potential exposures to environmental liabilities and financial costs surrounding climate change risks. At least one American academic has estimated that "$2.7 trillion of the $10 trillion U.S. economy is susceptible to weather-related loss of revenue, meaning that an enormous number of companies have 'off-balance sheet' risks [unaccounted for in a financial accounting sense] related to climate. This could wound corporate America in a lot of ways, particularly as insurance companies discover this new area of risk." (129)

Their sales pitch generally proceeds as follows:

   As investors and insurers demand better disclosure of environmental
   liabilities and better corporate risk management, more central
   control of global environmental risks is required. Thus, companies
   need to have a comprehensive system to identify, assess and
   mitigate environmental risks across their global operations, and
   understand their financial impacts. Insurance companies can not
   make informed underwriting decisions without better information
   about all risks, including systematic environmental risks and
   liabilities like climate change. (130)

It is then followed by what appear to be scientific and economic justifications:

   Climate Change will have a variety of financial impacts: Health
   Insurance--'Climate change will lead to a resurgence in infectious
   disease unseen since the 19th century'--Paul Epstein, Harvard
   Medical School; Property Insurance--'World--wide economic losses
   due to natural disasters appear to be doubling every ten years, &
   have reached $1 trillion over the past 15 years'--Munich Re
   (3/2002); Impact on profits--'Companies will incur significant, &
   differing, material increases in operating costs due to increases in
   energy prices and GHG effects on suppliers'--Martin Whittaker,
   Innovest; 'In a carbon-constrained future, climate change becomes a
   key financial issue'--John Fitzpatrick, CFO, Swiss Re (emphasis
   added). (131)

   Natural disasters brought about by climate change are forecast to
   cost the finance industry 85 billion pounds per year within the
   next 10 years, according to a UN Environmental Program Finance
   Initiative (UNEPFI) report. (132) Climate change affects our
   business in other ways. It has the potential to create uncertainty
   for morbidity rates, influencing life and health reinsurance
   business, [to] affect the future performance of investments and
   [to] create new liabilities for our corporate clients ...
   Reinsurers need to anticipate what the impact of activities today
   will have on the business of tomorrow ... Our goal is to understand
   the risks, to adapt business and assist clients through knowledge
   sharing and risk solutions. Supporting efforts to reduce greenhouse
   gas emissions is part of the process because it can reduce the
   uncertainty generated by climate change. (133)

But, a closer look at European reinsurance company activities reveals what they are really after. They are seeking to avoid or mitigate their own liability for possible future direct and indirect reinsurance losses to which they are subject under their current insurance and reinsurance contracts, just as they are seeking to do with respect to development risk. Initially, this can be accomplished by spreading the potential insurance and financial risks and higher related costs to their American competitors, and ultimately to their American clients. European reinsurers can also hope to influence human settlement patterns and catastrophe risk management practices through risk-adequate insurance rates. (134) "Risk-adequate insurance rates and conditions may serve as an incentive to encourage loss prevention and guarantees the financial compensation for catastrophe losses." (135)

For example, European reinsurance companies have sought to reduce their primary insurance and reinsurance property and casualty coverage of new policies that secure existing or newly planned commercial and residential real property assets located along densely populated, storm-prone European and U.S. coastlines. These limited and reduced coverage policies are likely to negatively impact property development, reduce the pool of available insurance funds, and drive up national and regional insurance rates beyond the reach of many European and U.S. property owners. As a result, remaining owners will then be forced to bear catastrophic losses from natural disasters on their own (with limited or no insurance), and, arguably this will lead them to demand immediate government action to cover their losses. That action will likely entail holding greenhouse gas ('GHG') 'polluting' industries responsible for their past GHG emissions pursuant to a precautionary principle-based strict liability regime, and governmental enactment of stringent hazard-based regulations to restrict GHG emissions in the future. Consider:

   Most policies covering natural disasters are renewable on a yearly
   basis. When risks become too expensive, insurers can simply walk
   away ... If climate change starts inflicting losses, insurers will
   again head for the exits. Just such insurer flight has already
   caused problems in North Carolina's Outer Banks and in parts of New
   York's fabled Hamptons, [let alone along the Florida coastline]
   where coastal storms are eating up homes and businesses. When
   insurance companies quit these high-risk places, the burden shifts
   to banks. But they don't have the same freedom simply to cancel
   mortgages and loans. What will happen to the markets if banks start
   demanding insurance for weather-related events that is either
   prohibitively expensive or completely unavailable? (136)

As noted above, the projected increases in insurance costs derive from both direct and indirect risk sources. Direct risks include climate-related physical impacts, interruptions in production, changes in market demand and changes in market supply and/or production costs. Indirect risks include GHG regulatory costs, negative impacts on company reputation and the risk of litigation. (137) The German reinsurance industry has estimated the potential market value of both types of risks to be between U.S.$ 210-915 billion globally, and for this reason, has recommended that climate-related risks be included in company debt ratings. (138)

However, because "it is difficult to quantify the actual and future [long-term] impacts of climate change on catastrophe losses", European reinsurers have focused their attention instead on the more expensive shorter-term indirect risks. Even before the EU GHG emissions trading regime entered into force in January 2005, regulatory risks had been identified as the most significant:

   Given the magnitude of the EU scheme and the potential pace of
   introduction--one might note an implementation time of less than 5
   years in the EU--in combination with a lifetime of over 40 years of
   technical equipment in several sectors, GHG emissions should be
   assessed as risks in other nations as well ... The allocation of
   allowances to installations covered by the emissions trading scheme
   equals the setting of emission targets and is thus one of the most
   crucial aspects of the design of the EUETS. Installations emitting
   more than they can 'pay' with allowances face substantial financial
   penalties: 40 euro per excess ton of CO2 from 2005-2007, and 100
   euro per excess ton of CO2 equivalent in the period 2008-2012 ...
   Monetary impacts on companies may occur in the short-term due to
   price fluctuations for CO2 allowances and/or mitigation credits
   (emphasis added). (139)

And, predictably, European reinsurers have discovered additional indirect insurance risks necessitating new insurance products that will ultimately be subject to coverage limitations. For example, they have alerted corporate directors and officers of the growing risk that they may be subject to liability from shareholder derivative suits for failing to effectively manage their company's carbon emissions consistent with GHG emission regulations. According to Swiss Re, the second largest reinsurance company in the world,

   [W]e were the first in the industry to identify and act upon the
   potential climate change related risks in directors' and officers'
   (D&O) insurance ... While the company does not presently plan any
   restrictions, we are making clients aware that directors and senior
   managers may in the future be held responsible if their companies
   fail to manage their carbon liabilities effectively or to comply
   with emissions regulations (emphasis added). (140)

What this really means, however, is that,

   [T]hey may be liable for damages ... if insurers like financial
   giant Swiss Re start changing the insurance policies that insulate
   directors and officers from the costs of lawsuits from the actions
   of their corporations ... Chris Walker of Swiss Re describes how
   this might come about with regard to climate change. He notes that
   energy giant Exxon/Mobil accounts for roughly 1% of global
   emissions, and has aggressively lobbied against any efforts to
   reduce greenhouse gases. 'So', says Walker, 'we might then go to
   them and say, since you don't think climate change is a problem,
   we're sure you won't mind if we exclude climate related lawsuits
   and penalties from your D&O insurance.' Swiss Re recently set the
   stage for such action by sending a questionnaire to its D&O
   customers inquiring about their company's strategy to deal with
   climate change regulations. (141)

Indeed, Swiss Re was reported to have "announced in 2002 that it would withdraw liability coverage from executives at companies that fail[ed] to adopt adequate climate change policies." (142)

Furthermore, these companies have endeavored to generate new demand for renewable energy and less carbon-intensive energy sources and promote new insurance and investment vehicles (or hybrid products) which their affiliates can underwrite, invest in, and/or finance in support of sustainable development. (143) Electrofinance is one such financial product:

   Electrofinance combines property-casualty insurance, electricity
   serviced, and an annuity into a single product, whereby any savings
   from reduced electricity bills due to aggregated demand and
   increased efficiency goes either into the annuity portion or to pay
   down a low-interest, long-term loan on a photovoltaic system ...
   Electrofinance [is] a product that could prove attractive to
   insurance and other financial service companies purely for business
   reasons ... What seems clear is that the best way to spur the
   American insurance sector to action is to show them that such
   activities can rapidly provide a profit through new business
   opportunities or through loss mitigation (emphasis added). (144)

These companies have sought to render consulting services to multinational companies that focus on carbon risk mitigation and consumer 'carbon branding'. These services have been advertised as providing companies with the means to develop an internal governance system to reduce and offset their GHG emissions regulatory requirements.

In essence, European reinsurance company climate change-related activities should be viewed for what they really are--as a financial enterprise aimed at generating new sources of premium and non-premium income--and not as a serious attempt to save the global environment. "Carbon reduction must be seen only as an incidental benefit. In the past few years, many new avenues have opened for insurers to earn those profits as lines between insurance, banking, and other services begin to blur." (145)

Unfortunately, for American businesses, in order for these financial opportunities to multiply for European insurance and reinsurance companies, precautionary principle-based regulation, insurance and liability law must be exported from Europe to the United States.

F. D&O Liability and the Business Judgment Rule

It would appear that, through their words and deeds, international reinsurance companies such as Swiss Re, Munich Re and Marsh & McLennan are putting their multinational clients on notice about the potential D&O liability they may incur under U.S. common law because of their directors' and officer's actions or inaction. Such 'covered' liability could be triggered, for instance, as the result of a board's gross negligence in rendering a business decision. Alternatively, it could attach as the result of a board's failure to remain adequately informed of and attentive to available and relevant information which could help it to decide how to mitigate company environmental litigation and regulatory risks, such as those that may be related to global climate change.

These reinsurers may also be admonishing companies that their D&O policies may, in the future, no longer cover director liability for breaches of the fiduciary 'duty of care'. For example, they may decide to raise premiums or to limit or exclude coverage whether or not a company director or officer directly and personally participated in the commission of a tortious or illegal act in the course of fulfilling company responsibilities (e.g., a violation of an environmental statute). However, reinsurers well recognize that legal liability for such violations will not usually attach as the result of poor or negligent business judgment (and D&O coverage triggered), unless there is direct officer or director involvement in the suspect act and a failure of board oversight. (146) One need only review and analyze the current U.S. case law surrounding the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA (147)) to see through these reinsurers' hollow warnings about the broadening scope of director, and hence, corporate liability. (148) However, as with other areas of U.S. law, the current case law in this area is in the process of evolving and should be closely monitored. (149)

What these reinsurers may also be saying is that the corpus of available and relevant information for which directors and officers of public companies should be held responsible in the future will include knowledge of the myriad activities conducted by their many small and medium-sized suppliers/contractors/agents. Companies have already been held responsible for their failure to systematically monitor U.S. federal environmental statutory violations committed by their subsidiaries about which they should have been aware. (150) Thus, according to these reinsurers, it would not be illogical to extend this information-gathering requirement so that it encompasses a review of all company supply chain activities. In their view, this would motivate companies to develop and implement internal governance systems that can track and promote more environment-friendly supply-chain management practices consistent with sustainable development. In other words, it would force multinational companies to dictate how their small and medium-sized suppliers should conduct their daily business operations.

Pursuant to such a requirement, directors and officers would also need to remain attentive to and 'enlightened' about emerging foreign regulatory trends and product standards, policies, and proposals, and to keep current regarding the status of ongoing intergovernmental regulatory and standards processes. D&O liability could thus arise in the absence of such knowledge, where it is shown that the board's inattentiveness or indecision prevented it from taking measures to reduce company climate change risk which, in turn, results in regulatory violations and a significant economic loss to the company. This would include failures to consider foreign environmental regulations such as the recently implemented EU GHG emissions trading and polluter's pay liability regimes, as well as, any U.S. state and regionally (e.g., Northeast State) imposed or proposed GHG emissions cap legislation. And, directors may even be held responsible if they fail to remain abreast of the current interstate litigation between state attorneys general over the Environmental Protection Agency's authority to regulate GHG emissions. (151)

Furthermore, precautionary principle advocates and environmental investors seeking more corporate accountability would like to extend such a broad knowledge mandate to other company activities deemed intrinsically hazardous to human health or the environment --even in the absence of scientific proof of possible harm. By putting companies on notice about the potential hazards posed by their continued production and/or use of chemicals deemed hazardous and the products containing or processed with them, or by pharmaceuticals, cosmetics or genetically-modified organisms ('GMOs'), a board would be hard pressed not to establish an extensive internal process of information-gathering. Under penalty of potential liability, they would have to engage in a regular pattern of decision-making that would raise issues related to product design, manufacturing, servicing, reclamation, recycling and/or disposal (i.e., product stewardship in the auto, appliances, electronic and electrical equipment and computer industries).

In each case, if director ignorance, inattentiveness or indecision results in a failure to consider and/or act against potential future regulatory liability and related economic loss, corporations, directors and officers could not rely on the 'business judgment rule' ('BJR') as a legal defense. This would appear to be precisely the message that private 'sustainability' indexed and mutual funds (152) and socially and environmentally focused state pension and investment funds have been endeavoring to convey (153) through their filing of shareholder resolutions. (154)

Decisions of this type, even if they result in liability, however, have traditionally fallen within the province of the business judgment rule. Pursuant to this common law doctrine, courts have typically deferred to the business judgment of directors, as long as they acted in good faith, with loyalty to the corporation and on an informed basis (with care). (155) "Although the [BJR] comes into play with respect to all three, it is most intimately associated with the duty of care." (156) If applicable, the BJR can serve as a defense to reduce director liability for mismanagement and breach of their duty of care. Implicit within this defense is the recognition that not all director decisions will benefit the corporation or appear to be prudent. Courts will not second-guess business decisions by directors provided the directors follow appropriate procedures in making the decision:

   As the Delaware Supreme Court has defined it, the duty of care
   requires directors to act with the same 'amount of care which
   ordinarily careful and prudent men would use in similar
   circumstances' (157) ... By invoking the language of reasonable care,
   the duty of care seemingly would be violated whenever directors act
   negligently. At the same time, however, if the business judgment
   rule does anything, it insulates directors from liability for
   negligence ... The rule does so by providing a presumption that the
   directors or officers of a corporation acted on an informed basis,
   in good faith, and in the honest belief that the action taken was
   in the best interests of the company. As a result, even clear
   mistakes of judgment will not result in personal liability
   (emphasis added). (158)

At least one legal commentator has argued that, based on this and other cases, the BJR should be construed as "an abstention doctrine." (159) In his view,

   [T]he rule's presumption of good faith does not state a standard of
   liability but rather establishes a presumption against judicial
   review of duty of care claims. Under it, the court abstains from
   reviewing the substantive merits of the directors' conduct unless
   the plaintiff can rebut the business judgment rule's presumption of
   good faith" (emphasis added). (160)

In other words, the abstention doctrine recognizes that certain preconditions (rebutting the presumption of good faith) must first be satisfied before a court will undertake a review of the substantive merits of directors' decisions, even if that decision might involve dismissal of a shareholder derivative suit. (161) Perhaps the clearest and most recent expression of the traditional formulation of the BJR was articulated by the Delaware Supreme Court in the recent case of Brehm v. Eisner. (162) In that case, "the court explicitly rejected, as 'foreign to the business judgment rule,' plaintiffs' argument that the rule could be rebutted by a showing that the directors failed to exercise 'substantive due care.'" (163) Instead, the court found that the BJR requires only 'process due care':

   Courts do not measure, weigh or quantify directors' judgments. We
   do not even decide if they are reasonable in this context. Due care
   in the decision-making context is process due care only ... Thus,
   directors' decisions will be respected by courts unless the
   directors are interested or lack independence relative to the
   decision, do not act in good faith, act in a manner that cannot be
   attributed to a rational business purpose or reach their decision
   by a grossly negligent process that includes the failure to
   consider all material facts reasonably available (emphasis added).
   (164)

Needless to say, the line between the exercise of gross negligence in rendering a decision and the absence of a conscious decision (indecision/inattentiveness) and failure to act is a fine one. This is especially true, where reasonable persons could disagree about the relevance, veracity and usefulness of available information, particularly, whether it should serve as the basis for corporate action or inaction. Indeed, from a business perspective, sometimes it is more prudent to wait and do nothing at all when faced with conflicting or unclear information. There are often instances where the law is unclear on its face, where there is doubt about how it will be implemented, or where uncertainty exists as to whether a legislative proposal will ultimately be adopted.

However, judging from the evolving BJR case law, while courts may not, except under extraordinary circumstances, review board of directors' substantive business decisions, they have become more proactive in reviewing the information gathering and review processes, (i.e. the internal governance mechanisms), upon which those decisions may ultimately be based. For example, in Smith v. Van Gorkom, (165) a shareholder derivative action was filed alleging that the act of approving a merger constituted a breach of the duty of care. Based on the facts presented, the Delaware Supreme Court denied the directors protection under the BJR. It premised its decision on an evaluation of "the board's many procedural errors and irregularities." (166) After focusing on the process by which the board made its decision, the court "established a requirement [of] procedural or process due care as a prerequisite for invoking the [BJR. Consequently,] directors who fail 'to act in an informed and deliberate manner' may not assert the business judgment as a defense to care claims." (167) This determination was consistent with the Delaware Supreme Court's prior ruling in the Aronson v. Lewis (168) case, which held that the business judgment rule was inapplicable "where directors have either abdicated their functions, or absent a conscious decision, failed to act." (169) "[T]he directors of a corporation [must] act [] on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." (170)

The Gorkom court's ruling had been extended by the Delaware Chancery Court in In re Caremark Int'l Inc. Derivative Litigation. (171) In the Caremark case, the court recognized the duty of the board to remain adequately informed before rendering decisions, and the important role that monitoring systems can play in assisting the board to fulfill that duty:

   [I]n order for the corporate Board to live up to its duty of care,
   appropriate information is necessary [and that] [m]onitoring
   systems, presumably, would assist the Board in gathering this
   information. Thus, in order to satisfy their obligation to be
   reasonably informed about the activities of the corporation, Boards
   should have monitoring systems in place in order 'to provide senior
   management and ... the board itself timely, accurate information
   sufficient to allow management and the board ... to reach informed
   judgments concerning ... the corporation's compliance with law.'
   Once such a system is implemented, the details of the system are
   matters of business judgment protected by the BJR (emphasis added).
   (172)

The court strongly suggested, therefore, that "the failure to have such a system in place could lead to director liability for losses caused by the [ignorant] violation of applicable legal standards." (173)

In the more recent case of In Re Abbot Laboratories Derivative Litigation (174), the U.S. Court of Appeals for the Seventh Circuit allowed a claim to go forward which "alleg[ed] that directors of Abbott Laboratories knew of significant problems [repeated FDA notices of safety violations at a major division] and [yet] decided that no action was required." (175) According to the court,

   The allegations if proved showed a 'systematic failure of the board
   to exercise oversight'. The court found that six years of
   noncompliance resulting in the largest civil fine ever imposed by
   the FDA 'indicate that the directors' decision to not act was not
   made in good faith ... (176)

In effect, the court ruled that if directors neglect to look at an issue important to the corporation, they would be found to have breached their fiduciary duty of good faith, thereby rendering the BJR unavailable as a defense.

Most recently, In In re the Walt Disney Co. Derivative Litigation (177), the Delaware Chancery Court accepted "an amended complaint against Disney directors arising out of the same severance payments [made] to [Michael] Ovitz