PERNICIOUS LOYALTY.

• Date: 01 March 2021
• Author: Gold, Andrew S.

TABLE OF CONTENTS INTRODUCTION 1189 I. VALUABLE LOYALTIES THAT ARE PERNICIOUS IN PRACTICE 1194 A. Lawyer and Client 1194 B. Director and Shareholder 1196 C. Guardian and Ward 1198 D. Judge and Justice 1201 II. SELF-POLICING, LEGAL CONSTRAINTS, AND AGENCY SLACK 1203 A. Self-Policing and the Standby Strategy 1203 B. Loyalty Constraints: Internal and External 1207 C. Agency Slack and Limits on Liability 1210 III. THE DOWNSIDES TO LIMITING PERNICIOUS LOYALTY 1212 A. Accommodating Loyalty 1213 B. Damaging Fiduciary Relationships 1219 C. Opportunism Risk 1222 IV. THE TENTATIVE CASE FOR A TARGETED APPROACH 1224 CONCLUSION 1227 INTRODUCTION

Loyalty's obligations can diverge from morality's obligations. The loyal member of the mob is often quite loyal indeed, but there is little about the mobster's loyalty to emulate. (1) Scholars even disagree over whether loyalty is a virtue. (2) Perhaps an ideal form of loyalty is virtuous, even if some forms are not. Whatever our views, the leading examples of problematic loyalty are usually egregious cases (like the loyal Nazi) and not the more benign examples. What if instead our concern is with desirable forms of loyalty that play out in an undesirable way? This Article will consider that question, with fiduciary loyalty as a central focus.

There should be little question that fiduciary loyalty is a valuable thing. Yet some types of loyalty are widely regarded as valuable while still proving harmful in specific applications. These harmful expressions of loyalty will be described here as "pernicious loyalty." While undesirable forms of loyalty represent a much broader category (as indicated by the loyal mobster), the interesting case for our purposes will be loyalty that is worth having in the general run of cases but harmful in specific circumstances. Fiduciary loyalty is a prominent example of loyalty that can be harmful in this way.

So defined, pernicious loyalty can also be subdivided to emphasize specific concerns. Expressions of loyalty are sometimes troubling because they induce partiality when morality is thought to require neutrality. (3) Loyalty may also be problematic where it causes blindness to the faults of its beneficiary or biases our judgment. (4) And, more generally, loyalty can prove harmful because of its breadth of application; loyalty is robust, and it retains its hold across a broad range of differing circumstances. (5) Although these challenges can overlap, this Article will discuss the final type of problem. Loyalty's tenacity across differing fact patterns is part of what makes loyalty valuable, but this tenacity also means that even desirable forms of loyalty can be harmful.

Consider some examples of fiduciary loyalty that cause harm to third parties or to society. Lawyers may seek to help their clients at the expense of justice between the parties, or else at the expense of the rule of law. Directors may seek to maximize shareholder wealth even where this causes brutal consequences for corporate employees, the local community, or the environment. Guardians may bring suit on behalf of wards even when those wards, if they were mentally competent, would have shown mercy to the defendant. And judges may show loyalty to the cause of justice though the heavens fall. Each of these difficulties stems from a type of loyalty that is valuable in the typical case but harmful in specific settings.

My hypothesis is that fiduciary loyalty's tenacity across different fact patterns is more challenging in legal settings than it is in most nonlegal contexts. Outside the law, loyalty is delimited in various ways, but it is difficult to modulate fiduciary loyalty adequately while still maintaining its benefits. If that is right, what can we do in response? This Article will review several possibilities. The first option is to adopt a form of self-policing. An example is what Philip Pettit has called a "standby strategy." (6) Loyal fiduciaries might police themselves, cutting back on loyalty's role in those cases in which appropriate cues indicate that strict compliance with a loyalty obligation will be unjust, injurious, or socially harmful.

Alternatively, the law might adopt legal constraints on fiduciary loyalty that preclude certain categories of pernicious loyalty. Such constraints might be external to the law's understanding of fiduciary loyalty, as when behavior is simply declared to be illegal without reference to fiduciary law. Yet constraints on pursuit of a loyalty mandate can also be internal to that loyalty mandate itself. (7) When constraints are internal, a proper understanding of the loyalty at issue dictates that it should not be pursued in certain ways or beyond a certain point. For example, an agent who paternalistically seeks the best interests of her principal would be violating an internal constraint on her fiduciary loyalty to the extent she disregards her principal's known preferences. Such internal constraints could preclude pernicious loyalty when it would otherwise advance a beneficiary's best interests.

A third approach would be to look the other way when fiduciaries disregard the pull of pernicious loyalty. Fiduciaries often possess a form of "agency slack" which enables them to avoid a complete devotion to their beneficiary when such devotion is socially undesirable. (8) In doing so, the fiduciary can escape liability because the legal system ignores the breach or refuses to enforce the obligations at issue. (9) This slack could be the product of an ex ante rule (such as the business judgment rule) or the product of ad hoc judicial decision-making. In either event, the underlying loyalty obligation is left untouched; it is loyalty's enforcement that changes. (10)

Each of these strategies works to some degree, but we ought not to disregard the drawbacks of success. I will discuss three of the more prominent difficulties here. While these challenges tend to overlap, some are more likely to occur for particular fiduciary relationships or specific fact patterns.

The first basis for caution is the need to accommodate extralegal expressions of loyalty. (11) Fiduciaries who are governed by legal loyalty obligations will often simultaneously develop an extralegal loyalty toward their beneficiaries. When the legal conception of loyalty diverges from the extralegal conception, this can place a substantial burden on the fiduciary who takes his loyalties seriously. (12) The problem is particularly acute with close personal relationships (for example, guardian-ward or parent-child relationships), but it can arise across a wide range of fiduciary fact patterns. (13)

The second consideration is that efforts to cut back on pernicious loyalty will alter a special relationship that exists between fiduciary and beneficiary. Parent-child relationships are clearly special relationships with substantial value, but various professional relationships can also be valuable even if they are less close. If an alteration in such relationships decreases their value, or even deters their formation, this could be a significant loss. One reason is instrumental; for example, it may be that certain relationships encourage trust in a way that advances markets, or that they help the justice system function effectively. But it may also be that some of the special relationships constituted by fiduciary law are relationships with intrinsic value. A loss of certain intrinsically valuable relationships, or a decrease in their intrinsic value, is not a small concern.

The third difficulty is opportunism. Fiduciary loyalty and the associated burdens of proof and remedies for breach are often understood to respond to opportunism risks. (14) The difficulty of monitoring a fiduciary's (often broad) discretionary authority invites various forms of advantage taking. To the extent courts facilitate a fiduciary's discretion as to when she will act in the best interests of her beneficiary--even if that discretion is aimed at avoiding pernicious loyalty--there is a real risk that the fiduciary will take advantage of that discretion to self-deal or otherwise act to advance the fiduciary's idiosyncratic preferences.

Where does this leave us? The costs and benefits of limiting pernicious loyalty are subject to great empirical uncertainty, and incommensurable values may run rampant. With those caveats, I tentatively suggest that pernicious loyalty is not something to be eliminated altogether but rather something to be managed. Targeted intrusions on fiduciary loyalty are less likely to destroy the value in fiduciary loyalty and its associated special relationships. On the other hand, a targeted approach will inevitably allow some pernicious loyalty to survive. Moreover, it is hard to eliminate all cases of pernicious loyalty (through whatever mechanism) given the bounded rationality of judges, legislators, and fiduciaries themselves. Accordingly, acting in a piecemeal fashion may not only be our best option, it may be the most we can hope for. So long as fiduciary law adopts a strong form of loyalty as its centerpiece--a reasonable choice--pernicious loyalty may be a necessary evil.

Part I of this Article will begin with an analysis of pernicious loyalty, illustrated by several leading examples. Part II will discuss ways to limit the existence of pernicious loyalty. These might take the form of self-imposed limits on loyalty, as with a standby strategy, or they might take the form of ex ante constraints on loyalty imposed by courts or legislatures. Alternatively, pernicious loyalty could be alleviated by doctrines like the business judgment rule, which leave room for some deviations from loyal behavior without threat of liability. Part III will discuss drawbacks to these measures, on the assumption that they can be successfully implemented. Among other concerns, it may be important to accommodate extralegal conceptions of loyalty or to preserve the value of special relationships...