Why are corporate fines for shady or illegal business practices so often less than the amount they made by doing those illegal practices? At that point, don’t the fines just become a cost of doing business?
Specifically thinking about Perdue Pharma. PBS article says they made $35billion pushing opioids, but the current court case is only seeking $6billion on fines. Ignoring the Sackler’s immunity request, this is still a net win.
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Your calculation is off.
OxyContin has generated $35 billion in revenue.
First of all, revenue isn’t profit. The profit is much smaller and would be what any fine relates to.
Second, much of the OxyContin business was entirely legitimate and the drug does work extremely well. The issue is that Purdue advertised and pushed it to doctors who, based on Purdue’s false advertisements, gave it too willingly and too frequently to too many patients.
If Purdue had knowingly marketed an entirely defective drug that harmed every single patient who received it and they had generated $35 billion in profit instead of revenue, then the fine should exceed those $35 billion.
I haven’t checked their numbers for accuracy, but the other response about Purdue’s profits is spot on.
In addition, there are lots of cases where a business is fined for illegal activity but it’s hard to gauge the exact amount. For example, Wells Fargo creating fraudulent accounts. In some of those cases, fines are laughably low.
If we really want to deter illegal activity from companies, fines should be expressed in percentages of their annual revenue. Any costs the government spends successfully litigating fines should be added on.
Purdue doesn’t really have any assets in it. All the money it has made has been taken out of the company. Many US states during the first few waves of Covid-19 were desperate for cash. The Sackler family offered to transfer $6.8b back into Purdue if the Sacklers got personal immunity. Mostly red states agreed. Courts have been split if you can do this and the Supreme Court has put it on hold before they have hearings about it.
The reason fines don’t keep up is they’re set to static values so whole it might be a lot of money, after 20 years of inflation it isn’t that much money. Corporations run the government in the USA and they don’t significant penalties for their misbehaviour so the politicans they pay don’t write large penalties into laws.
The laws were often written at a time the fine amounts were actually punitive. The laws were not written as the fines being a portion or profits or revenues.
>At that point, don’t the fines just become a cost of doing business?
If they make more money from breaking the law than the fine, then it is not a fine, it is the cost of doing business. In practice, that means for most large corporations, fines are just that.
It doesn’t help that often no one (who actually matters in terms of changing corporate behaviour) is held accountable either. There are exceptions, but often, some “expendable” employees will be the ones fired/scape goated. It was the fault of “rogue engineers”, “rogue scientists”, “bad accountants”, etc. and never of the C. suite or board of directors. Do keep in mind that having good ways of holding people accountable is not necessarily simple.
I don’t mean this response to be at all insulting or dismissive of your question. But I think you’re misconstruing the process by which laws which regulate industry behavior are crafted in a representative democracy. Almost always, the industry being regulated “lobbies” their representatives to meet and discuss the proposed regulation (or updates to it) and its potential impact on their ability to operate their business to “maximum benefit of the shareholders. The industry itself thus has a strong hand (arguably too strong) in the shaping of their own regulation.
Edit: typo
Opioids aren’t illegal, and prescriptions involved more than just the pharma company.
Is $35B revenue or profit?
Depending how those numbers line up $6B could more than wipe out the illicit gains or not.
It’s generally because those large corporations often have non-trivial numbers of other stakeholders like small shareholders and staff who didn’t really do anything wrong. Fining the company enough to completely put them out of business just puts the little guys out of work.
They are well aware. Paying fines is cheaper than following the rules. I agree it should use percentages.
This can be really complex and there are a lot of reasons. Additionally, not everybody agrees on what the penalty should be.
Let’s make up a completely fictional example.
X Corp sells the drug Xcessive. Xcessive can and does treat the condition for which it is prescribed, Pong-Pong. It is useful and does a lot of good.
However, there are downsides to Xcessive. It can cause harm (1 in 10,000 people who take it end up with damaged gloggleglands) and, while it can treat the condition Pong-Pong, it is only effective in 50% of cases. X Corp has this data.
X Corp looks at the market for the drug and determines that they will probably make $10 billion selling Xcessive. They want to make more, so they decide to lie. They produce biased studies and create advertisements that say that Xcessive works in 90% of Pong-Pong cases and that it never causes glogglegland damage.
They sell the drug for years, and it makes them $14 billion.
They get caught in their lie, and they are fined. What should they be fined?
First, nobody knows how much of that $14 billion is due to the lie. Would the drug have made only $3 billion? $10 billion? $12 billion? Who knows, and how did they come up with the answer?
Additionally, there are other questions. Were the studies deliberately biased, or did the executives cherry-pick the studies they liked? Did they think that the studies were valid? Did they actually have an accurate view of the harm the drug did or its level of effectiveness? How much of their decision-making process was deliberate lies, poor business practices, or wishful thinking?
Assuming that you get good answers to these questions, then you have a process for setting and levying fines that is often heavily biased in favor of the industry it is aimed at. In part, this is due to all kinds of potentially shady or even illegal business practices, but often it is nearly inevitable. In order to determine what the fines for a particular violation should be, you have to rely on the decisions of experts who worked in these fields and often spent years as co-workers and friends of the people still working in the business. Were else are you going to find experts who actually have the knowledge and experience?
Now, add in the fact that fines that were “locked down” in the laws or regulations may have been quite massive when the legislature created them, but over time they became less and less impactful. The growth of the industry and inflation has taken the bite out of them. Add in the fact that not everyone agrees on just how bad the violation was in the first place, and, well, you end up with a huge mess.
Okay, imagine you have some toys, and you really like playing with them. Sometimes, if you don’t follow the rules while playing, your grown-ups might say, “Oops! You did something you shouldn’t have.” And they might take away one of your toys for a little while.
Now, imagine there are big companies that make a lot of money by selling things to people. Sometimes, these companies also don’t follow the rules, and they might do things that are not okay, like selling things in a way that could hurt people. When they do these bad things, the grown-ups in charge might tell them, “Oops! You did something you shouldn’t have.” But instead of taking away their toys, they might give them a “fine,” which is like a special kind of grown-up punishment.
But here’s the tricky part: Sometimes the fine is not as big as the money the companies made by doing those bad things. So it’s a bit like if you got to keep most of your toys even after doing something wrong. This doesn’t seem fair, right? Some people think the companies might not be learning their lesson if they just have to pay a small fine. They might keep doing bad things because they know the fine is not too big. And that’s why some people talk about the fines just being a part of their “business cost,” like how you might lose a toy sometimes but still get to play with the rest of them.
One company called Perdue Pharma made a lot of money by selling medicine, but they didn’t follow the rules when selling it. They hurt people by accident, and now the grown-ups are trying to make them pay a fine to say sorry. But some people think the fine should be even bigger because they made a lot more money than the fine. It’s a bit like if you had to give away more toys to make up for what you did. It can be confusing, but the grown-ups are trying to figure out the best way to make things fair.
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