The concept of the “corporate veil” acts as a bulwark that ostensibly protects individuals like officers, directors, and shareholders from personal liability for the acts and obligations undertaken by such individuals in furtherance of the company’s business.
Although the idea that a company is a distinct legal entity separate and apart from the individuals who own and run is not unique to the United States, the limited liability afforded by the corporate veil is a fundamental aspect of our legal system and was a key factor in the growth of this country. Few if any of the entrepreneurs and inventors whose contributions helped modern society take shape would have done so if they ran the risk of losing everything if their efforts failed. As with any rule, however, there are exceptions to the limited liability created by the corporate veil.
Piercing the Veil
Courts have the power to disregard the protections offered by the corporate veil to hold individual officers, directors, and even shareholders of a corporation personally liable for its debts and obligations. When this happens, it is known as “piercing the veil.”
In deciding whether piercing the veil is an appropriate remedy, courts generally examine two things. First, whether there exists a “a unity of interest” between the company and those who run or own it such that their separate identities cease to exist, and second, that the company was used to perpetrate a fraud or achieve an inequitable result. In ordinary circumstances, these hurdles can often be difficult for litigants to overcome.
FTC vs. Amazon
While the corporate veil may do much to protect personal liability in the context of standard business litigation, it is far less effective when the government is the one pursuing a legal claim. Governmental regulatory agencies have broad discretion to disregard the corporate veil if the acts undertaken by corporate representatives rise to a certain level; a level that was allegedly surpassed by Amazon executives in the FTC’s enforcement action against that company, to which three executives were added as defendants in an amended Complaint.
According to the complaint, over the past several years Amazon and its leadership duped millions of consumers into unknowingly enrolling in its Amazon Prime service through the use of manipulative, coercive, or deceptive user-interface designs known as “dark patterns.”
In essence, the FTC is asserting that Amazon knowingly tricked its consumers into enrolling in automatically renewing Prime subscriptions. The agency reached this conclusion by reviewing the company’s internal documents, which were allegedly littered with references to “accidental signups,” along with customer post-cancellation surveys, in which customers stated their reason for cancelling Prime was that they never intended to enroll in the first place. And, in a draft memorandum from late 2020, Amazon designers and researchers documented the company’s use of techniques “designed to mislead or trick users to make them do something they don’t want to do, like signing up for a recurring bill.”
Ignoring the Veil
The executives who were personally named as defendants in the amended Complaint were executives responsible for Amazon Prime, although this is not the reason why the FTC elected to disregard the corporate veil to sue them personally.
According to the complaint, various lower-ranking Amazon employees informed the executives about the concerns expressed by consumers who were tricked into signing up for the service and urged them to make necessary changes. Despite having been aware of the problem, the executives disregarded all pleas to rectify it.
Instead, the FTC alleges that the executives slowed, avoided, and even undid user experience changes that they knew would reduce nonconsensual enrollment because those changes would also negatively affect Amazon’s bottom line. As one internal memorandum stated, Amazon decided “clarifying” the enrollment process was not the “right approach” because it would cause a “shock” to business performance.
Even after pressure from the FTC, the strategy persisted, underscoring the extent of the intentional obfuscation on the part of the company and key executives. The complaint includes numerous descriptions of egregious conduct such as that summarized below, which in the eyes of the FTC rose to the level of fraud and thus justified the inclusion of individual executives as defendants:
- An internal Amazon document used the term “misdirection” to describe how the company directed users to an inconspicuous, tiny blue link used to purchase an item without a Prime membership, which was displayed near a much larger, colorful button beckoning shoppers to click it to “Get FREE Two-Day Shipping,” thereby ensnaring them into the very Prime membership they hoped to evade.
- The company employed a rule that customers calling to cancel their Prime membership were instructed to do so online using a system called “Iliad” even though the customer service team were able cancel it for them over the phone. This tactic was employed to exhaust customers by transforming the cancelation process into a virtual escape room, that customers were less likely to complete.
- A company newsletter actually stated that “the issue of accidental Prime-sign ups is well documented,” and it was also noted that Prime customers often “sign up accidentally and/or [don’t] see auto-renewal terms.”
- Lastly, the record indicated that Amazon endeavored to obstruct and impede the FTC’s inquiry into certain matters including raising unwarranted claims of legal privilege over documents that lacked such status and the deliberate omission of pertinent, adverse documentation from the investigative proceedings.
These and other facts outlined in the amended complaint paint a picture of a company being used to perpetuate a fraud on its customers under the knowing direction of its leaders.
Although the corporate veil ordinarily protects individual stakeholders from personal liability for the debts and obligations of a corporation or LLC, regulatory enforcement agencies such as the FTC are ready, willing, and able to disregard its existence when presented with evidence of conduct such as that described in the FTC’s complaint against Amazon and the Prime executives,
In Amazon’s case, the alleged obfuscation and redirection of users, coupled with attempts to stall the FTC’s investigations, spotlight a compelling dilemma on the boundaries of corporate accountability. Business owners and leaders are expected to act with transparency and integrity, and when they encourage or ignore illegal conduct for the sake of a company’s bottom line, they and will can be held personally responsible for their actions.