Settle down

Settling lawsuits: From Google last month to tire-maker Bridgestone this week, companies have paid big money to avoid nasty fights with the government in US courts. Bridgestone’s bribery settlement on Thursday came despite prosecutors stretching the technicalities, and Google’s last month’s $500 million payment over drug advertisements cost more than the money involved. Trouble is, these deals encourage prosecutors to pursue what they can punish, not what the law prohibits.

Former New York Attorney General Eliot Spitzer helped set the template a decade ago. Among other things, he extracted big settlements for conflicts of interest in investment banks’ research. His legal theories were rarely tested in court, because firms cut deals to minimize costs. As a result, the alleged but unproven offenses became benchmarks for other settlements.

Prosecutors used similarly aggressive tactics in the Enron and Arthur Andersen cases. They persuaded several executives to plead guilty to financial shenanigans that, years later, the US Supreme Court ruled weren’t even illegal.

More recently, Goldman Sachs could have plausibly challenged government charges that led to its last year’s $550-million settlement over dealings in collateralized debt obligations.

The Google settlement rested on the idea that the firm’s Internet search pages violated drug laws by helping Canadian pharmacies sell “misbranded” prescriptions in the United States. Google didn’t deliver the drugs, but prosecutors say it was an accomplice. Legally, that seems a stretch, but, because of the settlement, that won’t be tested. And, prosecutors won another expansive, if unofficial, precedent.

Many bribery cases under the Foreign Corrupt Practices Act follow a similar path. Bridgestone agreed to pay $28 million for bid-rigging and bribing Latin American officials.

But, it’s hard to see how the Japanese company’s sending of emails into the US tripped the law’s requirement that illegal conduct occur there. Again, this settlement allows prosecutors to go after other companies armed with a newly broad interpretation of the law.

Of course, many prosecutions that settle are justified. And, some defendants fight back. In at least three cases this year, companies asked courts to narrow how the government defines a foreign official under the FCPA. However, there’s a risk that companies are left with yet another unpredictable cost of doing business.