Victims Must Outrank Stakeholders in Sale of Weinstein Co.

(Bloomberg View) -- New York Attorney General Eric Schneiderman effectively blocked a sale of the failing Weinstein Co. on Sunday by suing it for violating state sex discrimination laws. Is he a white knight protecting the interests of Harvey Weinstein’s victims? Or a publicity-seeking politician poised to destroy investors’ value by forcing the company into bankruptcy?

The answer depends on a simple principle: Any sale should benefit Weinstein’s victims, not harm them. When a company is failing in large part because of a legal wrong done by the company or its managers, the company’s fate should be determined by considering the interests of the people harmed by the wrongdoing.

Creditors’ and shareholders’ interests matter too, of course. But they voluntarily assume the risks of doing business, including the risk of bankruptcy. Victims of legal harm, in contrast -- like victims of sexual harassment and assault -- by definition didn’t assume the risk of the wrongs done to them. Their right to compensation should come first.

That leaves the more complicated issue of whether the particular proposed sale of the Weinstein Co. would have left the victims better or worse off.

The potential buyers, a group led by former Obama administration official Maria Contreras-Sweet, had reportedly worked out a plan to create a $30 million fund to compensate the victims. Presumably, this would have come from a combination of insurance and cash taken out of the company.

It’s hard to know from the outside whether this report was accurate. A spokesman for the attorney general’s office said that it had reviewed the deal and that it did not include provisions for a compensation fund. Schneiderman’s lawsuit specifically alleged that the sale could potentially leave victims “without redress.”

It would have been foolhardy for any investor to acquire the Weinstein Co. without having a strategy to manage any liabilities. As of October, more than 90 women said they were victimized by Weinstein, more than dozen of whom said they had been raped. The list continues to be updated, and the numbers continue to rise. Weinstein has denied allegations of nonconsensual sex, and his attorney said Sunday “there certainly was no criminality” in his actions.

Given those numbers, it seems entirely possible that $30 million would have been an inadequate sum to designate for compensation. Damages would likely go beyond the direct costs and extraordinary pain and suffering associated with rape and harassment. They could very well include lost wages by actors whose careers Weinstein is said to have torpedoed after his advances were rejected.

For the Weinstein Co. to have been legally liable for Harvey Weinstein’s harm to his victims, he would have to had been acting in his official capacity. It would also help the victims’ case if the company’s employees had helped facilitate his conduct. Both of these circumstances seem relatively easy to prove. So the company could very well be on the hook for much more than $30 million.

But that judgment should have been up to the buyers, not the New York attorney general. Blocking the sale is only justified if it would preserve more assets for the victims, not fewer.

In general, it’s preferable from the victims’ perspective for a company that harmed them stay in business, make a profit -- and be able to afford to compensate them fully for their injuries. If a sale will save a company and simultaneously allow for a compensation fund, it should ordinarily be allowed to go through.

If, however, a deal may actually leave the victims out in the cold, it wouldn’t be unprecedented for the company to be forced into bankruptcy and made to meet the interests of its creditors -- including the victims.

That’s not uncommon in mass tort cases. Think of A.H. Robins, manufacturer of the Dalkon Shield contraceptive device. It eventually declared bankruptcy, and its acquirer, American Home Products, created a $2.48 billion victims’ compensation fund.

It’s a little out of the ordinary to think of a single abuser’s conduct as a kind of mass tort. But from the perspective of the company, that’s exactly what Harvey Weinstein’s conduct seems to have been. He was a central moving force in the company, building relationships and producing films. And in the course of doing so, he was (assuming the truth of the allegations) simultaneously inflicting unlawful harm on many, many women, using the leverage of his official position.

In essence, then, Harvey Weinstein was a mass tortfeasor. The Weinstein Co. will have to bear the brunt of his actions.

Whether Schneiderman’s intervention turns out to have been justified will depend on how fully Weinstein’s victims get compensated.

The long-term consequences of the entire series of events, however, go beyond that concrete issue. The real societal response to mass torts is to find ways to prevent such harms from occurring in the future. Compensating victims may be part of that process. But on its own, it won’t be enough.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His seven books include “The Three Lives of James Madison: Genius, Partisan, President” and “Cool War: The Future of Global Competition.”

To contact the author of this story: Noah Feldman at nfeldman7@bloomberg.net.

To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net.

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