The Intersection of Business Judgment and Free Speech
By Tyler Votel, Senior Editor
In the United States, there are few principles that are as well-known or revered as free speech. Many Americans believe that freedom of speech is the most important constitutional right.[1] At the same time, many Americans are confused about how the First Amendment governs free speech.[2] For example, one common misconception about the First Amendment is that it applies to private businesses.[3] While the First Amendment only applies to the government and state actors, freedom of speech is still considered by many to be a principle and virtue that all Americans should attempt to uphold.[4] Unfortunately, however, there is an aspect of United States law that discourages, and in some cases prevents, corporations from upholding freedom of speech: corporate business judgment law.
A Real World Example
Recently, Blizzard Entertainment, Inc. (hereinafter “Blizzard”), the American video game developer and publisher responsible for well-known video games such as World of Warcraft and Hearthstone, was criticized for how it handled a situation regarding the Hong Kong protests.[5] As many are probably aware, the Hong Kong protests refer to the recent pro-democracy movement started by Hong Kong citizens, in part, because the Hong Kong government introduced an extradition bill. This bill would have allowed Hong Kong officials to detain and extradite criminal fugitives who are wanted in China and other territories.[6] Blizzard, whether intentionally or not, became involved in the Hong Kong protests via its handling of one its professional Hearthstone players.[7]
On October 5, 2019, Chung Ng Wai, a professional Hearthstone player better known by his player name “Blitzchung,” attended a Blizzard-sponsored Hearthstone tournament when he was asked to be interviewed.[8] At the end of the interview, Blitzchung showed his support for the Hong Kong protestors by wearing a gas mask and yelling, "liberate Hong Kong, revolution of our age."[9] Blizzard responded to Blitzchung's actions by banning him from Hearthstone tournaments for a year and taking away the prize money he had already earned in the tournament.[10] Blizzard claimed that it did this because Blitzchung broke tournament rules by "damaging the company's image."[11]
Because of America’s strongly held belief in freedom of speech, Blizzard’s actions caused immediate uproar with many calling for the total boycott of Blizzard and its parent company Activision Blizzard, Inc.[12] Even members of Congress voiced their disgust with Blizzard’s actions by sending Blizzard a letter asking it to reconsider its “disappointing” decision.[13] While Blizzard’s decision to handle the situation was completely adverse to the principles of free speech, it is clear that Blizzard had no obligation to uphold free speech because it is a private company.[14] In fact, it is quite possible that Blizzard’s decision may have been influenced, or even obligated, by corporate law.
A Corporation Director or Officer’s Duty of Care
While corporate law is a state law issue, the majority of all publicly held corporations, including Blizzard, are incorporated in the state of Delaware.[15] This makes Delaware law especially relevant when discussing corporate law in the United States.[16] Under Delaware law, and many other states’ laws, the directors and officers of a corporation owe fiduciary duties to their shareholders.[17] Among these duties is the duty of care.[18] The duty of care in the corporate context means that directors and officers of a corporation must act in the same manner as a reasonably prudent person in their position would.[19] Directors and officers of a corporation can be held personally liable for business losses if the loss was caused by a breach of the director or officer’s duty of care.[20] Mere negligence does not constitute a breach of the duty of care and a director or officer must be found at least grossly negligent or to have acted in bad faith before personal liability can be attached.[21] This “business judgment rule,” as Delaware courts have described it, is an objective standard. A determination that a director or officer’s conduct has fallen outside the business judgment rule often implies that the director or officer’s conduct was either not in good faith or wholly irrational.[22] Furthermore, a determination of recklessness automatically carries with it a determination of bad faith on the part of the director or officer.[23]
Blizzard’s Decision was Influenced by Delaware Law
Returning to Blizzard’s punishment of Blitzchung, it is clear to many that the decision was influenced by Blizzard’s relationship with China.[24] While Blizzard has denied this theory, the facts surrounding the theory make it very likely to be true.[25] First, China has one of the largest gaming markets in the world and, if its rate of growth continues, it will soon be the largest gaming market in the world.[26] Second, Tencent, a Chinese corporation who also happens to be the largest video game publisher in the world, owns a 5% stake in Blizzard’s parent corporation, Activision Blizzard.[27] Third, a large portion of Blizzard’s revenue is derived from the Chinese market with some estimating that over 10% of the company’s revenue comes from China alone.[28] Finally, Chinese law requires that its government approve the release and dissemination of any video game, and the Chinese government has a habit of threatening to ban the video games produced by companies with which it does not agree.[29]
For these reasons, it is clear that Blizzard has very large incentives to maintain a positive relationship with the Chinese government. Indeed, Blizzard was willing to risk losing western customers in order to appease the Chinese government.[30] The fact is, losing the Chinese market would cause Blizzard to take a serious hit to its revenue, which would in turn hurt shareholders of Blizzard Activision.[31] At its core, Blizzard was presented with two options; (1) uphold the principles of freedom of speech and risk losing the Chinese market or (2) appease the Chinese government and risk angering western audiences. In the end, Blizzard made a calculated business decision by choosing the latter.
If Blizzard had made the opposite decision, there could have been a risk that a shareholder would have brought a derivative suit against Blizzard’s board of directors or officers, alleging they had breached their duty of care to the corporation’s shareholders. This is because Blizzard determined that any harm to its other markets via boycotts was grossly outweighed by the harm it would sustain if it lost the Chinese market.[32] Arguably, if Blizzard had made the opposite decision, that action would have been grossly negligent or even reckless. Therefore, however unfortunate, Blizzard’s decision was in the best interests of its shareholders. Accordingly, Blizzard made its decision, at least in part, to comply with the law.
Conclusion
While this explanation of Blizzard’s actions may not be satisfactory to many, it is only one example of the unfortunate result that can occur under American corporate law. While there was nothing to compel Blizzard to uphold the time-honored American value of free speech, there was a strong force compelling Blizzard to silence the voice of one sharing his opinion to the world. That force was the corporate duty of care. While it would have been noble of Blizzard to uphold freedom of speech, it was simply a decision that it could not afford to make.
Footnotes
[1] What freedoms do Americans value most?, Metro Voice News (April 4, 2019), https://metrovoicenews.com/what-freedoms-do-americans-value-most/; Americans Say Freedom of Speech is the Most Important Constitutional Right, According to FindLaw.com Survey for Law Day, May 1, PR Newswire (April 30, 2015, 5:20 AM), https://www.prnewswire.com/news-releases/americans-say-freedom-of-speech-is-the-most-important-constitutional-right-according-to-findlawcom-survey-for-law-day-may-1-300074847.html.
[2] Aaron Earls, Freedom of Confusion: Most Americans Unsure What the First Amendment Protects, Facts & Trends (July 8, 2015), https://factsandtrends.net/2015/07/08/freedom-of-confusion-most-americans-unsure-what-the-first-amendment-protects/.
[3] AJ Willingham, The First Amendment doesn’t guarantee you the rights you think it does, CNN (Sept. 6, 2018, 7:36 PM), https://www.cnn.com/2017/04/27/politics/first-amendment-explainer-trnd/index.html.
[4] U.S. Const. amend. I.
[5] Kevin Webb, Here's a timeline of Activision Blizzard's terrible week, as it faces fan protests after an esports athlete was punished for voicing support for Hong Kong, Business Insider (Oct. 12, 2019, 9:45 AM), https://www.businessinsider.com/blizzard-boycott-hong-kong-protests-activision-blitzchung-blizzcon-2019-10.
[6] David Victor, Why Are People Protesting in Hong Kong?, NY Times (Nov. 13, 2019), https://www.nytimes.com/2019/11/13/world/asia/hong-kong-protests.html.
[7] Kevin Webb, Here's a timeline of Activision Blizzard's terrible week, as it faces fan protests after an esports athlete was punished for voicing support for Hong Kong, Business Insider (Oct. 12, 2019, 9:45 AM), https://www.businessinsider.com/blizzard-boycott-hong-kong-protests-activision-blitzchung-blizzcon-2019-10.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Gene Park, Activision Blizzard under fire from bipartisan group of Congress members over China relations, Washington Post (Oct. 18, 2019, 5:11 PM), https://www.washingtonpost.com/video-games/2019/10/18/activision-blizzard-under-fire-bipartisan-group-congress-members-over-china-relations/.
[14] U.S. Const. amend. I.
[15] Suzanne Raga, Why Are the Majority of U.S. Companies Incorporated in Delaware?, Mental Floss (March 11, 2016), https://www.mentalfloss.com/article/76951/why-are-so-many-us-companies-incorporated-delaware.
[16] See Id.
[17] In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996).
[18] Id.
[19] Id.
[20] Id. (Other exceptions the business judgment rule exist, such as illegality, but they are not relevant here).
[21] Id.
[22] Id.
[23] In re Walt Disney Co. Derivative Litigation 906 A.2d 27, 52-53 (Del. 2006).
[24] Leo Sun, Should Investors Worry About Tencent’s Stake in Activision Blizzard?, The Motley Fool (Oct. 15, 2019, 9:51 AM), https://www.fool.com/investing/2019/10/15/should-investors-worry-tencent-stake-activision.aspx.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
[30] Leo Sun, Should Investors Worry About Tencent’s Stake in Activision Blizzard?, The Motley Fool (Oct. 15, 2019, 9:51 AM), https://www.fool.com/investing/2019/10/15/should-investors-worry-tencent-stake-activision.aspx.
[31] Id.
[32] See Shannon Liao, 'Call of Duty: Modern Warfare' won't be slowed down by Activision Blizzard's recent controversy, CNN (Oct. 25, 2019, 7:26 PM), https://www.cnn.com/2019/10/25/tech/call-of-duty-modern-warfare-analysis-trnd/index.html.
