Reply: Clawback to the Future

In Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes (the “Ar- ticle”), we undertook the task of proposing a doctrine of claw- backs that would not only furnish a framework for analyzing the term more systematically, but would also describe the ways the doctrine would relate to established rules of contract law.1 With his response, In the Shadow of the Omnipresent Claw: In Response to Professors Cherry & Wong (the “Response”),2 Mi- chael Macchiarola has provided us with an opportunity to arti- culate these thoughts on the doctrine of clawbacks further, and for that opportunity and his careful reading of the Article, we thank him.

In essence, the Response takes issue with the Article in three respects;3 first, with what it terms the “newer” applica- tion of clawbacks to “the recoupment of corporate executive compensation”4; second, with the purported “latent subjectivity” of clawbacks generally;5 and third, with the apparent opera- tional difficulties of implementing prospective clawbacks, including those relating to measurement and enforcement.6 As for the first critique questioning the application of clawbacks to executive compensation, recent events, including the passage of the Dodd-Frank Act blunts the extent of the criticism. The Dodd-Frank Act, which establishes mandatory clawback poli- cies in the event of an accounting restatement, ensures that clawbacks will be a significant part of the executive compensa- tion landscape for the foreseeable future.

As to the second critique, we agree to some extent with the Response that clawbacks and the concept of unfair enrichment that we described may increase the overall complexity of con- tracts. However, the additional complexity that the Response complains of arises in many instances in which an equitable remedy exists. In this way, the clawback doctrine operates no differently from many existing equitable doctrines, including, for example, its close cousin, the doctrine of unjust enrichment. Moreover, like these other doctrines, the parameters of the doc- trine can and will only be more precisely delineated with time. Further, many of the Response’s fundamental objections to clawbacks on account of their “subjectivity” apply only to ret- roactive clawbacks, and not to prospective clawbacks. It bears noting, therefore, that the Article draws and, indeed, empha- sizes the critical distinction between the two. We not only iden- tify and explain the difficulties associated with the retroactive imposition of clawbacks, but affirmatively recommend writing clawback provisions into contracts prospectively.

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