Corporate Criminality Hurley Fall 2012
Themes of the Course:
· Do prosecutors have too much discretion? Are statutes too vague?
o Ed Meese (AG, Reagan): “We don’t indict innocent people.” (“We are the good guys” mentality)
· Do we have too much regulation? Over-criminalization?
· Is criminal behavior just a cost of doing business?
o If it’s just about money, what does corporate crime really add to the picture?
o Who actually pays for corporate crime?
o Economic theories and incentives
· What does it mean to hold a corporation criminally accountable/liable?
Half-Baked Justice:
· Bottom Line: Corporate prosecutions are all over the map
· BP Case:
o In 1965 the oilrig Sea Gem collapsed and killed 13 crew members in the North Sea. Then came 40 years of toxic waste dumping, oil and gas price manipulations, followed by the disastrous Texas City oil refinery blast of 2005 that left 15 workers dead and 270 injured.
o The federal government ordered BP to fix some 300 safety problems at the refinery, pay a record $21 million fine and hire a new CEO who vowed to make safety his top priority.
o But then in 2009 the government cited BP again for failing to repair more than 200 of those violations and imposed another fine. Then came BP’s oil spill in the Gulf of Mexico.
o BP now faces a criminal investigation and more than 300 civil suits
· How should the criminal justice system punish—or reform—the BPs of the world?
o This is important for in-house counsel, since Congress generally steps in to fix the problem by imposing more work on the lawyers and costly reforms on the companies
§ Ex: Financial Institutions Reform, Recovery and Enforcement Act—reaction to the savings and loan crisis
§ Ex: Sarbanes-Oxley Act—response to Enron scandal with public companies and accounting firms
§ Ex: Dodd-Frank Wall Street Reform and Consumer Protection Act—response to financial meltdown
o Prosecutors have settled for huge financial penalties and paper promises. Then the company returns to business as usual. Meanwhile, innocent companies are caught up in the consumer and government reactions.
o So far there is little evidence to show that higher fines and stricter monitoring are making the corporations change their behavior.
· So we’re left in a legal tug-of-war:
o Is the government not doing enough to prosecute crimes by big businesses?
§ It’s much cheaper for corporate executives to violate the law, negotiate fines, show contrition and then go about their business rather than comply
§ Larger fines are simply added to the cost of doing business and passed on to the shareholders
§ Jail time is the only effective deterrent
§ Two-tiered system with rich corporations buying their way out and ordinary citizens and small businesses falling? Do the consequences apply equally to all?
o Or has the government overreacted to a few bad actors by “over-criminalizing” corporate conduct?
§ Ex: Dodd-Frank Act is over 2,000 pages
§ Prosecutors intimidate corporations into settlements—corporations cave because they feel that being charged will irreparably damage their business—these resulting deals hide the legal process, leave novel prosecution theories untested and fail to expose possible prosecutorial misconduct
§ Lack of criminal intent or mens rea (but issue of willful blindness by the corporate execs)
· So how should prosecutors proceed?
o Ratchet up fines to get corporations’ attention?
o Combination of civil fine against the corporation and criminal prosecution of guilty individuals?
o Kill the corporation?
§ Ex: Arthur Anderson
o Criminally charged only repeat offending corporations?
o Enact more laws that make it easier to prosecute executives at corporations (strict liability)?
o Better detection and enforcement of current law?
o More prosecution of senior managers (putting scrutiny on executives, more criminal charges based on willful blindness, strict liability or obstruction of justice)?
Introduction:
· Do we need corporate criminal liability?
· Corporation: an independent entity (legal fiction); collection of real world people/assets doing some type of joint exercise with some accountability and the ordering of relationships within the cell is based in contract law, corporate law and corporate culture.
· Who makes up the corporation?
o Management (CEOs, BoD, employees)
o Shareholders (the rest)
o Consumers/communities
· Corporate Culture: the norms and values of the entity (implicit or explicit)
o A lot of decision-making in this area involves trying to get your arms around this culture. Determining if companies are bad through their cultures.
o Prosecutors want to go after the bad companies, not the “good” companies with one rogue employee.
o Do you know it when you see it? Is it a gut thing? Or do we need firm standards?
· Why shouldn’t a corporation be held liable?
o Punishes the SHs
§ Sometimes SHs have to pay, but sometimes corporations must maintain dividends per agreement
o Costs will be passed on the to consumers
§ Have to think about the economics/market—if it’s a competitive market/elastic good, can the corporation really drive up the prices that much?
§ Some will be able to pass it on, some will not
o Punishes the employees
§ Some companies must maintain dividends and can’t pass on costs to consumers, so they’ll have to make cuts here
· Analogy to honest services fraud – does the public have a right to fair dealings from corporations in the same way we do from public officials?
· As a policymaker, what should you do about corporate criminal prosecutions?
o You can’t make up the rules after the fact (basic principle of criminal law)
o So how do you set standards for corporations?
o Even when you have broad parameters, figuring out who fits in them is difficult
· Criminal v. Civil Law
o Criminal: the state is the plaintiff, type of harm=against society as a whole, punishment=retribution, shame, deterrence (including physical punishment), incapacitation, rehabilitation (i.e., four functions of criminal law)
o Civil: individual citizens are the plaintiffs, type of harm=against the individual, punishment=monetary, injunctive relief
o But note that in corporate criminal prosecutions the punishments are largely the same as civil
DOCTRINES OF CORPORATE CRIMINALITY
New York Central v. United States (SCOTUS 1909)
· Facts: D, a railroad corporation, and its assistant traffic manager were convicted under the Elkins Act for payments of rebates upon shipments from NY to Detroit.
o Note: the Elkins Act imposed heavy fines on railroads that offered rebates (refunds to customers after purchase) and upon shippers that authorized these rebates, thus forcing railroad companies to stick to the published shipping rates.
· Holding: SCOTUS affirmed the conviction, finding that the act of the agent, while exercising authority delegated to him to make rates for transportation, could be controlled, in the interest of public policy, by imputing his act to the corporation and imposing penalties upon the corporation.
o The court held that rebating under the federal statute was a crime which could have been committed by the corporation.
o The court concluded there was no good reason why corporations could not be held responsible for and charged with the knowledge and purposes of their agents, acting with the authority conferred upon them. The court reasoned that if the corporation had not been found criminally liable merely because it was a corporation, many such offenses would go unpunished (individuals were only the instruments of the corporation)
o Underlying theme of the opinion is that the Court thought it was fair for the corporation to pay a penalty since they had benefitted from breaking the law.
· Importance: “An exploded doctrine”—corporations had previously enjoyed immunity from criminal prosecutions. This case is considered the great pronouncement of corporate criminal liability, yet the court did not really address why it thought they were no longer bound by traditions of the common law.
o This is during the Lochner Era, in which industrialization is booming and there is little regulation on corporations. Corporations are huge, scary, impersonal and expansive, and Congress/the American people want to break them up and return to smaller firms. The government is likely in the best position to reign in the corporations. At the sam
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· Importance: Park + Dotterweich=current state of strict liability law with corporate officers (responsible corporate officer doctrine)
o Corporate employees who have a “responsible share in the furtherance of the transaction which the statute outlaws” are subject to the criminal provisions of the Act.
§ A corporate agent, through whose act, default, or omission the corporation committed a crime, is guilty, regardless of whether the crime required consciousness of wrongdoing (knowledge or intent)—applies to those who by virtue of their managerial position or other similar relation to the actor could be deemed responsible.
§ Bottom Line: no personal participation or knowledge required for liability
§ Rationale: this is a public welfare offense—the public has a right to expect such high standards of responsibility from those who assume high corporate roles (essentially using criminal liability as a means of regulation)
United States v. Hilton Hotels (9th Cir. 1973)
· Facts: Hilton Hotel was convicted of violating the Sherman Act—restraint of trade by its refusal to deal with suppliers who refused to pay the trade association fee (collective refusals by hotels to deal with certain suppliers are not good for the market). Hilton appealed the conviction, claiming that it was not responsible for its purchasing agent’s decision since Hilton had warned him not to participate in the boycott and he went against their orders.
· Holding: SCOTUS upheld the conviction, concluding that the purchasing agent was an agent of the corporation acting within the scope of his employment and the corporation benefited from his acts. Even acts undertaken by a corporate employee contrary to specific corporate instructions warrant imposition of corporate criminal liability. The rationale for this view is that the agent’s actions, taken while the agent is serving in the corporation’s employ, would appear to outsiders to be within the agent’s authority.
o Bottom Line: having a policy, even a policy that the corporation attempts to enforce, is not a defense. The only defense is claiming that the agent was not acting within the scope of his employment or for the benefit of the corporation (pretty close to strict liability)
o Standard of Hiltonàany time there is a violation by an employee who is not acting completely in his own interest, you can prosecute.
o What more could Hilton have done? “Undertake to enforce instructions by means commensurate with obvious risks” (p. 1007) – but thrust of opinion seems to be “if you are really trying, there wouldn’t be any violations”
§ But the flip side (lenient defense standard) would gut Sherman Act
§ “It is reasonable to assume that Congress intended to impose liability upon business entities for the acts of those whom they chose to delegate the conduct of their affairs, thus stimulating a maximum effort by owners and managers to assure adherence by such agents to the requirements of the Act.”
· Importance: the Court moved quickly through most of these issues without really acknowledging the tensions between over-deterrence and under-deterrence. If the rule is too strict, the consequences fall on the corporation (leading the corporation to make inefficient business decisions). But if the rule is too lenient, it is ineffective.
o Consider only individual liability – plenty of escape hatches – divide responsibility to make no single individual liable; pay employee enough to make the fall guy; “I’m the scapegoat” defense may play well to jury (nullification)
