Nothing has increased the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. That’s the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment–that is, within their actual or apparent authority and on behalf of the corporation. It has left companies completely defenseless in the face of criminal charges under the FCPA. Once an employee admits to an FCPA violation or is found guilty, the company is automatically guilty too. Case closed.
If respondeat superior sounds oppressive and unbalanced, that’s because it is. It becomes irrelevant to a corporation’s defense that the wrongdoer isn’t a high managerial official, that the corporation specifically instructed the employee not to engage in the proscribed conduct, or that the statute in question (such as the FCPA) requires willful or knowing violations. The idea, the courts say, is that criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations. So forget intent, mens rea, good faith and so on; think instead of strict liability for the employee’s criminal conduct.
Are we exaggerating? Not at all. Here’s how the United States Sentencing Commission’s May 2004 release describes respondeat superior as applied by the courts:
Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
As long as respondeat superior is the law of the land, corporations won’t be mounting any defense to potential criminal charges under the FCPA. They can’t win in court so of course they don’t go to court. Naturally enough, that puts the prosecutors in full control. They know an FCPA criminal indictment waved in front of a defenseless corporation inevitably leads to a plea deal — usually a deferred or non-prosecution agreement with terms dictated by the DOJ.
Now, though, there’s a serious challenge to respondeat superior in a Second Circuit case called United States v. Ionia Management, S.A. It’s the topic of a post on the White Collar Crime Prof Blog here. As Prof Podgor says, “This case forcefully takes on corporate criminal liability both from a policy perspective and in its application. This is clearly a case that needs to be watched.”
The facts are these: A ship management company headquartered in Piraeus, Greece was convicted in a criminal jury trial under the Act to Prevent Pollution from Ships and obstruction of justice. It was fined $4.9 million and sentenced to probation and other assessments on the basis of the application of respondeat superior, which the defendant now challenges.
The amicus brief in support of the defendant / appellant is particularly powerful. The brief calls on the court to “adopt a standard for vicarious corporate criminal liability . . . that limits the application of respondeat superior.” At the bottom of this post we’ve included a sample of the arguments.
Bloodless corporations are usually cast in the role of villain and seldom garner much sympathy. But we’re in full agreement with the amicus brief and Prof Podgor, who says the doctrine of respondeat superior “needs to be examined in the real world of today, a world with international dimensions resulting from corporations that have employees on more than one continent, where statutes omit mens rea terms, and where the trial penalties can destroy a company.”
What’s the fix? Prof Podgor thinks the best option is a “good faith defense” for corporations charged for acts of rogue employees. That, she says, would be similar to the application of the analogous civil-law defense. It makes sense. Let corporations defend themselves based on their own good-faith compliance efforts. That would allow them a measure of justice and give them the strongest possible incentive to maintain an effective compliance program. Wouldn’t everyone win?
Here are excerpts from the amicus brief in support of the defendant / appellant in United States v. Ionia Management, S.A. The brief comes from the Association of Corporate Counsel, the Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York Association of Criminal Defense Lawyers, and the Washington Legal Foundation. We’ve left in some of the citations but omitted the mountainous footnotes.
[T]he district court’s view of vicarious liability in the criminal context is inconsistent with the criminal law’s goals of deterrence and punishment. In cases where corporations have done everything reasonable to prevent criminal conduct on the part of their employees, the corporation itself is not morally culpable yet is disincentivized from taking steps to expose the wrongdoing because of the risk that expansive respondeat superior principles will lead to its own criminal liability. These are exactly the incentives that led the Supreme Court to adopt a more limited approach to vicarious liability in Faragher, Ellerth, and Kolstad. An alternative approach to corporate criminal liability is called for not only by Faragher, Ellerth, and Kolstad, but by numerous commentators who have criticized the respondeat superior approach.
The criticism of the prevailing scope of corporate vicarious criminal liability is widespread and growing, particularly given the rise of corporate investigations and prosecutions by the federal and state governments. While the availability of corporate criminal liability is congressionally mandated, the means by which such liability is established are critical.
A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution. District Judge Gerald E. Lynch phrased the problem with precision:
If a corporation is criminally liable for the unauthorized acts of mid-level managers, the corporation will often not have a viable defense, despite legitimate questions about the justice of punishing it. . . . Such defendants are increasingly relegated to making their most significant moral and factual arguments to prosecutors, as a matter of “policy” or “prosecutorial discretion,” rather than making them to judges, as a matter of law, or to juries, as a matter of factual guilt or innocence.
Gerald E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 Law & Contemp. Probs. 23, 59 (1997).
This imbalance and the problems it engenders are not theoretical. For example, one judge found that prosecutors violated the Constitution by causing KPMG to cut off attorneys’ fees to employees in the hope of obtaining a deferred prosecution agreement. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), appeal docketed, No. 07-3042-cr (2d Cir. 2007). In another instance, as part of a deferred prosecution agreement, Bristol-Myers Squibb agreed to endow a professorship at Seton Hall University, the prosecutor’s alma mater. Interview of Mary Jo White, Corp. Crime Rep., Dec. 12, 2005, at 14-15; see also Andrew Weissmann with David Newman, Rethinking Criminal Corporate Liability, 82 Ind. L.J. 411, 415 n.5 (2007. The potential for abuse is manifested as well in the then‑common requirement that corporations agree to broad waivers of attorney-client privilege as a factor to be considered for a deferred prosecution agreement.
The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.
Special thanks to Luke McLoughlin at Jenner & Block’s New York office for providing the link to the final version of the brief. The firm acted as counsel for the amici curiae.