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Naked Corporate Defendants

The Second Circuit Court of Appeals has affirmed the decision in U.S. v. Ionia Management, S.A., shooting down attempts to change the way corporations are held liable for the criminal acts of their employees through respondeat superior. As we’ve said many times, nothing has had a greater impact on enforcement of the Foreign Corrupt Practices Act against corporations than respondeat superior, which leaves companies defenseless once employees are found to have committed violations.

The amicus brief in Ionia had argued that respondeat superior makes it too easy to impute criminal liability to corporations. But the Second Circuit’s three-judge panel (Calabresi, Livingston, McLaughlin) didn’t buy the argument. In rejecting the idea that a compliance program should be counted in a company’s favor, the court said:

We note that this argument is made only by amici curiae and not by Ionia, and so we are not obligated to consider it. But the argument, whoever made it, is unavailing. Adding such an element is contrary to the precedent of our Circuit on this issue. See Twentieth Century Fox Film Corp., 882 F. 2d at 660 (holding that a compliance program, “however extensive, does not immunize the corporation from liability when its employees, acting within the scope of their authority, fail to comply with the law”). And this remains so regardless of asserted new Supreme Court cases in other areas of the law. As the District Court instructed the jury here, a corporate compliance program may be relevant to whether an employee was acting in the scope of his employment, but it is not a separate element.

So for now, at least, organizations will continue to face vicarious liability for nearly all criminal acts of employees — even low-level personnel “acting against explicit instructions and in the face of the most robust corporate compliance program,” as the amicus brief put it.

But here’s the problem: respondeat superior does more harm than good. Sure, it produces a 100% corporate “conviction” rate in FCPA cases, which must go down well at the Justice Department. But, it probably doesn’t deter illegal behavior or encourage better compliance programs. And it puts overwhelming pressure on organizations to resolve threatened criminal cases. Because of the catastrophic effects of any potential conviction, companies have to settle with the government. So they rush into agreements that may require them to waive the attorney–client privilege, hand over employees’ private documents and data, cut off support for their legal defense, and fire those who don’t cooperate with government investigations.

In other words, our criminal justice system is robbing corporations of the chance to defend themselves. What’s worse, it’s trampling the fragile rights and protections of individuals. That’s why respondeat superior needs serious fixing, and soon.

Read the Second Circuit’s per curiam opinion in U.S. v. Ionia Management S.A. here.
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1 Comment

  1. “however extensive, does not immunize the corporation from liability when its employees, acting within the scope of their authority, fail to comply with the law”).

    Can someone expound on the little hidden caveat… “acting within the scope of their authority”? Do companies actually authorize their employees to break the law? Does it not seem logical that an employee leaves their authority the moment they engage in an illegal activity or the furtherance of an illegal activity?


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