The centenary of a mistake: One hundred years of corporate criminal liability

American Criminal Law Review

Volumn 46, Issue 4, 2009, Pages 1329-1358

  Hasnas, John ^a  

^a GEORGETOWN UNIVERSITY   (United States)

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EID: 76749138143     PISSN: 01640364     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (119)

1. 212 U. S. 481 (1909).
2. This has been recently confirmed by the Second Circuit Court of Appeal's summary dismissal of a challenge to the New York Central standard of corporate criminal liability in United States v. Ionia Mgmt., S. A., 555 F.3d 303, 309 (2d Cir. 2009).
3. For a definition of moral responsibility, see infra text accompanying note 12.
4. For purposes of concision and convenience, I will employ the term "corporation" to refer not merely to businesses that have gone through the formal process of incorporation, but to business organizations generally, regardless of their legal form. What is commonly referred to as corporate criminal liability applies to partnerships and other unincorporated business organizations as well as corporations. My critique of such liability is intended to be equally general.
5. Peter A. French, The Corporation as a Moral Person, 16 AM. PHIL. Q. 207, 211 (1979).
6. Id. at 215.
7. THOMAS DONALDSON, CORPORATIONS AND MORALITY 30 (Prentice-Hall, Inc. 1982).
8. PATRICIA H. WERHANE, PERSONS, RIGHTS, AND CORPORATIONS 59 (Prentice-Hall, Inc. 1985).
9. Michael J. Phillips, Corporate Moral Personhood and Three Conceptions of the Corporation, 2 BUS. ETHICS Q. 435, 454 (1992).
10. See generally David T. Ozar, The Moral Responsibility of Corporations, in ETHICAL ISSUES IN BUSINESS: A PHILOSOPHICAL APPROACH 294 (Thomas Donaldson & Patricia Werhane eds., 1979) (arguing that corporations can use morality in decision making) ;
11. Kenneth E. Goodpaster & John B. Mathews, Jr., Can a Corporation Have a Conscience? 60 HARV. BUS. REV. 132 (1982) ;
12. Robert J. Rafalko, Corporate Punishment: A Proposal, 8 J. BUS. ETHICS 917, 924 (1989) (arguing that corporations sometimes behave like people, and therefore may be moral entities).
13. See, e.g., John Ladd, Persons and Responsibility: Ethical Concepts and Impertinent Analyses, in SHAME, RESPONSIBILITY, AND THE CORPORATION 77 (Hugh Curtler ed., 1986) (arguing that if we give corporations moral status we reduce the value of moral responsibilities as it applies to people) ;
14. John R. Danley, Corporate Moral Agency: The Case for Anthropological Bigotry, in BUSINESS ETHICS 202 (W. Michael Hoffman & Jennifer Mills Moore eds., 2d ed. 1990) (arguing that to give moral status to corporations would create profound problems in our moral discourse) ;
15. Michael Keely, Organizations as Non-persons, 15 J. VALUE INQUIRY 149 (1979) ;
16. Larry May, Vicarious Agency and Corporate Responsibility, 43 PHIL. STUDIES 69, 69 (1983) (suggesting that corporations cannot be morally responsible because they can only act vicariously).
17. See generally Manuel Velasquez, Debunking Corporate Moral Responsibility, 13 BUS. ETHICS Q. 531 (2003).
18. Id. at 532.
19. Id. at 539.
20. Id. at 538.
21. Id. at 539.
22. Id. at 540.
23. Velasquez, supra note 11, at 543.
24. Id.
25. Id. at 543-44.
26. Id.
27. Id.
28. Id. at 545.
29. Velasquez, supra note 11, at 546.
30. Id.
31. See DAN B. DOBBS, THE LAW OF TORTS 907-10 (2000) (noting that employees are often financially unable to pay for the harms they cause and so they will not be deterred by the threat of tort suits and enterprise liability can be justified as economically efficient by providing optimal deterrence of harmful activities).
32. See, e.g., LEONARD LEVY, ORIGINS OF THE FIFTH AMENDMENT 3-42 (1968).
33. WILLIAM BLACKSTONE, COMMENTARIES ON THE LAWS OF ENGLAND 359 (Cavendish 2001) (1969).
34. The purposes of punishment are often divided into thinner, more variegated conceptual slices. Thus, incapacitation or special deterrence, education, and denunciation are sometimes added to the list of retribution, deterrence, and rehabilitation. See, e.g., JOSHUA DRESSLER, UNDERSTANDING CRIMINAL LAW 13-22 (3d ed. 2001) (detailing different theories of criminal punishment) ;
35. WAYNE R. LAFAVE, PRINCIPLES OF CRIMINAL LAW 25-30 (2003) (detailing different theories of criminal punishment and conflicts between them) ;
36. Michael S. Moore, A Taxonomy of Purposes of Punishment, in FOUNDATIONS OF CRIMINAL LAW 60-67 (Leo Katz, et. al. eds. 1999) (discussing different reasons for society imposing punishments). However, in the present context, the more fine grained distinctions are not particularly relevant and have been ignored.
37. See City of Chicago v. Morales, 527 U. S. 41, 56-58 (1999) (discussing a charge of loitering, holding that the vagueness of the ordinance raises concerns of fair notice, which requires that the ordinary citizen is enabled to conform his or her conduct to the law).
38. New York Central & Hudson River R. R. Co. v. United States, 212 U. S. 481, 494 (1909).
39. Id.
40. Id. at 494-95.
41. Id. at 493.
42. Standard Oil Co. of Tex. v. United States, 307 F.2d 120, 128 (5th Cir. 1962).
43. See Steere Tank Lines v. United States, 330 F.2d 719, 722-24 (5th Cir. 1964) (holding that a corporation could be liable for the illegal actions of truck drivers who reasonably could believe the corporation benefited from and demanded such actions).
44. See United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1072) ("[L]iability may attach without proof that the conduct was within the agent's actual authority....").
45. Id. at 1007.
46. The respondeat superior standard created by New York Central is not the only basis for corporate criminal liability. Corporations can also be convicted of a crime under the collective knowledge doctrine. This standard of liability attributes all the knowledge possessed by a corporation's employees to the corporation itself, allowing the corporation to have knowledge not possessed by any individual. See United States v. Bank of New England, 821 F.2d 844, 856 (1st Cir. 1987) (holding that knowledge obtained by employees of a corporation is for legal purposes aggregated and considered part of the collective knowledge). Under the collective knowledge doctrine, it is possible for a corporation to be guilty of a criminal offense requiring a mens rea of knowledge, even though none of its employees could be convicted of the offense because none of them individually possessed the requisite knowledge.
47. For purposes of concision, I do not intend to address the collective knowledge doctrine directly in this article. All the objections I raise against the New York Central standard of corporate criminal liability apply equally well to the collective knowledge doctrine. In fact, the collective knowledge doctrine is probably more vulnerable to objections than the New York Central standard. I must hope application of these objections is self-evident enough to justify my decision to leave it to the reader.
48. Under the Organizational Sentencing Guidelines, this is reserved for "criminal purpose organizations." See U. S. SENTENCING GUIDELINES MANUAL § 8C1.1 (2004) (stipulating that a criminal purpose organization will be fined sums sufficiently large to divest the organization of all net assets).
49. My arguments are intended to apply to business organizations generally, not merely to those that have undergone the formal process of incorporation. Hence, with regard to unincorporated business organizations, this point must be adapted to the relevant organizational form. For example, in the case of limited partnerships, the issue would concern punishing the firm's innocent limited partners rather than innocent shareholders. In this regard, it must be admitted that in those business organizations in which there is true shared control among all parties-e.g., certain general partnerships-there may be no question of punishing the innocent because all parties are personally culpable. However, in such cases, punishing the firm as a corporate entity would be pointless because all members of the firm would be subject to conviction as individuals.
50. This form of deterrence is sometimes referred to as general deterrence to distinguish it from specific deterrence or incapacitation. Specific deterrence refers to punishing a wrongdoer to discourage or prevent that particular individual from committing future offenses. Because in the present context the distinction between general and specific deterrence is immaterial (both justify inflicting punishment only on a wrongdoer), I have chosen not to break specific deterrence out as a separate justification for punishment. Further, there is really no point to discussing specific deterrence in the context of corporate criminal liability, because, by hypothesis, the parties being deterred are not the parties who actually commit the offense.
51. Such programs are not "ethics" programs. See John Hasnas, Ethics and the Problem of White Collar Crime, 54 AM. U. L. REV.. 579, 631-655 (2005) (discussing the ways a corporate manager's ethical and legal obligations conflict).
52. I am grateful to both Professor David Luban of the Georgetown Law Center and Professor George Brenkert of Georgetown's McDonough School of Business for pointing this line of argument out to me.
53. The analogy contained in the objection holds to a point. When a corporation is punished, not only the shareholders suffer. A collateral effect of corporate punishment is that innocent employees may lose their jobs or receive reduced compensation. Such employees are analogous to the individual criminal's family members or dependents. The harm inflicted on them is not the intended result of the punishment, and may be viewed with regret. On the other hand, in the application of corporate criminal liability, no effort is made to ameliorate this collateral harm. The conviction of Arthur Andersen for a single instance of obstruction of justice cost over 28, 000 employees their jobs in the United States alone. Elizabeth K. Ainslie, Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution, 43 AM. CRIM. L. REV. 107, 107 (2006).
54. A good account of the degree of discretion the New York Central standard invests in prosecutors is provided by Andrew Weissmann, former Director of the Department of Justice Enron Task Force and Chief of the Criminal Division of the United States Attorney's Office for the Eastern District of New York. See Andrew Weissmann, A New Approach to Corporate Criminal Liability 44 AM. CRIM. L. REV. 1319, 1322-24 (2007). Weissmann explains:
55. [T]here is little by the way of systemic checks on the overly aggressive, misinformed, or unethical prosecutor.... Save for her personal integrity, a prosecutor may seek to charge for improper reasons, such as personal or political advancement, or exact sanctions that are unwarranted, such as fines disproportionate to the harm.
56. Id. (emphasis in original).
57. See Dep't of Justice, Deferred Prosecution Agreement, Bristol-Myers Squibb ¶ 40, ("BMS shall endow a chair at Seton Hall University of Law dedicated to the teaching of ethics and corporate governance."), available at, http://www.usdoj.gov/usao/nj/press/ files/pdffiles/deferredpros.pdf/.
58. Pedro Ruz Gutierrez, Congress Scrutinizing Selection of Outside Monitors, NAT'L L. J., July 21, 2008 at S11. See generally Dep't of Justice, Deferred Prosecution Agreement, Zimmer, Inc ¶ 4-7, (explaining the terms of the agreement). Other potentially abusive DPAs required the New York Racing Association to install slot machines at its venues to raise revenue for court-mandated improvements in public education, see Benjamin M. Greenblum, What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements, 105 COLUM. L. REV. 1863, 1878 (2005) ("[T]he agreement bound NYRA to either install the slot machines itself or make 'commerically reasonable' efforts to subcontract another party to do so."), and WorldCom to create hundreds of jobs in Oklahoma. Id. at 1894.
59. Memorandum from Mark R. Filip, Deputy Attorney Gen., U. S. Dep't of Justice, to Heads of Dep't Components & U. S. Attorneys 7, 14 (Aug. 28, 2008).
60. Id. at 15.
61. See Memorandum from Deputy Attorney General Larry Thompson, to Heads of Department Components, Principles of Federal Prosecution of Business Organizations 7-8 (Jan. 20, 2003), One factor the prosecutor may weigh in assessing the adequacy of a corporation's cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements.... [P]rosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation's cooperation. Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation. Some of these requirements have been relaxed since December 2006 in response to intense criticism from the bar and Congress.
62. Although I am not addressing it directly in this article, managers are also aware that no set of internal controls can guarantee that the corporation does not commit a criminal offense under the collective knowledge doctrine on the basis of individual employees possessing diffuse instances of knowledge that, taken together, constitute the mens rea of an offense.
63. See supra note 38.
64. 467 F.2d 1000 (9th Cir. 1972).
65. Id. at 1004.
66. This helps explain Bristol-Myers Squibb's endowed ethics chair and John Ashcroft's appointment.
67. See supra page 1340.
68. See Harry Kalven, Jr., & Maurice Rosenfield, The Contemporary Function of the Class Suit, 8 U. CHI. L. REV. 684, 691 (1941) (finding a "general agreement that [a class action shareholder suit] furnishes the major sanction behind the fiduciary rules of corporation law").
69. See also Judith Resnik, Money Matters: Judicial Market Interventions Creating Subsidies and Awarding Fees and Costs in Individual and Aggregate Litigation, 148 U. PA. L. REV. 2119, 2145 (2000) ("New Deal regulations had focused on the utility of statutory protections for consumers and the desirability of the federal courts as a forum for redress.... Ambivalence about how much government actors could and should do also prompted interest in class action litigation. ").
70. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (1995).
71. Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998).
72. This discussion ignores the considerable market pressure on corporations to prevent fraudulent activity by its employees. Recall that Enron and Worldcom disappeared upon discovery of their accounting irregularities, long before any legal action could be mounted. The value of the stock of companies whose employees are suspected of financial impropriety almost always plummets, frequently leading to the dismissal of top corporate executives. This is an extremely strong form of market discipline. Given that high level corporate managers are people who are strongly motivated to maintain the prestige and financial rewards associated with their positions, they have strong market incentives to suppress the illegal conduct of their subordinates that can cost them their jobs.
73. See supra text preceding and accompanying note 39.
74. Corporate criminal responsibility is frequently antithetical rather than complementary to civil liability. For example, before its criminal indictment, Arthur Andersen had negotiated a $750 million settlement with Enron's shareholders which fell through when the firm was indicted. Jonathan D. Glater, Enron Holders in Pact with Andersen Overseas Firms, N. Y. TIMES, August 28, 2002, at C3. Upon conviction of obstruction of justice, Andersen was assessed a criminal fine of $500, 000.
75. See Assaf Hamdani & Alon Klement, Corporate Crime and Deterrence, 61 STAN. L. REV. 271, 278 (2008). Thus, $750 million in potential restitution was sacrificed for a $500, 000 penalty.
76. See, e.g., Assaf Hamdani & Alon Klement, Corporate Crime and Deterrence, 61 STAN. L. REV. 271, 274 (2008) ("[W]e show that subjecting business entities to criminal liability carrying severe collateral consequences might, in fact, undermine deterrence. Indeed, purely financial penalties could contain misconduct more effectively than the threat of going out of business.").
77. See also Weissmann, supra note 45, at 1335-37 (describing how the current system fails to incentivize corporations to implement effective compliance programs).
78. New York Cent. & Hudson River R. R. Co. v. United States, 212 U. S. 481, 492 (1909).
79. Id. at 493.
80. Id. (emphasis added).
81. Id. at 494 (emphasis added).
82. Id.
83. Id.
84. New York Central, 212 U. S. at 495.
85. Id. at 495-96.
86. See People v. Drake, 462 N. E.2d 376, 377 (N. Y. 1984) (holding that false pretenses requires proof that the "defendant obtained title or possession of money or personal property of another by means of an intentional false statement concerning a material fact upon which the victim relied in parting with the property").
87. See, e.g., 18 U. S. C. §1341, 1343 (2006).
88. See Neder v. United States, 527 U. S. 1, 24-25 (1999) ("The common-law requirements of 'justifiable reliance' and 'damages,' for example, plainly have no place in the federal fraud statutes.") ;
89. United States v. Rybicki, 287 F.3d 257, 264 (2d Cir. 2002) ("[T]he potential reach of [the mail fraud statute] is virtually limitless.") ;
90. United States v. Townley, 665 F. 2d 579, 585 (5th Cir. 1982). The court in Townley explained: Under the mail fraud statute, it is just as unlawful to speak "half truths" or to omit to state facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading. The statements need not be false or fraudulent on their face, and the accused need not misrepresent any fact, since all that is necessary is that the scheme be reasonably calculated to deceive persons of ordinary prudence and comprehension. Id.
91. See, e.g., United States v. Jackson, 983 F.2d 757 (7th Cir. 1993) (upholding money laundering conviction of an alleged drug dealer for writing checks to purchase cell phones and pay his rent and for cashing checks for small amounts at his local bank).
92. See 18 U. S. C. §§ 1961-1963 (2006).
93. See 18 U. S. C. § 371 (2006). There are literally dozens of federal conspiracy statutes
94. see, e.g. 18 U. S. C. § 1962 (d) (2006) (RICO conspiracy) ;
95. 18 U. S. C. § 1956 (h) (2006) (conspiracy to commit money laundering) ;
96. 18 U. S. C. § 1951 (conspiracy to violate the Hobbs Act) ;
97. 21 U. S. C. §§ 846, 963 (2006) (conspiracy to traffic in or import drugs). Some of these conspiracies, such as RICO conspiracy and the conspiracy to traffic or import drugs, do not even require the performance of an overt act.
98. See 18 U. S. C. §§ 1503, 1505, 1510, 1512, 1519, 1520 (2006).
99. Section 1503 contains an omnibus provision that "is essentially a catch-all provision which generally prohibits conduct that interferes with the due administration of justice." United States v. Thomas, 916 F.2d 650 n. 3 (11th Cir. 1990).
100. This section also criminalizes "endeavors to influence, obstruct, or impede[] the due administration of justice", essentially converting the statute into a prohibition on attempted obstruction. 18 U. S. C. § 1503 (2006) (emphasis added).
101. Similarly, Section 1512 (c) punishes anyone who corruptly "obstructs, influences, or impedes any official proceeding, or attempts to do so". 18 U. S. C. § 1512 (c) (2006) (emphasis added).
102. Section 1519 punishes anyone who knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object, with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States... or in relation to or contemplation of any such matter, dispensing both with the requirement that the accused act corruptly and the existence of actual official proceeding. 18 U. S. C. § 1519 (2006).
103. A leading commentator has described the obstruction of justice statutes as "fairly incoherent, often redundant, and overbroad-leaving much to the discretion of prosecutor." JULIE R. O'SULLIVAN, FEDERAL WHITE COLLAR CRIME 346 (4th ed. 2009).
104. See George J. Terwilliger III, Under-Breaded Shrimp and Other High Crimes: Addressing the Over-Criminalization of Commercial Regulation, 44 AM. CRIM. L. REV. 1417 (2007) (discussing increased use of federal criminal sanctions to regulate business conduct, which deters economic activity and is not an appropriate means of securing regulatory goals).
105. For example, Martha Stewart was prosecuted for securities fraud for publicly asserting her innocence of trading stocks on non-public information, which the government considered a false statement. Stewart, who sold her shares of Imclone stock immediately prior to a sharp decline in its price, publicly asserted that she did so in response to a pre-established stop-loss order rather than on the basis of a tip from her broker based on non-public information. Because "Martha Stewart's reputation, as well as the likelihood of any criminal or regulatory action against Steward, were material to MSLO's [Martha Steward Living Omnimedia, Inc.] shareholders because of the negative impact that any such action or damage to her reputation could have on the company which bears her name", Indictment at 57, United States v. Stewart, 2003 WL 25730072 (S. D. N. Y. 2003) (No. 03 Cr. 717), the government charged her with securities fraud for attempting to [S]top or at least slow the steady erosion of MSLO's stock price caused by investor concerns [by making or causing] to be made a series of false and misleading public statements during June 2002 regarding her sale of ImClone stock on December 27, 2001 that concealed and omitted that Stewart had been provided [non-public] information... and that Stewart had sold her ImClone stock while in possession of that information. Id.
106. New York Central & Hudson River R. R. Co. v. United States, 212 U. S. 481, 495 (1909).
107. See supra text accompanying note 48.
108. See supra text accompanying notes 47-49.
109. See supra text accompanying notes 50-51.
110. See Andrew Weissmann, supra note 45, at 1321 ("It is now a commonplace position among the white-collar bar post-Enron-amongst both defense and prosecution-that corporate defense consist largely of being an arm of the prosecutor."). For a more detailed analysis of the workings of these incentives, see John Hasnas, Ethics and the Problem of White Collar Crime, 54 AM. U. L. REV. 579, 619-630 (2005).
111. See Pamela H. Bucy, Trends in Corporate Criminal Prosecutions, 44 AM. CRIM. L. REV. 1287 (2007) (arguing that in the years ahead, the number of corporate criminal investigations is likely to increase but fewer business will be indicted).
112. Professor Julie O'Sullivan suggests that the indictment that brought down Arthur Andersen was actually a punishment for its failure to agree to waive its attorney-client privilege. She states that The Arthur Andersen case may present a cautionary tale. Some argue that "[u]nder most objective standards, [Arthur Andersen, LLP] did everything in its power to avoid a prosecution that it knew would be a 'death penalty' for the firm", except agree to waive the attorney-client privilege. Thus, Andersen reportedly notified the Justice Department and SEC immediately upon learning of the document destruction in its Houston office. Andersen was also apparently willing to enter into a deferred prosecution agreement, "in essence a guilty plea, under which the government could have appointed a special monitor to oversee compliance with its new document retention policy and with other reforms to be approved by the DOJ." Finally, Andersen also agreed to expel the individuals responsible for the document destruction and did, of course, fire the head of Andersen's auditing team for Enron (and the government's cooperating witness in Andersen's criminal trial), David Duncan. Finally, Andersen "reportedly offered to pay as much as $750 million to Enron shareholders who had sued Andersen for its role in auditing Enron's books." Despite these efforts, DOJ decided to seek an indictment and ultimately secured a conviction of the partnership. Julie R. O'Sullivan, Some Thoughts on Proposed Revisions to the Organizational Guidelines, 1 Ohio St. J. Crim. L. 487, n. 30 (2004) (internal citations omitted).
113. For a more detailed account of this process, see John Hasnas, supra note 84, at 631-55.
114. MODEL PENAL CODE § 2.07 (l) (c) (Proposed Official Draft 1962).
115. MODEL PENAL CODE § 2.07 (5) (Proposed Official Draft 1962).
116. See Andrew Weissmann, supra note 45, at 1335.
117. See also Geraldine Szott Moohr, Of Bad Apples and Bad Tress: Considering Fault-Based Liability for the Complicit Corporation, 44 AM. CRIM. L. REV. 1343 (2007) (suggesting the use of the accomplice liability doctrine to hold firms criminally liable for fault-based conduct that encourages corporate crime).
118. See, e.g., Ellen Podgor, A New Corporate World Mandates a "Good Faith" Affirmative Defense, 44 AM. CRIM. L. REV. 1537 (2007).
119. SEE SUPRA text accompanying notes 4-8.