Corporate Liability Research Paper Example

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The principle that corporations can be held criminally responsible for crimes committed on their behalf has been well established in Anglo-American law for more than a century. After exploring the historical and theoretical underpinnings of this phenomenon together with the deterrent and retributive rationales for imposing criminal liability on corporations, this research paper examines Justice Department policies regarding the prosecution and punishment of corporate crime and how those policies are implemented in practice.

Fundamentals Of Corporate Criminal Liability

What is corporate crime? Although this question seems a logical place to begin, perhaps it assumes too much. It might be more apt to ask in the first instance whether it is possible for corporations to commit crimes. Corporations are, after all, creatures of the state. They are legal fictions that are created through corporate charters issued and approved by government officials. A corporation’s charter defines its powers and the conditions under which it can operate. It goes without saying, of course, that corporate charters do not (and cannot) confer the power to commit crimes. Thus, criminal wrongs committed on behalf of the corporation are legally beyond the organization’s authority to act. And because a corporation is a mere legal abstraction, it has no soul to damn and no body to kick (Coffee 1981). It should come as no surprise, then, that if pure logic were to prevail, the likely consensus would be that corporations don’t commit crimes. People do.

While this observation may seem intuitively correct, American courts and legislatures have seen fit to treat corporations as “persons” under the law. And once that step has been taken, it logically follows that recognition of a corporation’s status as a legal person necessarily leads to corollary principles relating to corporate rights and liabilities. Thus, for example, a corporation can own property, enter into contracts that impose binding legal obligations, sue and be sued in its own name, and even be prosecuted and held responsible for crimes committed on its behalf.

Respondeat Superior Theory

Before turning to the larger practical and philosophical questions, it is essential to first consider the underlying legal principles, which fall under the rubric of the respondeat superior doctrine and provide the theoretical foundation for holding corporations criminally liable.

Notwithstanding conventional wisdom to the contrary, it is now well established under the respondeat superior doctrine that corporations can be held criminally responsible for wrongs committed in their names. The basic idea is that even though corporations are legal fictions, they are treated as “persons” under the law and are thus deemed capable of committing wrongful acts and forming criminal intent. Thus, for example, just as an accused murderer must be shown to have struck the fatal blow with intent to cause the victim’s death, a corporation charged with price fixing must be shown to have acted in concert with another company to engage in anticompetitive conduct for the purpose of restraining trade. In the latter context, the corporation’s criminal wrongdoing is established through the doctrine of respondeat superior – a legal sleight of hand that allows attributing the wrongful acts and intent of the agents who plan and implement the price-fixing scheme to the corporation itself.

Historical Underpinnings

The respondeat superior theory of organizational liability has its origins in the early English and American law of nuisance. Under English law, corporations were not accountable for criminal acts. As Chief Justice Holt wrote in 1701, “A corporation is not indictable but the particular members of it are” (Anonymous, 88 Eng. Rep. 1518 (K.B. 1701)). His oft-quoted statement reflected the belief that criminal liability was properly attributable to corporate owners, operators, and agents who committed criminal wrongs in their individual capacities rather than to the corporation itself.

But as corporations became more numerous and increasingly engaged in activities that had widespread effects on the public welfare, the idea that corporations could rightly be held criminally responsible for the consequences of their business operations came to be seen in a somewhat different light. Corporate business activities polluted rivers with rubbish and dead animal carcasses, operated malodorous slaughterhouses, caused the deterioration of bridges and roads, obstructed public highways with illegal buildings and railroad cars, and endangered public health and welfare in countless other ways. Because these wrongs harmed the public at large, the only procedure the law recognized to vindicate the public’s interest in redressing this species of harm was criminal prosecution. For while the civil law allowed individuals to sue for particular injuries they had suffered, they had no legal right to sue on behalf of others to remedy the larger harm to the community.

The other obvious alternative – holding the individuals who directed or performed the offending acts – was deemed impractical for a number of reasons. Principal among them were that (1) the corporation, not the individual agent who acted on its behalf, was the primary (and usually sole) beneficiary of the wrongdoing; (2) the individual agents who permitted debris to fall into the river and obstruct navigation would be hard to identify and in all likelihood would lack both the financial and practical means to clean up the pollution; and (3) if the remedy involved a major economic outlay, it only made sense to make the corporation a party to the prosecution so it would have a fair opportunity to defend its actions – as, for example, to argue that a rogue employee who authorized or committed the wrongful acts was trying to sabotage the company. Of greater practical significance, however, was the absence of any legal procedure to enforce a judgment against a corporation – in this context, a judgment ordering the corporation to abate the nuisance – unless the corporation had been made a party to the proceeding. And so it was that the camel’s nose entered the tent.

Legal Doctrine

Organizational liability for crimes and injuries caused by agents has a century-long history both in England and America. But it was in 1909, in the seminal case of New York Central and Hudson River Railroad Company v. United States, 212 U.S. 481 (1909), that the United States Supreme Court formally recognized the respondeat superior doctrine in corporate prosecutions. In New York Central, a railroad company was convicted of violating a federal statute that prohibited giving rebates to shippers who paid them to transport their goods. The statute expressly authorized criminal prosecution of corporations and their agents for giving the rebates, which in this case had been paid to sugar refiners to retain the refiners’ business. The Supreme Court upheld the company’s conviction by borrowing from the civil law doctrine of respondeat superior, which held employers financially responsible for injuries caused by employees who were acting in the course of their employment. Lawyers for the railroad argued that the statute should be declared unconstitutional because to hold the corporation criminally responsible for the illegal acts of the offending employee was, in effect, to punish innocent stockholders for crimes that neither they nor the board of directors had – or indeed could have – legally authorized. Rejecting that reasoning, the Court wrote:

Since a corporation acts by its officers andagents their purposes, motives, and intent are just as much those of thecorporation as the things done. If, for example, the invisible, intangibleessence of air, which we term a corporation, can level mountains, fill upvalleys, lay down iron tracks, and run railroad cars on them it can intend todo it, and can act therein as well viciously as virtuously. Id. at 492-93 (quotingBishop’s New Criminal Law } 417)

The Court went on to note that corporations can only act through their officers and agents and that it was clearly fair to hold a corporation accountable for wrongs committed by those to whom it had entrusted the authority to act in the matter at hand – here, setting rates for transporting sugar. But the Court also found that as a practical matter, it was necessary to hold the railroad liable for giving illegal rebates because of the increasingly powerful role that corporations had begun to play. As the Court put it: “[T]he great majority of business transactions in modern times are conducted through these bodies, and… interstate commerce is almost entirely in their hands…. It would be a distinct step backward to hold that Congress cannot control those who are conducting… interstate commerce by holding them responsible for the intent and purposes of the agents to whom they have delegated the power to act in the

[matter]

” (Id. at 495–96).

Thus, the principle that the acts and intent of corporate agents who have authority to act in a particular matter can be attributed to the corporation in a criminal prosecution gained the imprimatur of the United States Supreme Court and quickly became the predominant theory of corporate criminal liability in American law.

Limits On Respondeat Superior Liability

Although New York Central was essentially about whether Congress had the power to impose criminal liability on corporations, the Supreme Court’s opinion firmly established that respondeat superior was an appropriate standard for recognizing this species of criminal responsibility. But that is not, of course, the end of the story. The Court’s opinion did not attempt to define the outer boundaries of corporate liability, and it stands to reason that a rule that holds corporations responsible for the acts of their agents should not be unlimited. It would not make sense, for example, to hold a pizza parlor liable for assault if its delivery man shot a customer who refused to give him a tip. Thus, while respondeat superior quickly became the established doctrine for holding corporations criminally responsible, it remained for the lower courts to develop a coherent set of rules to contain this potentially expansive doctrine within reasonable bounds and balance the need to make corporations accountable for the wrongful acts of their agents against the need to avoid overly broad liability rules.

The Scope Of Authority Requirement

The primary limitations on corporate criminal liability are that the offending employee or agent must have acted within the scope of employment and with intent to benefit the corporate employer. Thus, for example, if the pizza delivery driver shot a customer who refused to give him a tip, the restaurant’s corporate owner would not be liable for assault. Although the shooting occurred while the driver was on the job, committing an assault was not within the scope of his authority, that is, assaulting customers was not part of his job description. He was authorized to deliver pizzas, collect the tab, and accept a tip, but retaliating against a customer who refused to tip was clearly beyond the scope of his authority. Similarly, if Wall Street brokers conspired to engage in insider trading, they would be acting outside the scope of their authorized functions even though they might have legitimately become privy to inside information during the course of their employment.

But as might be expected, most cases are not so clear-cut and raise the knotty question of what constitutes an employee’s scope of authority. As a practical matter, courts ordinarily give the term “scope of authority” a broad interpretation. Rather than simply looking at the employee’s official job title or express authority, courts routinely examine the agent’s apparent authority to engage in the offending conduct to determine whether the corporation should be held criminally liable. This rule reflects the not surprising observation that corporations rarely grant their employees specific authority to engage in criminal conduct, which in turn leads to the principle that a corporation may be held criminally responsible for conduct that exceeds what the employee has been expressly directed or authorized to do.

To return to the pizza delivery illustration, suppose the corporate owner of a pizza parlor chain adopts a marketing policy that guarantees free pizza if the delivery takes more than 30 min. But suppose that, in addition, the corporation’s employee evaluation policy penalizes drivers who deliver a higher than average number of free pizzas. If our hypothetical driver speeds to avoid delivering too many free pizzas, his reckless driving is carried out at least in part to benefit the company by enabling it to sell more pizzas than it gives away. Thus, his reckless driving might well be attributed to the company. But that raises the corollary question of what happens if the corporate agent – here, the delivery man – has been specifically forbidden to engage in the wrongful conduct. Thus, for example, suppose that in addition to the free delivery marketing strategy and the employee evaluation policy described above, the corporation also has a strict rule that forbids drivers from speeding while they are delivering pizzas.

Or suppose that a hotel chain adopts a policy that expressly forbids its purchasing agents from giving preferential treatment to suppliers who pay a trade association’s assessment. The purchasing agent not only disobeys specific instructions not to boycott recalcitrant suppliers but admits that he did so out of “anger and personal pique toward the individual representing the supplier” (United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1972)). Under these circumstances, should the corporate owner be held responsible for the illegal boycott?

By and large, courts have concluded that it should. Even if a corporation has an “extensive program” to ensure employee compliance with the law, courts have rarely recognized the company’s due diligence as a valid defense to corporate criminal liability. An employee’s scope of authority includes “acts done on behalf of a corporation and directly related to the performance of the type of duties the employee has general authority to perform” (United States v. American Radiator & Standard Sanitary Corp., 433 F.2d 174, 204–05 (3d Cir. 1980)). Thus, “a corporate 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” (United States v. Ionia Management S.A., 555 F.3d 303, 310 (2d Cir. 2009) (internal quotations omitted)).

What policy supports such a seemingly harsh liability rule? First, notwithstanding the hotel chain’s efforts to require its employees to comply with its policy, the underlying purpose is to provide the corporate employer a stronger incentive to implement its compliance policies and monitor its agents to ensure that they follow the applicable requirements of the law. Second, if the purchasing agent’s strong-arm tactics were to succeed, the corporation would stand to benefit from increased business generated by members of the trade association. The hotel chain should not be permitted to escape responsibility for the purchasing agent’s violation of corporate policy and the letter of the antitrust laws simply “by issuing general instructions without undertaking to enforce [them] by means commensurate with the obvious risks” (Id. at 1007).

Similarly, in the pizza delivery example, the corporation sent the drivers conflicting signals that likely reflected policies devised by different departments that could well have had incompatible interests and goals.

The Intent To Benefit Rule

A second important limitation on the respondeat superior doctrine is the “intent to benefit” rule. For a corporation to be bound by the criminal acts of its agents, the acts must be performed with intent to benefit the corporate entity. But just what does that mean in this context? Like the scope of authority requirement, the intent to benefit rule is generally interpreted expansively by the courts. It does not require proof of any minimal level of actual or anticipated benefit to the corporation. Indeed, the corporation need not receive any benefit to be held vicariously liable for the agent’s crime. Instead, the touchstone is the agent’s intent. If the crime is intended to benefit the corporation, that is enough. Thus, even though the agent’s conduct may actually harm the corporation, the wrongful acts are attributable to the company as long as the agent was acting within the scope of authority (broadly construed) and with intent to benefit the corporation.

To illustrate, consider a bank vice-president who embezzles millions of dollars from various accounts for personal use, the Wall Street brokers who trade on inside information in violation of their fiduciary duty to their corporate employer, and the pizza delivery driver who assaults the nontipping customer. All of the agents in these hypothetical situations are acting purely out of self-interest. The bank vice-president and the Wall Street insiders are motivated solely by a desire to reap a personal financial gain. Similarly, when the pizza delivery driver assaults the customer, his sole motive is to retaliate because he feels cheated by the customer’s refusal to tip.

But what about corporate executives who “cook the books” to improve their company’s reported financial condition? The executives are motivated primarily by a desire to artificially inflate the corporation’s stock prices by making the company look more profitable than it actually is. Even if they derive a collateral benefit from the accounting fraud (e.g., receipt of bonuses or other forms of performance-based pay that are tied to the company’s reported profitability), the corporation and its shareholders will be the principal beneficiaries because the essence of the fraud is to overstate the company’s revenue to keep its stock price artificially high.

Relationship Between Individual And Organizational Liability

Since conventional wisdom holds that a corporation is liable for wrongs committed by agents who are acting on its behalf – and it can act and think only through its agents – it should come as no surprise that lawyers would argue that because the agents’ acts were the acts of the corporation itself, the agents should not be held individually responsible for wrongs they committed on the company’s behalf. Thus, the argument ran, established principles of agency law require courts to look “to the principal” – here, the corporation – “rather than the mere agent” (State v. Morris & Essex R.R., 23 N.J.L. 360, 369 (1852)). Although this, too, may seem intuitively correct, intuition fails once again.

Modern law recognizes that the criminal liability of a corporation is distinct from the liability of the offending agent. Thus, because a corporation and its employees have distinct existences and the employees are the “human face” of the organization, the argument that the agents could not be held individually responsible because their acts were deemed in law to be the acts of the corporation was to no avail. A corporate agent who acts in a representative capacity is not entitled to use the corporate entity as a shield against personal responsibility for his own misconduct. Stated differently, holding the corporation legally responsible for criminal wrongdoing does not serve as a proxy for holding the culpable agent who committed the crime personally responsible as well, notwithstanding that the agent was acting on behalf of the corporation itself.

But the corollary principle is that the respondeat superior rule does not condition corporate liability on the prosecution and conviction of the responsible agent. On the contrary, the agent need not be charged with the crime or may have even been acquitted of committing it. Yet notwithstanding this seeming incongruity, an unsuccessful prosecution of the agent will not automatically vitiate the corporation’s conviction. Even though the verdicts are inconsistent, the acquittal of the agent could be the product of jury mistake or lenity. Indeed, one court was incredulous that the jury had acquitted any of the accused agents and suggested that the acquittals could well be attributable to “considerations not rational at all” (United States v. Austin-Bagley Corp., 31 F.2d 229, 233 (2d Cir. 1929)). Thus, rather than trying to second guess which of two unexplained and inexplicably conflicting verdicts reflects the “correct” result, the default rule is that as long as there is sufficient evidence to prove that someone acting on the corporation’s behalf committed the crime, the corporation’s conviction may legitimately stand.

And, as will be discussed in a later section, it may be difficult or impossible to identify the particular agent or agents who committed the violation because of the diffusion or compartmentalization of responsibilities that is typical of modern corporate hierarchies.

Rationales For Corporate Criminal Liability

The classical goals of criminal justice are premised on society’s need to express moral disapproval of antisocial behavior and impose a punishment that serves, variously, the goals of retribution, rehabilitation, deterrence, and incapacitation. In the context of corporate prosecutions, perhaps the strongest rationales are deterrence and retribution.

Deterrence

As is true in the context of individual liability, there are two types of deterrence – specific and general – that are appropriate goals of corporate prosecution and punishment.

General Deterrence

The theory of general deterrence is that punishing one actor will discourage other similarly situated parties (here, other corporations) from committing the same or similar crimes in the future. In the corporate context, a criminal indictment or conviction can have a negative impact on stock prices and the company’s business reputation. Thus, for example, Arthur Andersen, a big-four accounting firm, collapsed under its own weight in the wake of its conviction for obstructing justice in the Enron accounting fraud scandal. Similarly – more than three decades earlier – E.F. Hutton, which was among the two or three largest brokerage firms in the United States, also vanished from the scene after pleading guilty to 2,000 counts of mail and wire fraud in conjunction with charges that the firm had obtained interest-free use of millions of dollars by engaging in what was at bottom an elaborate check-kiting scheme.

If these prosecutions were to serve as object lessons, one of the dominant themes would be a strong admonition to corporate managers that the consequences of crossing the line between corner cutting (e.g., engaging in “sharp practices”) can be swift and severe. Although the managers at Andersen and Hutton may have believed their firms could survive the scandals, they clearly could not. Thus, it could be said that the goal of general deterrence – here, to exert a positive influence on high-level managerial decision making – was arguably well served by these prosecutions because the expectation is that other companies will learn from the bad examples of firms that have been caught up in the web of a major criminal case.

The electrical equipment scandals of the 1950s are a case in point. During the late 1950s, a number of electrical equipment suppliers – including industry leaders General Electric (GE) and Westinghouse – engaged in an elaborate price-fixing conspiracy to illegally coordinate bids on major government contracts and artificially maintain profits and market share. This was an example of an industry-wide practice that had widespread effects on competition that could not easily be remedied without making visible public examples of the offending corporations and their executives. In consequence, 29 electrical equipment companies – including GE and Westinghouse – were convicted along with 44 of their executives for the roles they played in the flagrant price-fixing scheme (Corporations: The Great Conspiracy, TIME, Feb. 17, 1961, http://www.time.com/time/magazine/article/0.,9171,826890,00.html).

Although by today’s standards the penalties imposed were far from severe, they sent a strong message to the corporate community that major companies and their executives were not immune from prosecutorial scrutiny for conduct that crossed the line from what many corporate chieftains had considered to be aggressive (if possibly unethical) tactics, to what quickly came to be recognized as not only illegal but also criminal conduct.

Specific Deterrence

The goal of specific deterrence is to ensure that the convicted party will not re-offend. In the corporate context, imposition of a criminal penalty on the company is intended to provide management a strong incentive to institute policies and oversight mechanisms that will prevent the offending activity from occurring again. This goal can be advanced in various ways, including specific sanctions or remedies that the court imposes as part of a corporation’s criminal sentence or by collateral consequences that arise by operation of law or through discretionary actions undertaken by government agencies. And, of course, a convicted corporation may experience a change of fortune because of adverse market reactions to the scandal that led to the prosecution.

The most immediate and direct consequences that follow a criminal conviction are court-imposed sanctions. These can include a virtually limitless array of punitive and remedial measures such as a potentially crippling fine; appointment (at corporate expense) of a court-approved monitor who has expertise in the problematic part of the company’s operations (e.g., accounting controls or environmental compliance) and will have oversight responsibilities to ensure that effective compliance mechanisms are put into place; requiring disciplinary action against responsible corporate agents; requiring corrective advertising or publication of a public apology for the offending conduct; and other measures specifically designed to address conditions that led to the criminal violation.

Sanctions may also come in the form of collateral consequences that are imposed by external forces. In addition to loss of reputation that may flow from the fact of conviction, other consequences may include mandatory or discretionary sanctions such as a Defense Department decision to debar a military contractor from bidding on a lucrative government defense contract. These considerations contributed to big-four accounting firm Arthur Andersen’s refusal to plead guilty to a felony charge of obstruction of justice. Although a guilty plea might have brought an end to the relentless adverse publicity attendant to the high-profile criminal investigation of the firm’s destruction of Enron records, Andersen refused to plead guilty because the SEC would not guarantee that it would waive an agency rule that would disqualify the firm from auditing public companies if it were convicted of a felony. That, in turn, would only exacerbate concerns about the viability of the firm and thus contribute to further erosion of Andersen’s client base.

Similarly, in the E.F. Hutton case, the collateral consequences of Hutton’s conviction were catastrophic. As part of its guilty plea to engaging in a massive mail and wire fraud scheme, Hutton agreed to pay a $2 million fine, $750,000 for the costs of the government’s investigation and $8 million in restitution to the affected banks. In addition, Hutton incurred nearly $100 million in legal fees as it tried to extricate itself from its regulatory nightmare.

Although Hutton might have survived these financial consequences of the criminal investigation, it also faced countless civil law suits and intense regulatory scrutiny – including investigations (and ultimately censure) by the New York Stock Exchange, the US Department of Labor, and several congressional committees – as well as looming threats by a number of state agencies to forbid Hutton from doing business in their respective states and to subject the firm to additional regulatory checks.

But Hutton’s loss of reputation after the plea agreement also costs it dearly, especially in one of its strongest units – its municipal finance division. Illustrative examples include the New York Metropolitan Transportation Authority’s (MTA) decision to remove Hutton from a list of firms that were eligible to participate in MTA’s future underwritings; New York City’s removal of Hutton as an underwriter for a $592 million bond financing – the City’s thenlargest financing ever; and the Massachusetts Housing Financing Agency’s threat to remove Hutton from a select list of investment banks that were allowed to serve as managing underwriter on the Agency’s bonds.

That said conditions were ripe for a perfect storm.

Retribution

Retribution is another classic justification for recognizing corporate criminal liability because it is seen as an appropriate way to punish a corporation that financially benefits from its criminal activities. Retribution, of course, has ancient roots in the Biblical concept of “an eye for an eye, a tooth for a tooth.”

Punishment is considered an appropriate rationale for imposing criminal liability on a corporation because the illegal conduct commonly enriches the corporation, and punishment is deemed mete out “just deserts.” Some commentators have even suggested that in the context of corporate criminal liability, retribution should be the primary motivation for punishment because modern corporations develop distinctive personae through increasingly sophisticated marketing techniques (Friedman 2000). For example, a corporation may affect public perception of the organization by advertising its products and packaging as “green” or environmentally sustainable. Consumers who consider themselves environmentally conscious may then reward these businesses by purchasing their products over other, cheaper – or perhaps objectively superior – alternatives. Thus, the argument runs, it only seems appropriate that if society can give relative moral approval to a corporation’s “good deeds,” it should likewise have a mechanism for expressing moral disapproval for wrongs committed in the company’s name – especially if the corporation’s environmental claims turn out to be bogus.

Justice Department Corporate Prosecution Guidelines

Because corporations are persons only in a juristic sense, factors other than the traditional rationales for criminal prosecution and punishment often come into play. Many of these nontraditional factors are incorporated in Justice Department corporate prosecution guidelines that are designed to aid federal prosecutors in deciding whether to bring criminal charges against a corporation. Although the guidelines confirm that traditional considerations such as the potential deterrent value of a criminal prosecution should remain part of the equation, they also recognize that because corporations are “persons” in a uniquely different sense, additional considerations should be taken into account as well.

Those considerations include the following: (1) the nature and seriousness of the offense and whether it posed a risk of harm to the public; (2) whether the offense was an isolated instance of wrongdoing within the corporation and whether the organization’s managers condoned or participated in it; (3) whether the corporation had previously engaged in similar misconduct and – if so – whether it had been prosecuted, sued, or otherwise subject to regulatory scrutiny because of the prior incident; (4) whether the corporation had voluntarily disclosed the wrongdoing and cooperated in the investigation of those who may have been responsible for it; (5) whether the corporation had an effective compliance program in place when the wrongdoing occurred; (6) what steps the corporation had taken to correct the conditions that led to the violation, including disciplining or firing responsible agents; (7) whether a prosecution would be likely to harm shareholders, employees, and others who were not personally responsible for the violation; (8) whether prosecuting the responsible individuals would be an adequate response to the wrongdoing; and (9) whether other remedies short of criminal prosecution would likely be sufficient (United States Department of Justice, Principles of Federal Prosecution of Business Organizations } 9–28.300 (1997)).

Two points should be kept in mind, however. First, like all Justice Department guidelines, the principles of corporate prosecution are nonbinding and are not legally enforceable against the Department if prosecutors fail to follow them. And second, the guidelines do not purport to be statements about when a corporation can be prosecuted under established respondeat superior principles. Instead, they are intended to provide prosecutors general guidance on the desirability of filing criminal charges against a corporation under the particularized facts and circumstances of the case under consideration.

Practical Considerations

Beyond the classical justifications for imposing criminal punishment, there are unique practical reasons why courts and legislatures have fashioned rules for holding corporations criminally liable for crimes committed on their behalf. First and foremost is that in large, complex organizations, individual responsibility is – of necessity – diffused. It is a fact of modern corporate life that corporations must rely on an extensive system of delegation to carry out the organization’s ordinary, day-to-day business activities. Subordinate employees often have considerable autonomy in the performance of their responsibilities and may actually have (and exercise) greater power to act in matters relating to the corporation’s everyday operations than high-level managers. Yet despite the considerable influence that lower-level operatives may wield over the conduct of the corporation’s day-to-day business, they often remain shielded from personal liability by a complex web of corporate hierarchies that make it difficult if not impossible to identify which of them violated the law.

Although the corporate fraud scandals of the early 2000s stand out as a notable exception to the rule (scores of corporate executives and midlevel managers went to prison in the flurry of post-Enron prosecutions), high-level managers ordinarily will not be directly involved in the wrongdoing. Thus, for example, although the board of directors or high-level managers of a shipping company may be indifferent to environmental compliance issues, it is unlikely that there will be evidence that they expressly authorized subordinate employees to discharge untreated waste into the ocean. At the same time, even though there may be a corporate policy against illegal discharges, any one of many subordinate crew members or engineers might decide on their own to cut corners, defy corporate policy, and engage in “midnight dumping” on the sly. Although it may be evident that the dumping has occurred, the task of identifying the crew member who opened the valve that permitted the release of the waste can be daunting. And it may be equally difficult to establish that managers in the upper echelons of the company’s hierarchy (or, for that matter, the ship’s captain) either knew of or tacitly approved the illegal shortcut by turning a blind eye to parts of the ship’s operations where ocean dumping and other environmental violations are most likely to occur.

Corporate Prosecution And Punishment

No discussion of corporate criminal liability would be complete without at least brief consideration of how the underlying theories supporting recognition of corporate liability translate into practice.

Prosecution

Critics of corporate criminal prosecutions lament that current doctrine is overly broad and unfair. Yet despite the expansive liability principles they lament, the respondeat superior doctrine has not led to unchecked prosecutorial zeal for charging corporations with criminal misconduct. On the contrary, corporate prosecutions are relatively rare. Although there are few comprehensive sources that systematically track the incidence of corporate prosecutions and convictions, some specialized studies help to fill the void. One such study, which was conducted by the Department of Justice Bureau of Justice Statistics (DOJ Study), focused on federal enforcement of environmental laws between 1994 and 1997. The study found that only 17 % of those charged with environmental or wildlife offenses were organizations.

The results of the DOJ study also included the following findings relating to investigations of environmental protection violations and wildlife offenses. In 1997, federal prosecutors concluded 871 investigations of environmental or wildlife violations and declined to prosecute in more than 60 % of those cases, but the declination rate in corporate investigations was much higher than it was for individuals who were investigated for comparable crimes. In contrast with decisions to decline prosecution in 55 % of cases in which individuals were investigated for environmental crimes and 38 % of cases in which they were investigated for wildlife offenses, prosecutors declined to charge corporations investigated for violations in 70 % of environmental protection investigations and in 67 % of investigations for wildlife offenses (U.S. Dept. of Justice Office of Justice Programs, Bureau of Justice Statistics Special Report: Federal Enforcement of Environmental Laws, 1997, at 4 (1997)).

A similar disparity between individual and corporate prosecutions was reported in an empirical study of hazardous waste prosecutions under the federal Resource and Conservation Recovery Act that was conducted by this author (Brickey Study). Relying primarily on data compiled by the Environmental Protection Agency’s National Enforcement Investigations Center for the decade ending in 1992, the Brickey Study found that of roughly 140 hazardous waste prosecutions, about 30 % of the defendants were corporations (Brickey 2001).

In addition to traditional criminal prosecutions, Deferred Prosecution Agreements (DPAs) – which have proliferated in recent years – provide an alternative procedure for addressing corporate wrongdoing. Deferred Prosecution Agreements are conditional contracts between prosecutors and a corporation that is facing potential criminal prosecution.

These agreements grant corporations provisional pretrial diversion from prosecution in exchange for cooperation with the Justice Department’s investigation. In many instances the agreement is conditioned on the corporation’s payment of a substantial fine, the appointment of a corporate monitor to oversee problematic aspects of the corporation’s operations, or structural or personnel changes within the organization. DPAs do not ordinarily result in an immediate agreement to refrain from criminally prosecuting the corporation. Instead, they effectively place the corporation under government supervision for a specified period of time and defer the decision whether to actively pursue criminal charges pending a determination whether the corporation will successfully fulfill the terms and conditions of the agreement.

There has been a dramatic increase in the use of DPAs as a form of corporate oversight in the wake of the recent corporate accounting fraud scandals. Between 1974 and 2003, there were only 18 documented DPAs and similar pre-prosecution agreements (Nanda 2010). In contrast, between 2003 and 2008, the Justice Department entered into at least 103 such agreements with corporate defendants.

Punishment

Although deferred prosecution agreements almost invariably involve exacting some concession from the corporation such as payment of a fine or restitution, these exactions are a product of ad hoc decisions by prosecutors about the most effective and efficient means to resolve a case through a negotiated agreement rather than through formal punishment imposed by a court upon conviction.

Since corporations cannot be imprisoned, corporate punishment usually takes the form of a criminal fine. As would be expected, the size of the fine depends on the severity of the crime. Although the maximum (and occasionally minimum) fine is customarily set by statute (e.g., the maximum corporate fine for price fixing is $100 million, but no minimum fine is specified), courts have considerable discretion in determining the size of the fine to be imposed within the statutorily authorized range.

While it is not uncommon for individuals who are convicted of crimes to be sentenced to pay a fine, imposition of a criminal fine is more prevalent in corporate prosecutions. In 2010, for example, 77 % of corporate defendants were fined, while only about 10 % of individuals convicted in federal court were sentenced to pay a fine (United States Sentencing Commission Annual Reports 2010, Ch. 5 at 38–39). Not surprisingly, corporate fines tend to be more substantial than fines imposed on individuals in the run-of-the-mill criminal case. In 2010, the average criminal fine imposed against corporations convicted of violating federal law was about $16 million. The highest fine, which was levied against a pharmaceutical company for federal food and drug law violations, was nearly $1.2 billion. These figures reflect a recent upward trajectory in federal criminal fines. Yet while fines remain a mainstay of corporate criminal punishment, court-ordered restitution to the victims of a company’s wrongdoing also plays an important role in corporate sentencing. In 2010, restitution was ordered in nearly 25 % of sentences imposed on corporations, and the average amount that corporations were required to pay was nearly $18 million (Id. at 38).

While monetary sanctions in corporate prosecutions are common, corporations convicted of crimes are also routinely subject to nonmonetary sanctions like probation or mandatory ethics and compliance training programs. In 2010, slightly more than 70 % of corporations sentenced under the Federal Sentencing Guidelines received some form of probation (Id. at 39). This number generally tracks with previous years, during which a majority of corporate sentences included a term of probation. See generally 2003–2010 United States Sentencing Commission Annual Reports. The terms of corporate probation vary both in scope and length, but all have the universal goal of ensuring future compliance and, if need be, changing a lax “corporate culture” that allowed the criminal activity to occur.

But there are less conventional punishments in the Sentencing Guidelines’ panoply of corporate sanctions. Perhaps most notable among them is the so-called corporate death penalty, a sanction that is strictly reserved for what the Guidelines term “criminal purpose organizations,” that is, organizations that operate primarily for a criminal purpose or primarily through criminal means. Thus, for example, a hazardous waste company that has no legitimate way to dispose of hazardous waste and systematically dumps drums of dangerous chemicals in rural woods and streams would likely be deemed a criminal purpose organization. And if the company is found to be a criminal purpose organization, the Guidelines require the court to impose a fine that is high enough to divest the company of all of its assets, thus causing it to cease to exist.

Conclusion

And so the discussion has come full circle. It began with what some would consider a highly dubious premise that corporations possess sufficient attributes of personhood that – like their human counterparts – they are capable of committing crimes. The narrative ends on what is perhaps an even more surprising note – that the theory of corporate personhood has become so deeply entrenched that, in the eyes of the law, this “invisible, intangible essence of air” can even be sentenced to death.

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