Civil Litigation Implications of Corporate Employees' Criminal Acts

Under Rule 803(22), a judgment of conviction is admissible only to prove “any fact essential to sustain” that judgment. The determination of such essential facts is a question of law. Emich Motors Corp. v. General Motors Corp., 340 U.S. 558 571 (1951). When presented with evidence of a prior judgment, “what was decided by the criminal judgment must be determined by the trial judge … upon an examination of the record, including the pleadings, the evidence submitted, the instructions under which the jury arrived at its verdict, and any opinions of the court.” Id. at 569.

The process of determining a prior judgment's essential facts is “difficult,” Id., especially in the case of a guilty plea, but this problem may be alleviated when there has been a detailed guilty plea allocution. See Bank Brussels Lambert v. Credit Lyonnais, 2001 U.S. Dist. LEXIS 928, 10 (S.D.N.Y. 2001). However, where pleas, or generalized jury verdicts, do not indicate the specific facts upon which the final judgment is based, courts may be unable to identify any essential facts. See Columbia Plaza Corp. v. Sec. Nat'l. Bank, 676 F.2d 780, 789-790 (D.C. Cir. 1982) (general verdicts had been rendered: “it was not possible to determine for what reasons or upon what overt acts the jury in the criminal cases convicted the defendants”). Thus, a criminal tax conviction may not be evidence of the amount of tax in a later civil suit, even though the indictment recited a specific amount. See United States v. First Nat'l State Bank, 469 F. Supp. 612, 619 (D.C. N.J. 1979) aff'd in part, 616 F.2d 668 (3rd Cir. 1980). And a guilty plea to embezzlement may not be admissible to prove that the defendant had conspired in related transactions. Index Fund, Inc. v. Hagopian, 677 F. Supp. 710, 720 (S.D.N.Y. 1987).

Even if an essential fact underlying the prior conviction can be identified as relevant, the judge may use discretionary power under FRE 403 to exclude the conviction. Concerns of unfair prejudice are particularly acute in this context, given “the potential prejudice when a previous jury verdict is offered; the acting jury may give undue value to the previous determination.” Harrell v. DCS Equip. Leasing Corp., 951 F.2d 1453, 1465 (5th Cir. 1992). For example, in FDIC v. Refco Group Ltd., 184 F.R.D. 623, 628 (Col. D.C. 1999), a fraud action against an employer, the guilty plea of a former employee regarding an act of fraud against a different customer was excluded as unduly prejudicial. Evidence of a criminal judgment may also be excluded as tending to mislead or confuse a jury. In Rozier v. Ford Motor Co., 573 F.2d 1332, 1347 (5th Cir. 1978), a guilty plea stipulating that a non-party driver “caused” plaintiff's death was not admitted on the issue of whether the car's defective gas tank had caused plaintiff's injury.

Once the essential facts of a prior criminal judgment have been determined, and the judge's discretion is not used to exclude it under Rule 403, the judgment will only be admissible “for what it is worth” as evidence of its essential facts; the judgment is not conclusive, and a party may present other evidence disputing all of the facts the prior judgment is offered to prove. Lloyd v. Amer. Export Lines, 580 F.2d 1179, 1190 (3d Cir. 1978).

Adverse Inferences from Non-Party Invocations
of the Privilege Against Self-Incrimination

In Brink's Inc. v. City of New York, 717 F.2d 700 (2d Cir. 1983), the Second Circuit allowed an adverse inference to be drawn against a corporation based on employees' invocations of the privilege against self-incrimination. In Libutti v. United States, 107 F.3d 110, (2d Cir. 1997), an adverse inference was allowed against a defendant daughter based on her father's invocation of the privilege. The Libutti court outlined four factors to consider in determining when an adverse inference should be drawn against a civil litigant because of a non-party's invocation: the relationship between the non-party and the litigant against whom the adverse inference will be drawn; the degree of control of the party over the non-party witness; the compatibility of interests of the party and non-party witness; and the role of the non-party witness in the trial. These factors have been applied by a number of courts. See, eg, Banks v. Yokemick, 144 F. Supp. 2d 272 (S.D.N.Y. 2001) (no inference drawn as between police officer and partner); John Paul Mitchell Syst. v. Quality King Dist., 106 F. Supp. 2d 462 (S.D.N.Y. 2000) (inference drawn as between business partners); Payroll Express Corp. v. Aetna Cas. & Sur. Co., 216 B.R. 344 (S.D.N.Y. 1997) (no inference drawn as between former employees of bankrupt defendant and plaintiff insurance company).

The “overarching” consideration to which the Libutti factors are directed is whether the adverse inference “is trustworthy under all of the circumstances and will advance the search for truth.” 107 F.3d at 124. The factors consider two concepts regarding trustworthiness: the further apart the party and non-party stand, in terms of relationship, interest, and control, the more likely it is that the non-party would invoke the privilege to harm the party; and that the non-party would invoke the privilege for a reason unrelated to the current claims against the party. See Kontos v. Kontos, 968 F. Supp. 400, 408 (S.D. Ind. 1997) (refusing to draw adverse inference against defendant from defendant's sister's invocation because “the sister may have reason to invoke her privilege against self-incrimination while Defendant has none.”)

While an employer/employee relationship can be sufficiently close to ground an adverse inference from a non-party invoker against a party, such a relationship is not always sufficient. See, eg, Weschler v. Hunt Health Syst., 2003 WL 21998980 3 (S.D.N.Y. 2003) (no adverse inference drawn where relationship was between an employee and his former employer's administrative trustee). Relationships among conspirators can also be sufficiently close to be the basis for an adverse inference from a non-party's invocation, but independent evidence of the conspiracy is required. State Farm Mut. v. Abrams, 2000 WL 57446 5 (N.D. Ill. 2000); United States v. Dist. Council of New York, 832 F. Supp. 644, 651 (S.D.N.Y. 1993).

The specific questions asked of the non-party invoker are important in evaluating whether the interests are sufficiently aligned to justify the inference. A general invocation of the privilege in response to broad questions may not assist the trier of fact in determining whether party and non-party interests coincide. See Weschler, supra at 3 (“defense counsel's broad-based questions and Rosoff's sweeping invocation of his fifth amendment privilege provide no instruction as to the potential relevance of Rosoff's testimony.”) The interests of a party and non-party may be aligned with respect to some, but not all, questions, and “the probative value of the invokings in establishing facts relevant to civil liability will vary from case to case and from question to question, and the parties undoubtedly will seek to establish why the privilege was invoked and what a complete response would have admitted.” Robert Heidt, The Conjurer's Circle, 91 Yale L.J. 1062, 1123 (1982).

The fourth Libutti factor, the role of the non-party, seems unrelated to the trustworthiness concerns noted above. The Libutti court explained that, “[w]hether the non-party witness was a key figure in the litigation and played a controlling role in respect to any of its underlying aspects also logically merits consideration by the trial court.” This factor reflects a generalized fairness concern, since broad invocations by key witnesses may leave a party without any evidence, and thwart the principles underlying broad discovery rules. See Heidt, Conjurer's Circle, at 1124-1125.

The issue of adverse inferences from non-party invocations raises significant choice of laws in federal diversity cases. FRE 501 provides that in civil proceedings, where state law supplies the rule of decision, “the privilege of a witness [...] shall be determined in accordance with State law.” Two federal Courts of Appeals have held that in diversity cases, the issue of inferences from privileges should be determined by state law. Home Indem. Co. v. Lane Powell Moss and Miller, 43 F.3d 1322, 1328 (9th Cir. 1995) (Rule 501 required the application of state law barring inferences from certain privilege claims); Jewell v. Holzer Hosp. Foundation, Inc., 899 F.2d 1507, 1513-1514 (6th Cir. 1990) (federal court must look to state law to determine whether a court must allow a jury to draw a negative inference from a party's invocation of a privilege.”); but see Desai v. Hersh, 954 F.2d 1408, 1411 (7th Cir. 1992) (“collateral effects” of invoking privilege are “not immune from the application of the [FRE]“). The Second Circuit has never explicitly addressed the issue; Brink's was a diversity case, but the court did not look to state law to decide whether any inference should be drawn from non-parties' invocations. Under New York law, an adverse inference from a non-party's invocation of the privilege against self-incrimination cannot be used against a party in a civil case. State of New York v. Markowitz, 273 A.D.2d 637, 646 (3d Dept. 2000). Therefore, the question of whether state or federal law is applicable may be crucial.

Conclusion

Evidence of criminal wrongdoing by a corporation's current and former employees can be potentially powerful evidence against a corporation in civil litigation. However, while such employee convictions, pleas and invocations of the privilege against self-incrimination may be competent evidence against a corporation in some cases, substantial arguments may be available to prevent the introduction of such evidence. In the case of convictions and pleas, it will often be difficult to determine the essential facts of the conviction, and a careful evaluation of the underlying criminal proceedings may yield material differences between those essential facts and the specific facts at issue in a civil action. The proponent of the evidence may have an even more difficult task in the case of a guilty plea. The claims in the criminal proceeding and the later civil action should be characterized as narrowly and specifically as possible, so that the relevance of the criminal proceedings to the civil action may be minimized. Finally, even if there is sufficient overlap to establish some relevance, a Rule 403 argument that the probative value is outweighed by the potential prejudice associated with evidence of criminal conduct may be made.

With respect to privilege invocations, a threshold question in federal diversity litigation is that of governing law. Under FRE 501, an argument can be made that state law, which may preclude the evidence, should govern rather than more permissive federal law. If federal law governs then the application of the Libutti factors described above provides ample grounds for argument, particularly where the invocation of privilege is made by a relatively low level former employee who has little interest in the potential impact on their former employer.

When corporate employees engage in criminal wrongdoing, the result is often civil litigation against their employer. The criminal conviction of such employees, whether by trial or plea, or their invocation of the privilege against self-incrimination, can have serious adverse consequences in related civil litigations against their employer, even if the employee (or former employee) is not a party. This article discusses the use of such evidence against corporations.

Admissibility of Prior Convictions

Federal Rule of Evidence (FRE) Rule 803(22) provides an exception to the hearsay rule for convictions and guilty pleas, and any final judgment finding a person guilty of a crime punishable by imprisonment for more than one year can be used as evidence to prove any fact essential to sustaining that judgment. While Rule 803(22) does not apply to convictions or guilty pleas of third persons when offered as evidence in a criminal prosecution, there is no similar qualification for civil trials. Thus, a non-party's conviction may be used to prove any facts essential to that conviction in a civil case. American Intl. v. Towers Fin. Corp., 1997 U.S. Dist. LEXIS 22610 (S.D.N.Y.).

Under Rule 803(22), a judgment of conviction is admissible only to prove “any fact essential to sustain” that judgment. The determination of such essential facts is a question of law. Emich Motors Corp. v. General Motors Corp. , 340 U.S. 558 571 (1951). When presented with evidence of a prior judgment, “what was decided by the criminal judgment must be determined by the trial judge … upon an examination of the record, including the pleadings, the evidence submitted, the instructions under which the jury arrived at its verdict, and any opinions of the court.” Id. at 569.

The process of determining a prior judgment's essential facts is “difficult,” Id., especially in the case of a guilty plea, but this problem may be alleviated when there has been a detailed guilty plea allocution. See Bank Brussels Lambert v. Credit Lyonnais, 2001 U.S. Dist. LEXIS 928, 10 (S.D.N.Y. 2001). However, where pleas, or generalized jury verdicts, do not indicate the specific facts upon which the final judgment is based, courts may be unable to identify any essential facts. See Columbia Plaza Corp. v. Sec. Nat'l. Bank , 676 F.2d 780, 789-790 (D.C. Cir. 1982) (general verdicts had been rendered: “it was not possible to determine for what reasons or upon what overt acts the jury in the criminal cases convicted the defendants”). Thus, a criminal tax conviction may not be evidence of the amount of tax in a later civil suit, even though the indictment recited a specific amount. See United States v. First Nat'l State Bank , 469 F. Supp. 612, 619 (D.C. N.J. 1979) aff'd in part , 616 F.2d 668 (3rd Cir. 1980). And a guilty plea to embezzlement may not be admissible to prove that the defendant had conspired in related transactions. Index Fund, Inc. v. Hagopian , 677 F. Supp. 710, 720 (S.D.N.Y. 1987).

Even if an essential fact underlying the prior conviction can be identified as relevant, the judge may use discretionary power under FRE 403 to exclude the conviction. Concerns of unfair prejudice are particularly acute in this context, given “the potential prejudice when a previous jury verdict is offered; the acting jury may give undue value to the previous determination.” Harrell v. DCS Equip. Leasing Corp., 951 F.2d 1453, 1465 (5th Cir. 1992). For example, in FDIC v. Refco Group Ltd. , 184 F.R.D. 623, 628 (Col. D.C. 1999), a fraud action against an employer, the guilty plea of a former employee regarding an act of fraud against a different customer was excluded as unduly prejudicial. Evidence of a criminal judgment may also be excluded as tending to mislead or confuse a jury. In Rozier v. Ford Motor Co. , 573 F.2d 1332, 1347 (5th Cir. 1978), a guilty plea stipulating that a non-party driver “caused” plaintiff's death was not admitted on the issue of whether the car's defective gas tank had caused plaintiff's injury.

Once the essential facts of a prior criminal judgment have been determined, and the judge's discretion is not used to exclude it under Rule 403, the judgment will only be admissible “for what it is worth” as evidence of its essential facts; the judgment is not conclusive, and a party may present other evidence disputing all of the facts the prior judgment is offered to prove. Lloyd v. Amer. Export Lines , 580 F.2d 1179, 1190 (3d Cir. 1978).

Adverse Inferences from Non-Party Invocations
of the Privilege Against Self-Incrimination

In Brink's Inc. v. City of New York , 717 F.2d 700 (2d Cir. 1983), the Second Circuit allowed an adverse inference to be drawn against a corporation based on employees' invocations of the privilege against self-incrimination. In Libutti v. United States , 107 F.3d 110, (2d Cir. 1997), an adverse inference was allowed against a defendant daughter based on her father's invocation of the privilege. The Libutti court outlined four factors to consider in determining when an adverse inference should be drawn against a civil litigant because of a non-party's invocation: the relationship between the non-party and the litigant against whom the adverse inference will be drawn; the degree of control of the party over the non-party witness; the compatibility of interests of the party and non-party witness; and the role of the non-party witness in the trial. These factors have been applied by a number of courts. See, eg, Banks v. Yokemick, 144 F. Supp. 2d 272 (S.D.N.Y. 2001) (no inference drawn as between police officer and partner); John Paul Mitchell Syst. v. Quality King Dist. , 106 F. Supp. 2d 462 (S.D.N.Y. 2000) (inference drawn as between business partners); Payroll Express Corp. v. Aetna Cas. & Sur. Co. , 216 B.R. 344 (S.D.N.Y. 1997) (no inference drawn as between former employees of bankrupt defendant and plaintiff insurance company).

The “overarching” consideration to which the Libutti factors are directed is whether the adverse inference “is trustworthy under all of the circumstances and will advance the search for truth.” 107 F.3d at 124. The factors consider two concepts regarding trustworthiness: the further apart the party and non-party stand, in terms of relationship, interest, and control, the more likely it is that the non-party would invoke the privilege to harm the party; and that the non-party would invoke the privilege for a reason unrelated to the current claims against the party. See Kontos v. Kontos , 968 F. Supp. 400, 408 (S.D. Ind. 1997) (refusing to draw adverse inference against defendant from defendant's sister's invocation because “the sister may have reason to invoke her privilege against self-incrimination while Defendant has none.”)

While an employer/employee relationship can be sufficiently close to ground an adverse inference from a non-party invoker against a party, such a relationship is not always sufficient. See, eg, Weschler v. Hunt Health Syst., 2003 WL 21998980 3 (S.D.N.Y. 2003) (no adverse inference drawn where relationship was between an employee and his former employer's administrative trustee). Relationships among conspirators can also be sufficiently close to be the basis for an adverse inference from a non-party's invocation, but independent evidence of the conspiracy is required. State Farm Mut. v. Abrams, 2000 WL 57446 5 (N.D. Ill. 2000); United States v. Dist. Council of New York , 832 F. Supp. 644, 651 (S.D.N.Y. 1993).

The specific questions asked of the non-party invoker are important in evaluating whether the interests are sufficiently aligned to justify the inference. A general invocation of the privilege in response to broad questions may not assist the trier of fact in determining whether party and non-party interests coincide. See Weschler, supra at 3 (“defense counsel's broad-based questions and Rosoff's sweeping invocation of his fifth amendment privilege provide no instruction as to the potential relevance of Rosoff's testimony.”) The interests of a party and non-party may be aligned with respect to some, but not all, questions, and “the probative value of the invokings in establishing facts relevant to civil liability will vary from case to case and from question to question, and the parties undoubtedly will seek to establish why the privilege was invoked and what a complete response would have admitted.” Robert Heidt, The Conjurer's Circle, 91 Yale L.J. 1062, 1123 (1982).

The fourth Libutti factor, the role of the non-party, seems unrelated to the trustworthiness concerns noted above. The Libutti court explained that, “[w]hether the non-party witness was a key figure in the litigation and played a controlling role in respect to any of its underlying aspects also logically merits consideration by the trial court.” This factor reflects a generalized fairness concern, since broad invocations by key witnesses may leave a party without any evidence, and thwart the principles underlying broad discovery rules. See Heidt, Conjurer's Circle, at 1124-1125.

The issue of adverse inferences from non-party invocations raises significant choice of laws in federal diversity cases. FRE 501 provides that in civil proceedings, where state law supplies the rule of decision, “the privilege of a witness [...] shall be determined in accordance with State law.” Two federal Courts of Appeals have held that in diversity cases, the issue of inferences from privileges should be determined by state law. Home Indem. Co. v. Lane Powell Moss and Miller , 43 F.3d 1322, 1328 (9th Cir. 1995) (Rule 501 required the application of state law barring inferences from certain privilege claims); Jewell v. Holzer Hosp. Foundation, Inc. , 899 F.2d 1507, 1513-1514 (6th Cir. 1990) (federal court must look to state law to determine whether a court must allow a jury to draw a negative inference from a party's invocation of a privilege.”); but see Desai v. Hersh , 954 F.2d 1408, 1411 (7th Cir. 1992) (“collateral effects” of invoking privilege are “not immune from the application of the [FRE]“). The Second Circuit has never explicitly addressed the issue; Brink's was a diversity case, but the court did not look to state law to decide whether any inference should be drawn from non-parties' invocations. Under New York law, an adverse inference from a non-party's invocation of the privilege against self-incrimination cannot be used against a party in a civil case. State of New York v. Markowitz , 273 A.D.2d 637, 646 (3d Dept. 2000). Therefore, the question of whether state or federal law is applicable may be crucial.

Conclusion

Evidence of criminal wrongdoing by a corporation's current and former employees can be potentially powerful evidence against a corporation in civil litigation. However, while such employee convictions, pleas and invocations of the privilege against self-incrimination may be competent evidence against a corporation in some cases, substantial arguments may be available to prevent the introduction of such evidence. In the case of convictions and pleas, it will often be difficult to determine the essential facts of the conviction, and a careful evaluation of the underlying criminal proceedings may yield material differences between those essential facts and the specific facts at issue in a civil action. The proponent of the evidence may have an even more difficult task in the case of a guilty plea. The claims in the criminal proceeding and the later civil action should be characterized as narrowly and specifically as possible, so that the relevance of the criminal proceedings to the civil action may be minimized. Finally, even if there is sufficient overlap to establish some relevance, a Rule 403 argument that the probative value is outweighed by the potential prejudice associated with evidence of criminal conduct may be made.

With respect to privilege invocations, a threshold question in federal diversity litigation is that of governing law. Under FRE 501, an argument can be made that state law, which may preclude the evidence, should govern rather than more permissive federal law. If federal law governs then the application of the Libutti factors described above provides ample grounds for argument, particularly where the invocation of privilege is made by a relatively low level former employee who has little interest in the potential impact on their former employer.