Corporate Criminal Liability

The trial court charged the jury that a corporate defendant could be held criminally responsible for the conduct of a single low-level employee even if that employee acted in direct contravention of corporate policy and notwithstanding a robust compliance program. The jury found it guilty. Ionia appealed its conviction, arguing inter alia that the district court overstated the reach of the theory of criminal respondeat superior when charging the jury that any act by any employee ' even a low-level employee ' could result in criminal liability for the company.

The Legacy of New York Central

Obviously, a company can act only through its employees. The question, therefore, is whether the company should be criminally responsible when its employees commit criminal acts without corporate direction or authorization.

In 1909, the U.S. Supreme Court held in New York Central & Hudson River Railroad v. United States, 212 U.S. 481 (1909), that Congress has the power to enact laws holding a corporation criminally liable for the criminal acts of its employees. At issue in New York Central was the Elkins Act, which regulated price rebates by common carriers, and which specifically provided that in “construing and enforcing the provisions of this section, the act, omission, or failure of any officer, agent, or other person acting for or employed by any common carrier, acting within the scope of his employment shall, in every case, be also deemed to be the act, omission, or failure of such carrier, as well as that of the person.” Pub. L. No. 57-103, ch. 708, 32 Stat. 847 (1903). In attacking the statute, the railroad argued that “these provisions of the law are unconstitutional because Congress has no authority to impute to a corporation the commission of criminal offenses, or to subject a corporation to a criminal prosecution by reason of the things charged.”

The Supreme Court rejected that claim, holding that Congress indeed had the authority to punish a company for the criminal behavior of its employees. The Supreme Court was silent, however, on whether statutes without such express language could lead to a company's conviction under those statutes and, if so, under what circumstances an employee's conduct would create respondeat superior liability for his employer. In fact, the Court noted, “It is true that there are some crimes, which in their nature cannot be committed by corporations. But there is a large class of offenses, of which rebating under the Federal statutes is one, wherein the crime consists in purposely doing the things prohibited by statute ' It is a part of the public history of the times that statutes against rebates could not be effectually enforced so long as individuals only were subject to punishment for violation of the law, when the giving of rebates or concessions enured to the benefit of the corporations of which the individuals were but the instruments.” Such considerations were “no doubt influential in bringing about the enactment of the Elkins Law, making corporations criminally liable.”

On the basis of the Supreme Court's narrow holding in New York Central, lower federal courts have ruled that corporations can be held criminally liable for the criminal acts of their employees. See, e.g., United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir. 1989). Courts have done so even though the statute at issue is silent whether a company may be held liable for the actions of its employees, as most are, often noting that a “person” is broadly defined in the U.S. Code to “include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals,” 1 U.S.C. ' 1.

Company Conduct and Risk of Criminal Liability

Today, most companies, especially those in highly regulated industries, have implemented extensive policies and procedures to ensure compliance with the law, including procedures for disciplining employees who contravene those policies. The courts, however, instruct juries to disregard those policies and procedures when it comes to holding a company criminally liable for the acts of a rogue employee. Because no company can control every action of every employee, companies are literally powerless to avoid criminal sanctions when any of their employees violate the law, regardless of how conscientious they are to prevent such misconduct.

To be sure, federal authorities do not prosecute every company whose employees commit criminal acts. In fact, the U.S. Attorneys' Manual instructs federal prosecutors to consider a company's policies and procedures in deciding whether to bring criminal charges. However, since the law allows such prosecutions without affording the company any defense that the employee's misconduct violated its policies, businesses are literally at the whim of federal prosecutors. Companies have virtually no bargaining power because the mere filing of criminal charges can sound their death knell as with Arthur Andersen, which was driven out of business even though its conviction was reversed on appeal. When confronted with a federal investigation, a company has no choice but to agree to a deferred or non-prosecution agreement with heavy fines, collateral civil consequences, and even the imposition of monitorship.

At oral argument, both the amici and Ionia pressed the panel to revisit the Second Circuit's precedent stemming from New York Central. The court refused. In its opinion, the court reiterated its standards for respondeat superior liability ' that the government must prove merely that the wrongdoers acted within the scope of their employment and intended to benefit their employer ' and held that “there was ample evidence for a jury to have reasonably found that the Kriton's crew” did so. The court also refused to adopt the amici's “suggestion that the prosecution, in order to establish vicarious liability, should have to prove as a separate element in its case-in-chief that the corporation lacked effective policies and procedures to deter and detect criminal actions by its employees.” Instead, the panel upheld the district court's jury instruction that “a corporate compliance program may be relevant to whether an employee was acting in the scope of his employment, but it is not a separate element.”

Conclusion

While Ionia Management was not successful in the Second Circuit, this case should prompt continuing reconsideration of the appropriate standards for corporate criminal liability. At the very least, indicted companies that go to trial should seek jury charges limiting their liability for the crimes of low-level employees, especially when the companies have a robust compliance program. As more circuits are forced to revisit this issue, it may eventually win the attention of the Supreme Court or Congress.

Stanley A. Twardy, Jr. ([email protected]), a former U.S. Attorney for Connecticut and a member of this newsletter's Board of Editors, is a partner and Daniel E. Wenner ([email protected]), a former federal prosecutor in the Eastern District of New York, is an associate at Day Pitney LLP. They are members of the firm's White Collar Defense and Internal Investigations Practice Group.

In January, the Second Circuit affirmed the conviction of Ionia Management S.A. (Ionia) for criminal acts of its non-management employees. United States v. Ionia Mgmt. S.A., Nos. 07-5801-cr & 08-1387-cr, 2009 U.S. APP. LEXIS 902, 2009 WL 116966 (2d Cir. Jan. 20, 2009) (per curiam). While the affirmance of a conviction is commonplace, what set this appeal apart is that the Association of Corporate Counsel, the Chamber of Commerce of the United States of America, and other prestigious amici supported Ionia's argument that the Second Circuit should revisit its long-standing rule that a company can be held criminally liable for acts of even low-level employees. Although the court refused to alter the standard for vicarious criminal liability, the Ionia appeal raises an important policy issue that warrants consideration by Congress and the courts.

Ionia operates and manages shipping vessels, including the oil-tanker M/T Kriton, which transported oil to the United States. Ships such as the Kriton produce a quantity of oil-contaminated bilge waste, which they are required to store for proper disposal or process with pollution prevention and control devices. To ensure that ships entering U.S. ports comply with international protocols regulating the shipping industry, the Act to Prevent Pollution from Ships (APPS), 33 U.S.C. ” 1901, et seq., makes it a crime to knowingly violate the international protocols and requires that every ship maintain an Oil Record Book recording treatment and disposal of the oily mixtures generated on board.

The indictment charged Ionia and an engine room crew member with conspiring to maintain an inaccurate Oil Record Book, falsify the Oil Record Book to mislead the U.S. Coast Guard, and obstruct justice. It alleged that Ionia's agents and employees illegally dumped oil-contaminated waste and then doctored its Oil Record Book to conceal the dumping. The company was charged with the substantive offenses supported by allegations that it had been “acting by and through its agents and employees, acting in the scope of their employment and for the benefit of their employer.”

The trial court charged the jury that a corporate defendant could be held criminally responsible for the conduct of a single low-level employee even if that employee acted in direct contravention of corporate policy and notwithstanding a robust compliance program. The jury found it guilty. Ionia appealed its conviction, arguing inter alia that the district court overstated the reach of the theory of criminal respondeat superior when charging the jury that any act by any employee ' even a low-level employee ' could result in criminal liability for the company.

The Legacy of New York Central

Obviously, a company can act only through its employees. The question, therefore, is whether the company should be criminally responsible when its employees commit criminal acts without corporate direction or authorization.

In 1909, the U.S. Supreme Court held in New York Central & Hudson River Railroad v. United States , 212 U.S. 481 (1909), that Congress has the power to enact laws holding a corporation criminally liable for the criminal acts of its employees. At issue in New York Central was the Elkins Act, which regulated price rebates by common carriers, and which specifically provided that in “construing and enforcing the provisions of this section, the act, omission, or failure of any officer, agent, or other person acting for or employed by any common carrier, acting within the scope of his employment shall, in every case, be also deemed to be the act, omission, or failure of such carrier, as well as that of the person.” Pub. L. No. 57-103, ch. 708, 32 Stat. 847 (1903). In attacking the statute, the railroad argued that “these provisions of the law are unconstitutional because Congress has no authority to impute to a corporation the commission of criminal offenses, or to subject a corporation to a criminal prosecution by reason of the things charged.”

The Supreme Court rejected that claim, holding that Congress indeed had the authority to punish a company for the criminal behavior of its employees. The Supreme Court was silent, however, on whether statutes without such express language could lead to a company's conviction under those statutes and, if so, under what circumstances an employee's conduct would create respondeat superior liability for his employer. In fact, the Court noted, “It is true that there are some crimes, which in their nature cannot be committed by corporations. But there is a large class of offenses, of which rebating under the Federal statutes is one, wherein the crime consists in purposely doing the things prohibited by statute ' It is a part of the public history of the times that statutes against rebates could not be effectually enforced so long as individuals only were subject to punishment for violation of the law, when the giving of rebates or concessions enured to the benefit of the corporations of which the individuals were but the instruments.” Such considerations were “no doubt influential in bringing about the enactment of the Elkins Law, making corporations criminally liable.”

On the basis of the Supreme Court's narrow holding in New York Central, lower federal courts have ruled that corporations can be held criminally liable for the criminal acts of their employees. See, e.g., United States v. Twentieth Century Fox Film Corp. , 882 F.2d 656, 660 (2d Cir. 1989). Courts have done so even though the statute at issue is silent whether a company may be held liable for the actions of its employees, as most are, often noting that a “person” is broadly defined in the U.S. Code to “include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals,” 1 U.S.C. ' 1.

Company Conduct and Risk of Criminal Liability

Today, most companies, especially those in highly regulated industries, have implemented extensive policies and procedures to ensure compliance with the law, including procedures for disciplining employees who contravene those policies. The courts, however, instruct juries to disregard those policies and procedures when it comes to holding a company criminally liable for the acts of a rogue employee. Because no company can control every action of every employee, companies are literally powerless to avoid criminal sanctions when any of their employees violate the law, regardless of how conscientious they are to prevent such misconduct.

To be sure, federal authorities do not prosecute every company whose employees commit criminal acts. In fact, the U.S. Attorneys' Manual instructs federal prosecutors to consider a company's policies and procedures in deciding whether to bring criminal charges. However, since the law allows such prosecutions without affording the company any defense that the employee's misconduct violated its policies, businesses are literally at the whim of federal prosecutors. Companies have virtually no bargaining power because the mere filing of criminal charges can sound their death knell as with Arthur Andersen, which was driven out of business even though its conviction was reversed on appeal. When confronted with a federal investigation, a company has no choice but to agree to a deferred or non-prosecution agreement with heavy fines, collateral civil consequences, and even the imposition of monitorship.

At oral argument, both the amici and Ionia pressed the panel to revisit the Second Circuit's precedent stemming from New York Central. The court refused. In its opinion, the court reiterated its standards for respondeat superior liability ' that the government must prove merely that the wrongdoers acted within the scope of their employment and intended to benefit their employer ' and held that “there was ample evidence for a jury to have reasonably found that the Kriton's crew” did so. The court also refused to adopt the amici's “suggestion that the prosecution, in order to establish vicarious liability, should have to prove as a separate element in its case-in-chief that the corporation lacked effective policies and procedures to deter and detect criminal actions by its employees.” Instead, the panel upheld the district court's jury instruction that “a corporate compliance program may be relevant to whether an employee was acting in the scope of his employment, but it is not a separate element.”

Conclusion

While Ionia Management was not successful in the Second Circuit, this case should prompt continuing reconsideration of the appropriate standards for corporate criminal liability. At the very least, indicted companies that go to trial should seek jury charges limiting their liability for the crimes of low-level employees, especially when the companies have a robust compliance program. As more circuits are forced to revisit this issue, it may eventually win the attention of the Supreme Court or Congress.

Stanley A. Twardy, Jr. ([email protected]), a former U.S. Attorney for Connecticut and a member of this newsletter's Board of Editors, is a partner and Daniel E. Wenner ([email protected]), a former federal prosecutor in the Eastern District of New York, is an associate at Day Pitney LLP. They are members of the firm's White Collar Defense and Internal Investigations Practice Group.