Changing the Game

Last month, we looked at the recent case of Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011), where the Supreme Court endorsed ' and defined ' the concept of “willful blindness” for the first time. There, the Court explained that legal culpability could be shown through a defendant's “willful blindness” to wrongdoing only if he or she: 1) “subjectively believe[d] that there is a high probability that a fact exists”; and 2) “t[ook] deliberate actions to avoid learning of that fact.” 131 S. Ct. 2060, 2070 (2011). The Court's “clarification” of this doctrine, although given in the context of a civil patent dispute, promises to have immediate effects on criminal prosecutions, both for individual and corporate defendants.

Willful Blindness After Global-Tech

As an initial matter, it is patent that, following Global-Tech, the law on willful blindness in most circuits ' at least as reflected in pattern jury instructions ' must change. The Eleventh Circuit's pattern instruction, for example, states “it's enough that the Defendant was aware of a high probability that the fact existed ' unless the Defendant actually believed the fact didn't exist. ' [However,] negligence, carelessness, or foolishness isn't enough to prove that the Defendant knew about the [fact].” This instruction is now plainly inadequate in that it does not preclude recklessness as a basis for finding knowledge and intent, nor does it require any deliberate action ' i.e., “active efforts” ' by a defendant. The pattern jury instructions of, at least, the First, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Circuits are also flawed.

Further, Global-Tech raises important questions about what will satisfy its requirement of “active efforts” to avoid knowledge.

Historically, defendants in willful blindness cases were convicted for little more than inadequate investigation. In the benchmark case of United States v. Jewell, 532 F.2d 697 (9th Cir. 1976) (en banc), for instance, the defendant was convicted of knowingly transporting drugs exclusively on the basis that he had exhibited little interest in the contents of the trunk of the car he had been highly paid to deliver to the United States shortly after declining to buy drugs from the car's owner. Post-Global-Tech, it is unclear whether this would be sufficient to support a conviction. Beyond his lack of curiosity, Jewell appears to have engaged in no efforts ' much less “active efforts” ' to avoid knowledge. As such, he seems akin to the reckless defendant, who “kn[ew] of a substantial and unjustified risk of ' wrongdoing,” but did nothing about it, and who can now no longer be found to have acted “knowingly” under Global-Tech's more muscular standard. Global-Tech, 131 S. Ct. at 2071. Henceforth, the government's evidence of inaction alone ought to fail to satisfy this test.

Global-Tech should also slow the trend ' particularly prevalent in white collar and corporate prosecutions ' toward a reliance on “red flags” to show knowledge through willful blindness. See, e.g., United States v. Ferguson, 653 F.3d 61, 78'79 (2d Cir. 2011) (“Red flags about the legitimacy of a transaction can be used to show both actual knowledge and conscious avoidance.”); see also Stanley S. Arkin and Howard J. Kaplan, Criminal Intent and the So-Called 'Red Flag' Theory, 19 Bus. Crimes Bulletin 1 (October 2011) (criticizing this theory). Now, mere indifference to “red flags” suggesting wrongdoing should be insufficient. Without more, there is nothing to distinguish that defendant from one who is merely reckless or negligent.

In the future, the only cases that are sure to meet Global-Tech's standard are those in which the defendant created artificial ignorance by taking clear, proactive steps with the sole purpose of cabining knowledge for an illicit purpose. See, e.g., United States v. Stadtmauer, 620 F.3d 238, 248 (3d Cir. 2010) (Defendant “frequently instructed his subordinates to omit descriptions in check requests to avoid leaving a trail when [his company] used one property to pay for another property's expenses,” and also “admonished [another party] to never put the description in, because he didn't want the descriptions to show up in the ledger.” (quotation marks and brackets omitted)). Although other fact patterns may prove sufficient over time, the Court's decision has placed an important limitation on the application of this doctrine.

Corporate Prosecutions and 'Collective Knowledge' After Global-Tech

Beyond its ramifications for individual defendants, Global-Tech also calls into question one of the bedrock cases articulating the corporate “collective knowledge” doctrine ' United States v. Bank of New England, 821 F.2d 844 (1987). See, e.g., Patricia S. Abril & Ann Morales Olaz'bal, The Locus of Corporate Scienter, 2006 Colum. Bus. L. Rev. 81, 116'20 (asserting that Bank of New England pioneered the use of collective knowledge). In that case, the defendant bank was convicted of “willfully” violating its Currency Transaction Reporting obligation.

When instructing the jury, the district court explained that they could infer knowledge of the reporting requirement based solely on the defendant's conscious avoidance of facts, and further stated that “willfulness” could be found upon a showing of “flagrant organizational indifference” to its reporting obligation. Bank of New England, 821 F.2d at 855'56. These instructions failed to require specific action by the defendant to avoid knowledge and permitted a conviction based upon recklessness (which seems indistinguishable from “flagrant organizational indifference”), and thus are flawed. Nonetheless, in affirming the conviction, the First Circuit (in a pre-Global Tech opinion) reasoned that the bank had knowledge of the violations because “the knowledge obtained by corporate employees acting within the scope of their employment is imputed to the corporation.” Bank of New England, 821 F.2d at 856.

Bank of New England's simple aggregation of knowledge has always been problematic. The Seventh Circuit has grappled with the issue, and perhaps has developed a standard that can survive the new Global Tech requirements. In United States v. L.E. Myers Co., 562 F.3d 845 (7th Cir. 2009), the defendant company was convicted of “willfully” violating Occupational Safety and Health Regulations after the jury was instructed that it could aggregate the knowledge of all corporate employees acting within the scope of their employment. The Seventh Circuit reversed because the instruction did not limit the imputed knowledge to only that information which the obtaining employee had an obligation to report (or otherwise act on). Absent this requirement, there was a risk that otherwise innocuous information, which, in isolation, would never be reported, could be aggregated to create corporate criminal liability where the defendant corporation would never have reason ' or opportunity ' to respond. This, when combined with an otherwise unwarranted willful blindness instruction, had “[t]he cumulative effect of ' significantly water[ing] down the willfulness requirement of the ' offense.” Id. at 853'55 (internal quotation marks omitted).

The L.E. Myers “duty to report or respond” approach minimizes the risk posed by the aggregation of information across all employees, and forces the prosecution to show the active, artificial, and intentional (as opposed to inevitable) cabining of information. Such a showing is likely sufficient to survive Global-Tech, where the Court relied, in part, on evidence that the defendant deliberately withheld information concerning its wholesale copying of a competitor's design from the attorney hired to issue a “right to use” opinion to conclude that the defendant had taken “active steps” to avoid knowledge of its competitor's patent. The failure to report or respond when there is a duty to do so could be construed as analogous to this “active step.” It would seem this now ought to be a minimum requirement for relying on collective knowledge to prove willfulness and knowledge in the corporate crime context.

Conclusion

From the unlikely world of patent litigation, the Supreme Court appears to have changed the proof-of-knowledge landscape in criminal cases. That change may turn out to be most dramatic in the world of corporate prosecutions. Now, when prosecutors default to the broadest Bank of New England implications ' whether in plea negotiations or charging decisions ' a valid limitation exists. Although there will be important implications for individual prosecutions, that change may turn out to be most dramatic in the world of corporate prosecutions.

Joseph F. Savage, Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. David McCrary is a litigation associate in the same office.

Last month, we looked at the recent case of Global-Tech Appliances, Inc. v. SEB S.A. , 131 S. Ct. 2060 (2011), where the Supreme Court endorsed ' and defined ' the concept of “willful blindness” for the first time. There, the Court explained that legal culpability could be shown through a defendant's “willful blindness” to wrongdoing only if he or she: 1) “subjectively believe[d] that there is a high probability that a fact exists”; and 2) “t[ook] deliberate actions to avoid learning of that fact.” 131 S. Ct. 2060, 2070 (2011). The Court's “clarification” of this doctrine, although given in the context of a civil patent dispute, promises to have immediate effects on criminal prosecutions, both for individual and corporate defendants.

Willful Blindness After Global-Tech

As an initial matter, it is patent that, following Global-Tech, the law on willful blindness in most circuits ' at least as reflected in pattern jury instructions ' must change. The Eleventh Circuit's pattern instruction, for example, states “it's enough that the Defendant was aware of a high probability that the fact existed ' unless the Defendant actually believed the fact didn't exist. ' [However,] negligence, carelessness, or foolishness isn't enough to prove that the Defendant knew about the [fact].” This instruction is now plainly inadequate in that it does not preclude recklessness as a basis for finding knowledge and intent, nor does it require any deliberate action ' i.e., “active efforts” ' by a defendant. The pattern jury instructions of, at least, the First, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Circuits are also flawed.

Further, Global-Tech raises important questions about what will satisfy its requirement of “active efforts” to avoid knowledge.

Historically, defendants in willful blindness cases were convicted for little more than inadequate investigation. In the benchmark case of United States v. Jewell , 532 F.2d 697 (9th Cir. 1976) (en banc), for instance, the defendant was convicted of knowingly transporting drugs exclusively on the basis that he had exhibited little interest in the contents of the trunk of the car he had been highly paid to deliver to the United States shortly after declining to buy drugs from the car's owner. Post-Global-Tech, it is unclear whether this would be sufficient to support a conviction. Beyond his lack of curiosity, Jewell appears to have engaged in no efforts ' much less “active efforts” ' to avoid knowledge. As such, he seems akin to the reckless defendant, who “kn[ew] of a substantial and unjustified risk of ' wrongdoing,” but did nothing about it, and who can now no longer be found to have acted “knowingly” under Global-Tech's more muscular standard. Global-Tech, 131 S. Ct. at 2071. Henceforth, the government's evidence of inaction alone ought to fail to satisfy this test.

Global-Tech should also slow the trend ' particularly prevalent in white collar and corporate prosecutions ' toward a reliance on “red flags” to show knowledge through willful blindness. See, e.g. , United States v. Ferguson , 653 F.3d 61, 78'79 (2d Cir. 2011) (“Red flags about the legitimacy of a transaction can be used to show both actual knowledge and conscious avoidance.”); see also Stanley S. Arkin and Howard J. Kaplan, Criminal Intent and the So-Called 'Red Flag' Theory, 19 Bus. Crimes Bulletin 1 (October 2011) (criticizing this theory). Now, mere indifference to “red flags” suggesting wrongdoing should be insufficient. Without more, there is nothing to distinguish that defendant from one who is merely reckless or negligent.

In the future, the only cases that are sure to meet Global-Tech's standard are those in which the defendant created artificial ignorance by taking clear, proactive steps with the sole purpose of cabining knowledge for an illicit purpose. See, e.g., United States v. Stadtmauer , 620 F.3d 238, 248 (3d Cir. 2010) (Defendant “frequently instructed his subordinates to omit descriptions in check requests to avoid leaving a trail when [his company] used one property to pay for another property's expenses,” and also “admonished [another party] to never put the description in, because he didn't want the descriptions to show up in the ledger.” (quotation marks and brackets omitted)). Although other fact patterns may prove sufficient over time, the Court's decision has placed an important limitation on the application of this doctrine.

Corporate Prosecutions and 'Collective Knowledge' After Global-Tech

Beyond its ramifications for individual defendants, Global-Tech also calls into question one of the bedrock cases articulating the corporate “collective knowledge” doctrine ' United States v. Bank of New England , 821 F.2d 844 (1987). See, e.g., Patricia S. Abril & Ann Morales Olaz'bal, The Locus of Corporate Scienter, 2006 Colum. Bus. L. Rev. 81, 116'20 (asserting that Bank of New England pioneered the use of collective knowledge). In that case, the defendant bank was convicted of “willfully” violating its Currency Transaction Reporting obligation.

When instructing the jury, the district court explained that they could infer knowledge of the reporting requirement based solely on the defendant's conscious avoidance of facts, and further stated that “willfulness” could be found upon a showing of “flagrant organizational indifference” to its reporting obligation. Bank of New England, 821 F.2d at 855'56. These instructions failed to require specific action by the defendant to avoid knowledge and permitted a conviction based upon recklessness (which seems indistinguishable from “flagrant organizational indifference”), and thus are flawed. Nonetheless, in affirming the conviction, the First Circuit (in a pre-Global Tech opinion) reasoned that the bank had knowledge of the violations because “the knowledge obtained by corporate employees acting within the scope of their employment is imputed to the corporation.” Bank of New England, 821 F.2d at 856.

Bank of New England's simple aggregation of knowledge has always been problematic. The Seventh Circuit has grappled with the issue, and perhaps has developed a standard that can survive the new Global Tech requirements. In United States v. L.E. Myers Co. , 562 F.3d 845 (7th Cir. 2009), the defendant company was convicted of “willfully” violating Occupational Safety and Health Regulations after the jury was instructed that it could aggregate the knowledge of all corporate employees acting within the scope of their employment. The Seventh Circuit reversed because the instruction did not limit the imputed knowledge to only that information which the obtaining employee had an obligation to report (or otherwise act on). Absent this requirement, there was a risk that otherwise innocuous information, which, in isolation, would never be reported, could be aggregated to create corporate criminal liability where the defendant corporation would never have reason ' or opportunity ' to respond. This, when combined with an otherwise unwarranted willful blindness instruction, had “[t]he cumulative effect of ' significantly water[ing] down the willfulness requirement of the ' offense.” Id. at 853'55 (internal quotation marks omitted).

The L.E. Myers “duty to report or respond” approach minimizes the risk posed by the aggregation of information across all employees, and forces the prosecution to show the active, artificial, and intentional (as opposed to inevitable) cabining of information. Such a showing is likely sufficient to survive Global-Tech, where the Court relied, in part, on evidence that the defendant deliberately withheld information concerning its wholesale copying of a competitor's design from the attorney hired to issue a “right to use” opinion to conclude that the defendant had taken “active steps” to avoid knowledge of its competitor's patent. The failure to report or respond when there is a duty to do so could be construed as analogous to this “active step.” It would seem this now ought to be a minimum requirement for relying on collective knowledge to prove willfulness and knowledge in the corporate crime context.

Conclusion

From the unlikely world of patent litigation, the Supreme Court appears to have changed the proof-of-knowledge landscape in criminal cases. That change may turn out to be most dramatic in the world of corporate prosecutions. Now, when prosecutors default to the broadest Bank of New England implications ' whether in plea negotiations or charging decisions ' a valid limitation exists. Although there will be important implications for individual prosecutions, that change may turn out to be most dramatic in the world of corporate prosecutions.

Joseph F. Savage, Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. David McCrary is a litigation associate in the same office.