Corporate Criminal Responsibility

Both of the American standards for holding organizations criminally liable employ the "identification" approach pioneered in England. This approach imposes vicarious liability on an organization for the acts committed by agents of the organization. Respondeat superior is the broader of the two standards. It is a common law rule developed primarily in the American federal courts and adopted by some American state courts. Derived from agency principles in tort law, it provides that a corporation "may be held criminally liable for the acts of any of its agents [who] (1) commit a crime (2) within the scope of employment (3) with the intent to benefit the corporation." (Note, p. 1247). This standard is quite broad, permitting organizational liability for the act of any agent, even the lowest level employee.

The U.S. Supreme Court first recognized the respondeat superior standard as appropriate for imposing corporate criminal liability for intentional crimes in New York Central & Hudson River Railroad v. United States (1909). New York Central Railroad had been convicted of bribery because an assistant traffic manager gave "rebates" on railroad rates to certain railroad users. As a result of the rebates, the effective shipping rate for some users was less than mandated rates; this violated the Elkins Act, which imposed criminal sanctions. In affirming the conviction of New York Central the Supreme Court applied the respondeat superior standard, holding that since an agent of New York Central committed a crime while carrying out his duties, New York Central was liable. The Court applied this broad standard to New York Central with almost no analysis of whether respondeat superior was an appropriate standard for assessing criminal intent. The Court noted that the principle of respondeat superior was well established in civil tort law, then simply stated that "every reason in public policy" justified "go[ing] only a step farther" and applying respondeat superior to criminal law (p. 495). Other American courts have followed the lead of New York Central, stating: "There is no longer any distinction in essence between the civil and criminal liability of corporation, based upon the element of intent or wrongful purpose" (Egan v. United States, 137 F.2d 369, 379 (8th Cir.), cert. denied, 320 U.S. 788 (1943)).

New York Central and its progeny have been criticized as failing to appreciate the inherently different nature of civil and criminal liability, failing to consider civil alternatives to imposing corporate criminal liability, and failing to examine alternative standards for imposing criminal liability upon corporations.

Critics point to the fact that tort lawsuits are designed primarily to compensate one party for the damage caused by another party. The assumption underlying tort liability is that it is more equitable for the employer of the tort-feasor to absorb the financial loss caused by its agent's conduct than for the individual victim to do so. Except in rare tort cases, intent is not an issue in holding a corporation liable. There is no effort to assess corporate intent since even the most honorable corporation becomes liable simply because its agent engaged in certain conduct. Moreover, even though the threat of tort liability may deter conduct, collection of damages, not deterrence of future conduct, is the paramount concern of a tort action. Lastly, in all but unusual cases, tort liability carries no moral or punitive stigma; it is simply a cost of doing business.

In all criminal cases, however, intent, deterrence, and stigma are key ingredients. Intent to violate the law is an essential element of almost every crime. Criminal prosecutions are pursued precisely because of their deterrent impact. The stigma and shame of a criminal conviction, coupled with the disabilities a conviction carries, helps conveys this impact. In short, while the notion of respondeat superior is well suited to torts, it is anathema to the criminal law.

The second flaw regularly identified in New York Central is its failure to consider civil options to imposing criminal liability on corporations. The Court stated in New York Central that failure to impose criminal liability on corporations would "virtually take away the only means of effectually controlling the subject matter and correcting the abuses aimed at" (p. 496). This statement is inaccurate. There are two major options to imposing criminal liability on corporations: criminal liability of responsible individuals within the corporation, and civil remedies against the corporation. Granted, when the Court decided New York Central in 1909, prosecution of responsible corporate officials was unusual. Since then, however, such prosecutions have become more routine and much easier through the development of the "responsible corporate official" and strict liability doctrines. In addition, in 1909, administrative regulation and supervision was in its infancy. During the twentieth century, however, agencies grew dramatically in size, expertise, and power to regulate. Unfortunately, courts and legislatures have failed to reexamine the propriety of using respondeat superior to hold corporations criminally liable. As one court noted in affirming the conviction of a corporation, failure to impose criminal liability against the corporation "[was] to immunize the offender who really benefits and open wide the door for evasion" (United States v. George F. Fish, Inc., 154 F.2d 798 (2d Cir.), cert. denied, 328 U.S. 869 (1946), p. 801).

The third flaw highlighted in New York Central is the Court's failure to consider the conceptual alternatives to respondeat superior for imposing corporate criminal liability. In New York Central, the Court assumed that the only standard available for imposing corporate criminal liability was respondeat superior. Such a rigid view of its options is understandable given the posture of the case before the Court and the historical place of the opinion. However, in light of the considerable scholarship throughout the twentieth century identifying the problems with the respondeat superior approach and proposing alternative conceptual models, there is little reason to adhere to the overly simplistic choice facing the Court in 1909.

The Model Penal Code, section 2.01, remedies some of the problems of the respondeat superior standard because it more narrowly imposes corporate criminal liability. The Code approach more closely tracks the approach taken worldwide for imposing corporate criminal liability. The Code imposes corporate criminal liability only for the acts of some corporate agents. It provides that a corporation is criminally liable for criminal conduct that was "authorized, requested, commanded, performed or recklessly tolerated by the board of directors or by a high managerial agent acting in behalf of the corporation with in the scope of his office or employment." A high managerial agent is anyone "having duties of such responsibility that [their] conduct may fairly be assumed to represent the policy of the corporation or association."

While praised as an improvement over respondeat superior's breadth, the Code standard has been criticized on several grounds. The first such criticism is that it is unrealistic, given the size of many modern corporations. Because illegal activities rarely are conducted openly, it would be difficult if not impossible to obtain the required proof that a high managerial agent conducted, or even recklessly tolerated, illegal activity. Second, the Code standard has been criticized because it encourages high managerial agents to avoid learning of wrongdoing within a corporation. Since the Code imposes corporate liability only if higher-level corporate officials are involved in or tolerate wrongdoing, a lack of knowledge of wrongdoing avoids liability under the Code. Lastly, the Code standard has been criticized as inappropriately narrow, since even if a clear corporate policy encouraged a lower echelon employee to commit an offense, the corporation is not liable unless there is evidence of participation or knowledge by a specific corporate director or high managerial agent.

Both the respondeat superior and the Code standards contain two requirements that could substantially limit their applicability and cure some of the problems they pose, but the courts have interpreted these requirements so broadly that they mean almost nothing. Both standards require that the illegal act be "within the scope of the agent's employment" and undertaken "for the benefit of the corporation" (p. 1247). Courts have interpreted "within the scope of employment" as applying to acts within an agent's apparent scope of employment. Under this broad interpretation even acts undertaken by a corporate employee contrary to specific corporate instructions have been held to warrant imposition of corporate criminal liability. The rationale for this view is that the agent's actions, taken while the agent is serving in the corporation's employ, would appear to outsiders to be within the agent's authority. United States v. Hilton Hotels Corporation, 467 F.2d 1000 (9th Cir. 1972), provides an example of this broad interpretation. The purchasing agent at Hilton Hotel in Portland, Oregon, threatened a supplier of goods with the loss of the hotel's business if the supplier did not contribute to an association formed to attract conventions to Portland. The corporate president testified that such action was contrary to corporate policy. Both the manager and assistant manager of the hotel testified that they specifically told the purchasing agent not to threaten suppliers. Nevertheless, the court convicted Hilton Hotel Corporation of antitrust violations under the respondeat superior standard because to outsiders, the assistant manager appeared to be acting on behalf of the corporation.

Although the respondeat superior test was applied in Hilton Hotels, the problem of the maverick employee arises even under the narrower Model Penal Code standard since the Code also relies on vicarious liability. Thus, for example, if the Hilton Hotel purchasing agent had "duties of such responsibility that his conduct may fairly be assumed to represent the policy of the corporation or association," the agent would be a "high managerial agent" (MPC § 2.01) and Hilton Hotels Corporation would be criminally liable.

Courts also have interpreted the second requirement, "with intent to benefit the corporation," almost out of existence. As one court noted, "[t]here have been many cases . . . in which the corporation is criminally liable even though no benefit [to the corporation] has been received in fact" (Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962), p. 128). Courts have found this element of corporate criminal liability met, even when the corporation is a victim of its agent's act. United States v. Sun-Diamond Growers of California, 138 F.3d 961 (D.C. 1998), provides an example. Sun Diamond, a large agricultural cooperative owned by member cooperatives, was convicted of making illegal gifts to a public official, wire fraud, and making illegal campaign contributions. A vice president of Sun-Diamond made the improper payments and engaged in all of the illegal conduct. Sun-Diamond argued that its vice president did not act with intent to benefit Sun-Diamond, but with intent to defraud Sun-Diamond. Acknowledging that Sun-Diamond "look[ed] more like a victim than a perpetrator," the court nevertheless rejected Sun-Diamond's argument, finding that the jury could have concluded that the vice president acted with an intent, "however befuddled," to further his employer's interest (p. 970). The court explained its holding by noting the policy justification for holding corporations criminally liable for acts of their agents: "to increase incentives for corporations to monitor and prevent illegal employee conduct" (p. 971). This analysis is typical of judicial creation and application of corporate criminal liability. The court relied upon a utilitarian rationale with no discussion of whether corporate liability for crimes is consistent with principles of criminal law. Yet even if courts wanted to require stringent proof of "intent to benefit the corporation," it is unclear how they could. It seems impossible to apply literally. For example, if an employee takes bribes for favors to corporate customers, has the corporation benefited? If so, how do courts measure the benefit? Do the disadvantages, such as poor relationships with other customers, a criminal conviction, detrimental publicity, internal dissension, and poor morale, outweigh the benefit?

In addition to watered-down interpretations of "within the scope of employment" and "for the benefit of the corporation," adoption of the notion of "collective intent" has rendered the respondeat superior and Model Penal Code standards extremely broad. The doctrine of "collective intent" allows courts to find intent on the part of a corporation even when it is not possible to identify a corporate agent with criminal intent. United States v. Bank of New England, 821 F.2d 844 (1st Cir. 1987), demonstrates this. The Bank of New England was convicted of failing to file U.S. Treasury reports of cash transactions over $10,000. On thirty-one occasions, a bank customer withdrew more than $10,000 in cash from a single account by simultaneously presenting multiple checks in sums less than $10,000 to a single bank teller. Acknowledging that under applicable law a corporation's criminal intent is imputed from an agent's intent, the bank argued that it was not liable because there was no bank employee with sufficient criminal intent to violate the reporting requirements. According to the bank, the teller who conducted the transactions did not know that the law required the filing of the reports in the circumstance presented by the customer. And, the bank employee who knew of the reporting requirements did not know of the customer's transactions. Thus argued the bank, there was no single bank employee with sufficient mens rea to impute to the corporation. The trial court rejected the bank's argument because of the "collective intent" of bank employees. The court explained that "the bank's knowledge is the totality of what all of the employees know within the scope of their employment" (p. 855).