by Samuel W. Buell

The Justice Department, the defense bar, the academics, the public, and perhaps even the executive suites all agree:  Corporate crime is a management problem.  For abundant evidence that they are right one generally need look back only a few days—for example, to last week’s revelation that, to meet corporate sales targets, thousands of employees at Wells Fargo crammed millions of credit card and other accounts onto customers who didn’t want them.

Only a firm’s managers (by which I mean more than strictly the c-suite) are, after all, in a position to create the positive and negative incentives that will induce employees and other agents to refrain from breaking the law.  Critically in the current American system of corporate criminal liability, only the managers have the authority to negotiate with prosecutors and regulators, including control over the decision whether to report law violations discovered by the firm.

It is striking how the academic analysis here (the deeply technical work of Jennifer Arlen and Reinier Kraakman, for example[1]) lines up so well, at bottom, with the outrage about corporate crime that has pervaded the public square since the financial crisis of 2008.  If only the criminal law could really get managers’ attention—indeed, their serious fear—then the enduring problem of corporate crime would finally come under control.

At the management level, then, corporate and individual criminal liability are parts of the same problem:  How criminal law can and should encourage managers to motivate and police those under their supervision, as well as, I suppose, each other.  As I explore in depth in a chapter of my new book—Capital Offenses:  Business Crime and Punishment in America’s Corporate Age (W.W. Norton)—both corporate and individual criminal liability come up short in performing this function.  The problem is structural, not a matter of tweaks in law reform.

As so many have observed, including at least implicitly the Deputy Attorney General with her recent “Yates Memo,” corporate criminal liability is deficient in motivating managers because of prison, agency costs, and moral hazard.  There is no prison for corporate criminal liability and the prospect of prison is what really—some would say only—gives criminal law its extra deterrent bite.  Moreover, divergence between the interests of the firm and the interests of managers, especially over the longer run or in circumstances of a “last period,” means managers will be insufficiently averse to the risk of criminal liability being imposed on the firm.  Finally, the too-big-to-fail phenomenon—evidenced over and again in the government’s preference for the nonprosecution or deferred prosecution agreement over trial and conviction—weakens in the eyes of managers the credibility of the government’s threat to cripple the firm through prosecution.

Thus the impulse to impose more individual criminal liability at the top of corporations.  But here too the constraints are structural.  They have to do not with the nature of the large firm but with the foundations of criminal law.

To massively simplify, criminal responsibility in the Anglo-American theoretical (not to mention doctrinal) tradition requires action and culpable mental state.  Managers who fail to work at preventing crime by their underlings are omitters, not doers.  And unless they actually think about blowing off such efforts, they are at most negligent—a mental state that most analysts consider sufficient to justify criminal liability only for certain crimes at lower levels of punishment, and that some have carefully argued is never sufficient at all.[2]

One can try to navigate past these problems of theory by widening the lens.  One could say, for example, that managers take affirmative action when they set up compensation and compliance systems within the company, so that the allowance of a later crime by underlings is not merely an omission.  Similarly, one could say that a manager’s culpable mental state can extend to knowledge of the overall conditions she has set up within the firm.  But such moves necessitate stretched accounts of causation that are especially uncomfortable when it comes to criminal responsibility.  Recall that a common situation in corporate crime—the GM starter switch fiasco makes a good example—involves a level of ignorance and non-action that is both condemnable management and far from the sort of behavior that fits the basic pattern of crime-doing in our legal tradition.

A more straight-up response to the limitations criminal law poses for individual manager liability is to advocate for special exceptions.  The so-called responsible corporate officer doctrine (RCO) is one such special body of criminal law for managers.  It needs statutory authority and is currently limited to a few regulatory areas (food and drug, water and air pollution).  But it could be expanded.  The trouble is how far its expansion, much less its current scope, can be justified.

RCO, at least as articulated in the holding of the foundational Park case,[3] dispenses with both act and mental state to an alarming degree.  A manager will be held individually criminally liable if she “stood” in a “responsible relation” to someone else’s law violation at the firm, whether or not she knew about the relevant problem or had made any effort to address it.  I am aware of no other area in which American criminal law has imposed strict liability for omission to act—at least enduringly, modernly, and constitutionally.

Of course the alarm about Park quiets when one notes that Park did not go to prison, suffering inexpensive misdemeanor liability only, and that the prosecutors had evidence that he was personally told by the regulator to get on top of a recurring problem (rat droppings found during inspection of his food company’s warehouse).  Indeed, when the Eighth Circuit Court of Appeals recently affirmed a conviction of an egg company executive on an RCO theory, one of the two judges in the majority of a 2-1 panel split said he joined the ruling only on the grounds that Park implicitly required negligence and that the defendant in the egg case was really negligent at the least.[4]

Given how much clamor there has been, especially of late, for greater management exposure to individual criminal liability, it is worth taking a step back from RCO to ask:  Could U.S. criminal law be expanded to include a more extensive and/or more punitive doctrine of omission liability for corporate managers?  After all, it is not the case that American criminal law rejects liability for failure to perform acts, as many cases of tragic homicide liability for parental neglect of dying children attest.  (Happily, this question will garner the attention of some of the giants of criminal law theory, among whom I will appear as a Lilliputian, at a symposium in the spring organized by Georgetown Law and the journal Criminal Law and Philosophy.)

The question is mostly normative but also somewhat positive, as this sort of criminal liability may raise viable constitutional objections.[5]  Since the move would be to broaden existing criminal law, it is best to work outward from existing doctrine.

The prevailing criminal law of omission liability, as embodied in the Model Penal Code and most state statutes, goes like this:  There is no criminal liability in the absence of a voluntary act unless one culpably fails to act in a situation in which one has a legal duty to do so.  Where do such duties come from?  According to the Model Penal Code commentary at least, from either criminal law itself (statutes can impose duties to take action, like the obligation to file a tax return) or from other law.

The eyes of corporate lawyers and scholars just stopped drooping—because duty is about the most basic and pervasive concept in corporate law.  The duties of corporate managers are multiple and deeply articulated in statutes and judicial decisions, much less the subject of a massive academic literature.  Those duties famously, though not without controversy, include the Caremark duty, which is, among other things, a duty to prevent crime.[6]

We would appear to have created a syllogism supporting the imposition of criminal liability on corporate managers for the crimes of those under their supervision.  Not so fast, of course.  Omission liability is not a crime.  It’s a way of holding someone liable, in special circumstances, for a specified crime in spite of the ordinary rule requiring a voluntary act.

Most specified crimes in the territory where federal criminal law intersects with serious corporate crime—fraud, FCPA violations, felony environmental offenses, obstruction of justice, and so on—require a seriously culpable mental state such as knowledge or intent (or even the infamous willfulness, which sometimes but not always means intent to break the law).  Allowing omission liability is not a way to weaken the mental state requirements in a criminal statute.

Indeed, when the parent is held criminally liable for homicide because he did not obtain medical care for the dying child, it is all the more important to carefully establish the parent’s culpable mental state with respect to the child’s grave condition than in the case of an affirmative act causing death.  In the latter type of case, the mental state can generally be inferred in a straightforward way from what the actor did to the victim.

I am not yet at all sure whether this line of thinking leads to a sound and constitutionally viable justification for, for example, felony liability for senior bank managers who fail to prevent securities fraud by their traders.  A welcome opportunity to think deeply about this lies before me and colleagues in the coming months.  I am sure, in any event, that culpability is critical:  that failure to act coupled with genuine and at least non-egregious ignorance cannot justify felony sanctions.  And I am doubly sure that the continued pressure to address corporate crime by heightening criminal exposure for managers will make the preceding discussion increasingly germane.

Footnotes

[1] Jennifer Arlen & Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. Rev. 687 (1997).

[2] See Larry Alexander & Kimberly Kessler Ferzan, Crime and Culpability:  A Theory of Criminal Law (2009).

[3] United States v. Park, 421 U.S. 658 (1975).

[4] United States v. DeCoster, No. 15-1890 (8th Cir. July 6, 2016).

[5] See Lambert v. California, 355 U.S. 225 (1957).

[6] In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del Ch. 1996).

Samuel W. Buell is the Bernard M. Fishman Professor at Duke University School of Law.

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