by Steve Solow
Up until around a month ago, if you asked law professors and white collar defense counsel “what does it take for a company to be held criminally liable,” for most serious felonies, you would most likely get an answer that there needs to be a person, who worked for or on behalf of a company, who committed a crime in connection with their job. It’s the standard of respondeat superior, or vicarious liability, that has been in use at least since New York Central & Hudson River Railroad Co. v. United States was decided over one hundred years ago. 212 U.S. 481 (1909).
But a few weeks ago, in what might be an ironic move in light of the September memo from DAG Sally Yates (more on that in a moment), federal prosecutors succeeded in convicting Pacific Gas & Electric (PG&E) of criminal charges (knowing and willful criminal charges) using a theory of “corporate collective knowledge.”
PG&E was originally charged with one count of obstruction of the National Transportation Safety Board investigation into a September 9, 2010 rupture and fire on a PG&E pipeline in San Bruno, California that killed 8 people and injured 58 others. Additionally, and PG&E was charged with 27 counts of violation of the Pipeline Safety Act for failing to pressure test lines, failing to maintain accurate records regarding pipeline integrity, failing to keep records of pressure testing and repairs on natural gas transmission lines, relying on erroneous and incomplete information when evaluating the integrity of natural gas transmission lines, failing to identify and evaluate potential threats to the integrity of the lines, and failing to prioritize lines as high risk after a changed circumstance.
As described in my recent article for BNA, the PG&E case represents the first adjudicated case in decades to hold a corporation liable for a knowing and willful charge based on a theory of collective intent. The approach is premised on the notion that the government could take the pieces of knowledge in the minds of different people, in different parts of the company, and then ask a jury to find that the company can be held liable on the theory that the company “knew,” in a collective sense, all of the pieces of knowledge that were in the minds of these employees. Thus, the company could be found guilty, even if no individual employee could be found guilty.
More specifically, the PG&E trial court instructed the jury that it could find that the company had knowingly violated the law based on the “collective knowledge of its employees,” and that willfulness could be established by the company having a legal duty.
Yet, as Professor Samuel Buell wrote in this space recently, the “Yates Memo” is premised on the notion that mere corporate criminal liability “comes up short in motivating managers.” As Professor Buell points out, in discussing whether notions of individual liability could be expanded, the entire notion of criminal responsibility in the law is premised upon a combination of an action and a culpable mental state in the body of one person.
Notably, in a civil case from the civil rights era, the Supreme Court declined to adopt a notion of “collective knowledge.” In striking down a defamation action against the New York Times in the famous Sullivan case, among other things, the Court held that the plaintiff could not prove actual malice based on the collective information housed in the newspaper’s files: “The mere presence of the stories in the files does not, of course, establish that the Times ‘knew’ the advertisement was false, since the state of mind required for actual malice would have to be brought home to the persons in the Times’ organization having responsibility for the publication of the advertisement.” New York Times v. Sullivan, 376 U.S. 254, 287 (1964) (emphasis added). In other words, the Court said, one cannot hold an entity liable if the pieces of knowledge necessary to have the requisite mental state were in the minds of different employees. That’s pretty much the opposite of what the district court said in PG&E.
To Professor Buell’s point, there are other ways of finding individual liability in a company where knowledge is, in effect, imperfect, as a stepping stone to corporate liability. One is the Responsible Corporate Officer Doctrine as he discusses, and others include willful blindness or deliberate ignorance.
The existence of willful blindness demonstrates that the government does not need a watered-down standard of vicarious liability to prosecute companies that attempt to deliberately compartmentalize information to avoid liability. Instead, if an employee intentionally compartmentalized information to avoid liability—that is, if the employee essentially structured the company to make it willfully blind to the truth—then the government could prosecute the company for that employee’s deliberate act of structuring the employee to make the company willfully blind to some existing legal duty.
Unlike willful blindness, which requires deliberate conduct, the collective intent doctrine can render a company strictly liable for the knowledge of its employees—without any evidence of individual intent. This flies in the face of traditional principles of corporate vicarious liability—that some person must have acted with criminal intent in order to bind a company to a knowing and willful felony. Indeed, the collective knowledge approach appears to allow the government to “aggregate the innocent conduct of (unnamed) employees to manufacture a corporate criminal.” (The preceding quote is from PG&E’s pre-trial Motion to Dismiss the indictment.) This, in turn, arguably conflicts with the premise and purpose of the Yates Memo, which favors holding a company liable where specific employees have committed a crime, and thus directs prosecutors to hold those individuals accountable to presumably deter future crimes by corporations.
PG&E has filed a motion for a judgment of acquittal, notwithstanding the verdict, and if that is unsuccessful, the company may challenge the government’s theory before the Ninth Circuit. If that appeal goes forward, whatever the outcome, it will be significant for a wide-range of corporate regulatory criminal enforcement matters.
In that regard, on October 26, in Washington, DC, an ABA conference will, among other things, consider how various concepts of corporate criminal liability (including collective knowledge) will play out in environmental, health and safety prosecutions. The chief of the DOJ Environmental Crimes Section, among others, will be present to discuss, and it should be a useful event in light of the PG&E case.
Steve Solow is the former chief of the Environmental Crimes Section at DOJ, and a former prosecutor with the New York Organized Crime Task Force. He is co-head of Katten Muchin Rosenman’s national Environmental and Workplace Safety practice and co-head of the White Collar, Investigations and Compliance practice in the firm’s Washington, DC office.
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