Getting Comfortable with Collective Knowledge

by Mihailis E. Diamantis

Doctrines for attributing knowledge to corporations seem to be stuck between doing far too little and the risk of doing far too much.  Respondeat superior forces plaintiffs and prosecutors to find a single corporate employee with all the relevant knowledge.[1]  This means corporations automatically win against knowledge-based allegations when, as will predictably happen, knowledge is dispersed across corporate personnel.  The familiar solution is to introduce some way to aggregate knowledge.  But the doctrine that does just that—the collective knowledge doctrine—has met with widespread skepticism.[2]  The worry is that the collective knowledge doctrine treats corporations as knowing too much by triggering knowledge-based penalties for mere negligence in maintaining lines of communication.[3]  As a result, few courts have adopted the collective knowledge doctrine since it was introduced more than thirty years ago.[4]

If judges and scholars are ever going to get comfortable with moving beyond respondeat superior, they need to think hard about the informational logic of the collective knowledge doctrine.  As I argue in a working paper, The Corporation and the Epistemologist,[5] that logic is poorly understood.  Discussions vacillate without warning between two versions of the doctrine: one of which is entirely toothless, the other of which is worryingly permissive.  Once these two versions are distinguished, the search for a happy compromise can begin.

The toothless version of the collective knowledge doctrine is the one that appears in careful formulations.  As formulated, the doctrine is merely an aggregation principle.  If some employee knows A, another knows B, and a third knows C, then their corporate employer knows A, knows B, knows C, and nothing further.[6]  To take a familiar sort of example, suppose that a bank teller at one branch knows (A) that a customer withdrew $5,500.  Suppose that another bank teller at a different branch knows (B) that a customer (who happens to be the same customer) withdrew $5,500.  And finally, suppose that a third bank employee knows (C) that any cash transactions totaling over $10,000 must be reported to the federal government.  The interesting question is whether the bank knows the transactions have to be reported.  Under respondeat superior, the answer is clearly negative since the bank can only be held to have known one of A, or B, or C.  But the collective knowledge doctrine, as formulated, must reach the same result.  As a mere aggregation principle, it adds little to the power of respondeat superior.  While the bank may be held to know all three facts, none of those is the fact in question, i.e. that the transactions had to be reported.  From knowing A, and knowing B, and knowing C, the bank could, with some elementary logic, come to know the conjunction of them all, “A and B and C.”  With some mathematical reasoning, the bank could add $5,500 to $5,500 and check to see whether the result is greater than $10,000.  That the bank had a reporting obligation may follow inferentially from the three things the employees knew, but it is a distinct item of knowledge.  Some information processing is needed first.[7]

If the collective knowledge doctrine is to be a useful supplement to respondeat superior, it has to go beyond mere aggregation.  Indeed, the version of the doctrine that is applied allows for attribution of inferences from aggregate knowledge.  In the example from the previous paragraph, courts applying the collective knowledge doctrine would treat the bank as knowing that a reporting obligation had been triggered.[8] 

This is where the worry that the collective knowledge doctrine does too much takes hold.  An infinite number of inferences follow from any set of information.  Attributing knowledge of all inferences available from aggregate knowledge is clearly an absurd position—it would treat corporations as logically omniscient.[9]  But where to draw the line?  Without any constraining legal principles, corporations confronting the collective knowledge doctrine are left to the uncertain exercise of judicial discretion as to how many and what inferences will be attributed.  Worse still, judges cannot even be aware they are exercising such discretion if they do not realize they are moving beyond the mere aggregation principle they initially recite.  For many corporate defendants, that state of uncertainty could be about as troublesome as a presumption of logical omniscience.

If all this is correct, there are important implications for developing a workable doctrine for collecting corporate knowledge.  The path forward does not lie somewhere between respondeat superior and the collective knowledge doctrine, but between two versions of the collective knowledge doctrine: one that attributes no inferences from aggregated knowledge, and another that attributes them all.  The question for policymakers is where to draw the line and what influence that will have on corporate incentives to aggregate and process compliance-relevant information. 

In The Corporation and the Epistemologist, I propose a framework that aims to balance the private costs of information systems against the social costs of corporate misconduct.  What is needed is a way to determine when to treat a corporation as knowing some fact that no single employee knows, but is instead inferable from the aggregation of facts different employees do know.  I argue that two variables are most relevant.  One is how much it would have cost the corporation to design, implement, and run an information system that would have collected the dispersed information, processed the inference, and put a corporate employee in a position to know it.  The second is the prevalence of such information systems (capable of gathering and processing similar information) among peer corporations.  Such combinations of variables—one particular to the individual defendant, the other reflective of practices among similarly situated people—are familiar in civil and criminal law.  I explain in the paper how judges and legislators could use these two variables to develop a collective knowledge doctrine we can be comfortable with.

Footnotes

[1] See Patricia S. Abril & Ann Morales Olazábal, The Locus of Corporate Scienter, 2006 Colum. Bus. L. Rev. 81, 113 (2006) (“[W]here the case against a single actor within an organization does not contain all of the requisite elements of the crime, respondeat superior liability would not attach to the corporation.”).

[2] See, e.g., In re Tex. E. Transmission Corp. PCB Contamination Ins. Coverage Litig., 870 F. Supp. 1293, 1307 (E.D. Pa. 1992), aff’d, 995 F.2d 219 (3d Cir. 1993) (“[T]he imputation of every bit of knowledge known to each individual employee—from the Chief Executive Officer to the most recently hired recruit—would likely paralyze a corporation.”).

[3] See Bradley J. Bondi, Dangerous Liaisons: Collective Scienter in SEC Enforcement Actions, 6 N.Y.U. J.L. & Bus. 1, 20 (2009) (“[T]he use of collective scienter by the SEC would run afoul of Supreme Court precedent distinguishing scienter from negligence.”); Thomas A. Hagemann & Joseph Grinstein, The Mythology of Aggregate Corporate Knowledge: A Deconstruction, 65 Geo. Wash. L. Rev. 210, 239 (1997); (“[I]t is easy to see how the collective knowledge rule could in fact punish a company for its negligence.”); Martin J. Weinstein & Patricia Bennett Ball, Criminal Law’s Greatest Mystery Thriller: Corporate Guilt Through Collective Knowledge, 29 New Eng. L. Rev. 65, 82 (1994) (“[T]he end result is that Bank of New England allows corporations to be prosecuted for criminal acts committed negligently or recklessly.”).

[4] See Steve Solow, What Does a Corporation Have to “Know” to be Criminally Prosecuted?, Compliance and Enforcement (Oct. 5, 2016), (“[T]he PG&E case [decided in 2016]  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.”).

[5] Mihailis E. Diamantis, The Corporation and the Epistemologist (2018).

[6] See United States v. Bank of New Eng., 821 F.2d 844, 855 (1st Cir. 1987) (approving jury instruction stating that “if Employee A knows one facet of the currency reporting requirement, B knows another facet of it, and C a third facet of it, the [corporate employer] knows them all”).

[7] It may be worth noting that the same issue arises for natural people.  After establishing that a person knows some facts, there will always be some further facts that they could know only after some information processing.  Treating the person as knowing none of those inferences (even the most obvious ones), or as knowing all of them (even the most obscure), are both unsustainable positions.  For individual people, the doctrine of willful blindness can be a partial guide to which inferences to attribute.  As I explain in the paper, it is unclear how helpful the doctrine of willful blindness is in the corporate context.

[8] See Bank of New Eng., 821 F.2d at 856 (“‘[A] corporation cannot plead innocence by asserting that the information obtained by several employees was not acquired by any one individual who then would have comprehended its full import. Rather the corporation is considered to have acquired the collective knowledge of its employees and is held responsible for their failure to act accordingly.’” (quoting United States v. T.I.M.E.-D.C., Inc., 381 F. Supp. 730, 738 (W.D. Va. 1974)).

[9] See Vincent Hendricks & John Symons, Epistemic Logic, The Stanford Encyclopedia of Philosophy (Edward N. Zalta, ed., Jan. 4, 2006),  (“A particularly malignant philosophical problem for epistemic logic is related to closure properties.  Axiom K[, that an epistemic subject knows all the propositions they know are implicated by the propositions they know], can under certain circumstances be generalized to a closure property for an agent’s knowledge which is implausibly strong—logical omniscience.”).

Mihailis E. Diamantis, Associate Professor, University of Iowa, College of Law

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