Corporate liability standards: when should corporations be held criminally liable?

• Author: Khanna, V.S.

1. INTRODUCTION

   Corporate criminal liability is a frequently and hotly debated subject.(1) One issue that attracts much attention is whether a corporation should be at "fault" or "culpable" before liability is imposed, and precisely what "corporate fault" or "corporate culpability" means.(2) In other words, what liability standard should be required before imposing liability on the corporation. For example, should liability be imposed when the corporation is negligent, when it acts "knowingly," whenever harm occurs regardless of the "fault" or "knowledge" of the corporation, or some other liability standard? This paper addresses this issue and provides some deterrence-based insights into the choice of liability standards for corporate crime.

   The primary thesis of this paper is that neither strict liability, mens rea, nor negligence are likely to be optimal liability standards across the vast majority of corporate wrongdoing and that a composite liability regime -- one which mixes elements of each of the liability standards -- is likely to be the most desirable standard in most instances.(3) The Organizational Sentencing Guidelines are an example of a composite liability regime, and I argue that these guidelines, with some refinements, may present a desirable approach (from a deterrence perspective) to reducing corporate wrongdoing.(4)

   Part II of this paper begins with some general considerations about corporate criminal liability. Specifically, section A discusses how vicarious liability is imposed on a corporation under the doctrine of respondeat superior for the wrongs of its employees. Section B then discusses why we need to impose liability on the corporation to influence the behavior of its employees -- rather than simply increasing sanctions on the employees themselves. Section C defines, in sketch form, the primary corporate liability standards (i.e., strict liability, mens rea, and negligence) and what they mean.

   The next two Parts compare the various liability standards against each other. Part III considers the likely effects of the corporate mens rea standards in comparison to strict liability and certain negligence standards. Part III concludes that reliance on corporate mens rea as a liability standard will generally be undesirable because corporate mens rea standards impose liability on the corporation only when harm is caused by its agents and a sufficient amount of information exists within the corporation to meet one of the mens rea standards.(5) Premising liability on the amount of information a corporation or its agents actually have provides both with disincentives to keep or gather information.(6) Less gathering of information would probably lead to decreased information sharing within the corporation and hence to suboptimal levels of care or precautions.(7) Suboptimal precautions would lead to an increase in corporate wrongdoing relative to strict liability (or certain negligence rules), which is not infected by this perverse effect.(8) Thus, rarely would corporate mens rea be a desirable liability standard. Further, in those rare instances where inquiry into an agent's mens rea is desirable that inquiry should be conducted at the sanctioning stage rather than at the liability determination stage.(9) This, Part III argues, is probably best accomplished through a composite regime.

   Part IV compares strict liability and negligence, assuming that inquiry into corporate mens rea is undesirable (as it would be in most cases), along two broad lines -- the effects of each standard on corporate enforcement efforts to reduce costs associated with the frequency and magnitude of wrongdoing by its agents and corporate efforts to produce the optimal amount of a good or service.(10) Strict liability is likely to be the preferred liability standard for certain kinds of corporate enforcement efforts and to induce the corporation to produce the optimal amount of a good or service.(11) However, negligence-style regimes are likely to be the preferred liability standard for other kinds of corporate enforcement efforts.(12) Thus, regardless of which liability standard is considered, none is likely to be desirable all of the time or even most of the time. Each standard has its own weaknesses, making reliance on any one particular standard rife with difficult trade-offs. This recognition counsels, once again, for a composite regime.

   Part V addresses the issue of solutions to the problem of these imperfect liability standards. It would appear that the most desirable liability standard is likely to be one that combines some elements of strict liability, mens rea, and negligence into a composite regime that captures much of the advantages of each individual regime while minimizing the disadvantages of each regime.(13) Such a regime resembles the current Organizational Sentencing Guidelines (OSGs) which permit sentence mitigation when there is an "effective" compliance program, amongst other things.(14)

   Part VI discusses areas of concern with the OSGs -- including the fact that corporations can rely on the OSGs to avoid severe criminal penalties by instituting internal procedures or compliance programs that are largely "window-dressing" rather than any real deterrent to agent wrongdoing.(15) I will address these concerns and argue that some refinements to the guidelines and greater experience with corporate internal procedures or corporate compliance programs should ameliorate many of the concerns with the OSG approach. In this Part, I will also address desert-based critiques of the OSGs.(16) Part VII then concludes.

2. CORPORATE CRIMINAL LIABILITY -- GENERAL CONSIDERATIONS.

   Corporate criminal liability is a doctrine of considerable antiquity in the United States and one that has expanded consistently over the years.(17) Given the increasing prominence of corporate criminal liability, it is important to begin any discussion of corporate criminal liability standards with a brief introduction to the doctrines used to impose vicarious liability on the corporation for the acts of its agents and why this type of liability might be desirable. We can then move on to consider what kinds of liability standards are currently being used to impose vicarious liability on the corporation.

   1. Vicarious Liability

      As an initial matter it should be noted that corporations themselves cannot engage in wrongdoing -- only agents (for example, employees) of the corporation can commit wrongs.(18) Thus, corporate liability is a form of vicarious liability wherein the corporation is held liable for the wrongs of its agents.(19)

      Vicarious liability is imposed on corporations under the doctrine of respondeat superior when "an agent (1) commits a crime(20) (2) within the scope of employment(21) (3) with the intent to benefit the corporation."(22) Satisfying these elements is considered quite easy in most cases.(23) For example, liability attaches to the corporation "even when corporations have forbidden the wrongful activities"(24) and the agent's behavior harms the corporation, provided "there [was some] possibility that wrongdoing might increase corporate profits."(25)

      Such broad liability attribution has resulted in corporations being held criminally liable for almost all crimes except those "manifestly requiring commission by natural persons, such as rape and murder."(26) The scope of corporate criminal liability in the United States is considerably broader than in most other countries,(27) and raises questions about what purpose such broad liability serves.

   2. Purposes of Vicarious Corporate Criminal Liability

      One might wonder why we need to impose liability on corporations to induce their agents to behave appropriately. Why not simply increase the sanction on the agent who engaged in the wrongdoing? Normally, sanctioning the wrongdoer seems the most direct way to deter.(28) However, there are at least three reasons why individual liability may fail and hence why there may be a niche for corporate liability.(29)

      First, agents often do not have sufficient assets to pay for the total social costs of wrongdoing and corporate liability may help to reduce problems stemming from this.(30) This requires us to examine why wrongdoers should pay for the total social costs of wrongdoing, what happens when agents are effectively judgment proof, and how corporate liability changes this.

      Wrongdoers should pay for the total social costs of their activities because that forces them to internalize the costs of their behavior and should lead to optimal deterrence.(31) The effects of this general principle on calculations of sanctions can be seen through the following example. Assume X engages in an activity three times, which gives X benefits of $99 each time, but causes harm to society of $100 each time. However, X is caught and held liable only one of those three times. What should X's sanction be the one time X is held liable? To obtain optimal deterrence X should be required to pay $300. This is because a sanction less than $300 means that X will not bear the total social costs of his behavior and engages in too much of the behavior from society's perspective.(32) This example highlights how a sanction would be set under the standard deterrence approach -- the sanction equals the harm caused divided by the probability of being held liable for causing that harm (or in this case $100 divided by one-third).(33) This method of calculating sanctions should, in most cases, result in the wrongdoer bearing the full social costs of her activities and in optimal deterrence.

      If X is judgment proof with respect to a $300 sanction (for example, X has only $50 in assets) then X is again not optimally deterred because he faces only a fraction of the total social costs of his behavior.(34) In order to improve deterrence liability should perhaps be imposed on another person who has more assets and who might be able to influence the behavior of X.(35) We...