Punishing Corporations: the Food-chain Schizophrenia in Punitive Damages and Criminal Law

• Publication year: 2021

87 Nebraska L. Rev. 197. Punishing Corporations: The Food-Chain Schizophrenia in Punitive Damages and Criminal Law

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Christopher R. Green(fn*)

Punishing Corporations: The Food-Chain Schizophrenia in Punitive Damages and Criminal Law

TABLE OF CONTENTS

I. Introduction ....................................................... 198

II. Types of Food-Chain Rules for Punishing Corporations .............. 199 A. Liberal Rules .................................................. 200 1. The Federal Rule for Corporate Crime ........................ 200 2. The Goddard-Mobile Rule for Corporate Punitive Damages ..................................................... 202 3. An Accounting of Liberal Rules .............................. 204 B. Types of Restrictive Rules ..................................... 204 1. The MPC Rule for Corporate Crime ............................ 204 2. The Restatement Rule for Corporate Punitive Damages ..................................................... 206 3. Lake Shore and the Restrictive-Rule Ratification-Requirement-Regress (5R) Problem ..................................................... 209 4. Corporate-Policy Rules ...................................... 212 5. A Survey of Restrictive-Rule Touchstones .................... 215 6. Amount-of-Punishment Rules .................................. 216 7. Prosecutorial-Discretion Rules .............................. 219

III. The Schizophrenic Landscape of the Law ........................... 221 A. Consistently Liberal Jurisdictions ............................ 226 B. Consistently Restrictive Jurisdictions ........................ 229 C. Federal-Schizophrenia Jurisdictions ........................... 239 D. Pennsylvania-Schizophrenia Jurisdictions ...................... 247 E. Lack of Cross-Fertilization Between Fields .................... 250

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IV. Why Criminal Law and Punitive Damages Should Have the Same Food-Chain Rule For Punishing Corporations ...................................................... 258 A. Identical Functions: Deterrence and Retribution ................ 258 B. Applicability of Reasons to Both Fields ........................ 259 C. Similar Mens Rea and Scienter Requirements ................................................... 262 D. Clarity in the Corporate Duty to Prevent Employee Misbehavior .................................................... 263 E. Punishing Corporations and Blaming Corporations ................................................... 263 F. Possible Defenses of a Mismatch ................................ 265

V. Conclusion ......................................................... 269

I. INTRODUCTION

American law has been persistently unsettled about when corporations should be punished. In particular, American law has been persistently unsettled when answering what I call the food-chain issue: How high must misbehavior go in a corporate hierarchy before a corporation may be punished? When, if ever, can a corporation legitimately claim that punishment is inappropriate because misbehavior should be attributed only to an individual employee, and not to the corporation itself? More specifically, I will look at the food-chain question for criminal mens rea and civil scienter: when should such improper mental states by an employee be imputed to a corporation?(fn1)

This article uncovers a schizophrenia regarding the food-chain issue which has not previously been explored. Both criminal law and the law of punitive damages feature a deep split of authority on the food-chain issue between states following a broad rule attributing the mental states of any employee to the corporation and those following a narrow rule only attributing the mental states of relatively important employees. Strikingly, the divisions of authority do not match. Many jurisdictions take different approaches to the food-chain issue in punitive damages and criminal law. More surprisingly, no one has analyzed or assessed this schizophrenia before.

In Part II of this paper, I set out the full menu of approaches that American jurisdictions take with regard to corporate punishment in either criminal law or the law of punitive damages. The broad or liberal rule in both fields tracks the traditional respondeat superior scope-of-employment rule for compensatory damages. Different sorts

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of narrow or restrictive rules, though, set different criteria for exactly when an employer can escape punishment even though an employee misbehaved in the scope of his employment.

Part III gives a complete picture of the current food-chain-issue schizophrenia. Slightly over half of the American jurisdictions (28 of 55, counting federal law, the District of Columbia, Puerto Rico, Guam, and the Virgin Islands) take inconsistent positions on corporate crime and corporate punitive damages. All four possible approaches are well represented among American jurisdictions. Eleven jurisdictions are Consistently Liberal; sixteen are Consistently Restrictive; eighteen follow Liberal Rules for corporate crime but Restrictive Rules for corporate punitive damages, and ten follow Liberal Rules for corporate punitive damages but Restrictive Rules for corporate crime. A survey of the literature on corporate punitive damages and corporate crime reveals that almost no one, either courts or commentators, has given the issue any attention. This lack of cross-fertilization is particularly curious because there are many ways in which litigants might profitably point out the current schizophrenia to foster their own cases. Some litigants in almost all states can profit by pointing out the connections (and inconsistencies) between the resolution of food-chain issues in criminal law and punitive damages.

In Part IV, I consider whether corporate crime and corporate punitive damages should resolve the food-chain issue the same way. I argue that compelling reasons exist to think that criminal law and the law of punitive damages should apply the same rule to decide when to punish a corporation. Several distinctions might be offered to explain the divergence of approaches, but they do not justify it.

II. TYPES OF FOOD-CHAIN RULES FOR PUNISHING CORPORATIONS

In both criminal law and the law of punitive damages, some states follow what I call the Liberal Rule and some other states follow what I call a Restrictive Rule. The Liberal Rule allows courts to punish a corporation if any employee misbehaves in the scope of her employment--thereby imputing to a corporation any employee's malice, knowledge, recklessness or other scienter or mens rea. The Restrictive Rule allows courts to punish corporations only if relatively high-level employees (the usual term is a "managerial" or "high managerial" employee) misbehave while acting in the scope of their employment-- thereby imputing to a corporation only such high-level employees' scienter or mens rea. Put another way, we might divide employees between more important Big-Cheeses and less important Small-Fries. The Restrictive Rule punishes corporations only for Big-Cheese misbehavior, but the Liberal Rule punishes corporations for Small-Fry misbehavior too.

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Of the fifty-five jurisdictions I survey, I count a thirty-four to twenty-one advantage for Restrictive Rules on corporate punitive damages and a twenty-nine to twenty-six advantage for Liberal Rules on corporate crime.(fn2) Therefore, among the 110 rules on corporate punishment, I count a sixty to fifty advantage for Restrictive Rules.

The Liberal Rules for corporate punishment are relatively simple; they simply punish corporations for the same conduct that tort law uses for compensatory damages: the actions of any employee in the scope of employment.(fn3) Sometimes the Liberal Rule is therefore called a "scope-of-employment" rule.(fn4) However, there are many types of Restrictive Rules, giving different answers to the food-chain question, "how high in the corporate hierarchy is enough?" The Liberal Rule requires no special articulation, which a Restrictive Rule would require, of a Big-Cheese/Small-Fry distinction. I assume, therefore, that states that allow for a type of corporate punishment without specifying a food-chain limit on its availability follow the Liberal Rule.

A. Liberal Rules

Many courts apply a rule that does not allow a corporation to avoid punishment by disavowing a low-level employee's mental states. If an employee is within the scope of his employment, then his mental states are always imputed to the corporation. If the employee is punishable, so is the corporation.

1.The Federal Rule for Corporate Crime

The Liberal Rule for corporate crime is also known as the "federal" rule, after its establishment in the New York Central and Hudson case in 1909 and succeeding cases.(fn5) The rule holds that a corporation may be punished for the act of any employee within the scope of his employment, applying the same familiar rules that are applied for compensatory damages. New York Central and Hudson approved a

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statutory provision that provided for criminal liability regarding the regulation of the rates of common carriers. The provision provided that:

The act, omission, or failure of any officer, agent, or other person acting for or employed by any common carrier, acting within the scope of his employment, shall, in every case, be also deemed to be the act, omission, or failure of such carrier, as well as that of the person.(fn6)

The Court explained:

While the law should have regard to the rights of all, and to those of corporations no less than to those of individuals, it cannot shut its eyes to the fact that the great majority of business transactions in modern times are conducted through these bodies, and particularly that interstate commerce is almost entirely in their hands, and to give them immunity from all punishment because of the

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