Refusing to settle: why public companies go to trial in federal criminal cases.

Author:Warin, F. Joseph

On September 9, 2010, a San Bruno, California, natural gas pipeline exploded, killing eight people and leveling a neighborhood. In connection with the incident, utility Pacific Gas and Electric Company ("PG&E") was charged recently with twelve criminal felony counts alleging violations of the Natural Gas Pipeline Safety Act, 49 U.S.C. [section] 60123 (1) (the "Pipeline Safety Act"). (2) However, rather than go the route of a negotiated resolution, PG&E pleaded not guilty to the criminal counts in both the initial and superseding indictments, opting to put the prosecutors to their proof.

On July 17, 2014, another publicly traded company, FedEx Corporation, FedEx Express, Inc., and FedEx Corporate Services, Inc. (collectively, "FedEx") was criminally charged with fifteen counts of violating a number of drug-related laws. (3) The counts in part alleged a conspiracy to ship and deliver drugs from online pharmacies that dispensed prescription drugs without a proper prescription. (4) FedEx pleaded not guilty to the charges on July 29, 2014. (5) Two weeks later, a superseding indictment added money laundering charges to those previously brought; (6) FedEx has pleaded not guilty to those charges as well. (7) Federal criminal charges can overhang companies for years: neither PG&E nor FedEx is scheduled to be tried until 2016.

These recent charges invite questions as to the frequency with which publicly traded companies go to trial in federal criminal cases, and the factors driving the decision to do so. In general, only a very small number of corporate prosecutions involve trials, as more than ninety percent of prosecuted corporations plead guilty. (8) For example, the United States Sentencing Commission data from 2013 indicates that out of 172 organizations convicted that year, only nine had opted for trial. (9) Companies frequently seek to avoid trial for several reasons, including the nearly strict liability of corporations for the actions of their employees and the fear of an Arthur Andersen-style "corporate death sentence." Some attorneys have argued that "[t]he low threshold for corporate criminal liability ... combined with the threat of being debarred or excluded from contracting with the federal government upon conviction, has all but closed the criminal courthouse door to sizable corporations in the United States." (10) Others contend that despite the ambiguity of the government's proof, the reputational injury from prolonged proceedings, coupled with the diversion of senior leadership from the corporation's core mission, compels a resolution.

Accordingly, to animate the issue, we surveyed twelve federal criminal trials of public companies (11) from the last two decades and analyzed the trial outcomes and news reporting surrounding the events. (12) Although it is difficult to discern the precise reasoning behind a company's legal strategy, our analysis suggests that a number of legal, evidentiary, business operational, and general strategic considerations contribute to a company's decision to go to trial.

After identifying the factors that tend to inform this critical decision, we then, with the benefit of hindsight, address whether the decisions to go to trial in these twelve cases support the unconventional wisdom that it may indeed be mandatory for public companies, under some circumstances, to go to trial.


    1. Ambiguity of the Law

    Some companies may choose to go to trial when the state of the law is unclear, in the hope that they will be able to vindicate themselves. In United States v. Nippon Paper Industries Co., the government charged Nippon Paper Industries Co. ("Nippon Paper") with conspiring to fix prices for thermal paper, (13) in violation of the Sherman Act. The case against Nippon Paper was unique, as it "marked the first time a foreign company was tried for alleged misconduct that took place entirely on foreign soil." (14) Appleton Papers Inc., one alleged coconspirator, had already been acquitted at trial; five other alleged coconspirators had pleaded guilty. (15) Under such circumstances, it was difficult to predict the results of a trial. This legal ambiguity may have been a significant factor in driving the company to trial.

    When the Nippon Paper trial ended with a hung jury, federal prosecutors sought to retry the case; defense counsel countered with a motion for acquittal. (16) Ultimately, the district court offered a novel opinion in response to the novel facts. The court ruled that "[t]he correct approach to a foreign price-fixing conspiracy ... is what the First Circuit announced, something akin to a 'per se plus' test, adding to the traditional domestic analysis the requirement that the government show substantial effects by showing a substantial connection to the United States market." (17) In part based on this "substantial effects" standard, the district court granted Nippon Paper's motion for acquittal. (18)

    In Morrison v. National Australia Bank Ltd., the Supreme Court underscored the Nippon Paper conclusion (19) in the civil context, reemphasizing the canon of construction that federal law does not apply extraterritorially unless such application is clear from the statute. (20) More recent lower court cases have extended this holding beyond the Securities Exchange Act to the Racketeer Influenced and Corrupt Organizations Act ("RICO"); (21) in a recent appeal of its price-fixing conviction, Taiwanese public company AU Optronics argued that Morrison applies to the Sherman Act as well, the same legal scheme at issue in Nippon Paper. Rather than address that argument on the merits, however, the Ninth Circuit held that the company had waived that claim as a result of its earlier arguments on the subject of extraterritoriality. (22)

    Like the charges against Nippon Paper, the case against PG&E is a new enforcement frontier for the government. Bloomberg quoted the executive director of the Pipeline Safety Trust as saying that the PG&E indictment marks only the second time since the 1968 enactment of the original Pipeline Safety Act that the federal government has brought criminal charges against a company for pipeline safety violations. (23) PG&E may believe that this novelty will work to its advantage.

    FedEx may similarly be compelled to go to trial to rebut the prosecution's expansive theory of culpability. FedEx seeks to go to trial, in part, to challenge the proposition that, as a common carrier of freight, it is obligated to ascertain a package's contents. The issues in that case, including customer privacy and a transportation company's liability for the contents of its packages, are unusual, as FedEx sought to highlight in its press release:

    We want to be clear what's at stake here: the government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day.... We have no interest in violating the privacy of our customers. We continue to stand ready and willing to support and assist law enforcement. We cannot, however, do the job of law enforcement ourselves. (24) B. Complexity of the Legal Scheme

    The complexity of the relevant statutory scheme and seemingly arbitrary criminalization of various violations may compel a company to choose trial as well. The Pipeline Safety Act, for example, involves a deep and intricate statutory scheme that prescribes criminal penalties for knowing and willful violations of various provisions. Approximately a third of the pages in the original nineteen-page indictment are devoted to detailing the statute and underlying regulations. (25)

    The indictment alleges that PG&E:

    * "knowingly and willfully failed to gather and integrate existing data and information on a line ... that could be relevant to identifying and evaluating ... potential threats;"

    * "knowingly and willfully failed to maintain records concerning the date, location, and description of each repair made to a line;"

    * "knowingly and willfully failed to identify and evaluate potential threats to covered segments on the lines set forth [in the indictment];"

    * "knowingly and willfully failed to include in its annual baseline assessment plan all potential threats on a covered segment and failed to select the most suitable assessment method to assess ... potential threats;"

    * "knowingly and willfully failed to prioritize covered segments of lines as high risk segments for the baseline ... or a subsequent reassessment, after a changed circumstance rendered manufacturing threats on segments of the lines set forth below unstable;" and

    * "knowingly and willfully failed to prioritize covered segments of a line ... as high risk segments for a baseline ... or a subsequent reassessment after a changed circumstance rendered manufacturing threats on those segments unstable, and failed to analyze covered segments to determine the risk of failure from such manufacturing threats." (26)

    A superseding indictment was filed on July 30, 2014. (27) The twenty-three-page indictment not only added fifteen counts to the original twelve under the Pipeline Safety Act, but also included a count alleging obstruction of an agency proceeding. (28) The potential penalties against PG&E increased to $1.1 billion. (29) To levy these penalties, however, the government will have to prove each one of these knowing and willful violations beyond a reasonable doubt. The Ninth Circuit Model Criminal Jury Instructions explain: "An act is done knowingly if the defendant is aware of the act and does not [act] [fail to act] through ignorance, mistake, or accident. [The government is not required to prove that the defendant knew that [his] [her] acts or omissions were unlawful.]" (30) Although the Ninth Circuit does not offer general instructions on what must be shown to prove willfulness, since "the meaning of 'willfully' necessarily depends on particular facts arising under the applicable statute," (31)...

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