What Rises from the Ashes?

• Author: Khanna, Vikramaditya S.

1. INTRODUCTION 1029 II.WHAT REMAINS IF CORPORATE CRIMINAL LIABILITY FALLS? 1030 A. Sanctions 1030 B. Enforcement Considerations 1032 C. Procedures 1034 III. BLAMING AND MESSAGE SENDING FUNCTIONS 1035 IV. WHAT MIGHT BE GAINED? 1038 A. Information Gathering 1038 B. Political and Institutional Ramifications? 1040 C. Release of Resources 1042 D. An Impetus to Re-Think Regulation of Corporate Wrongdoing? 1042 V. CONCLUSION 1045 I. INTRODUCTION

   This symposium begins with a provocative prompt--imagine a world without corporate criminal law. This, in turn, triggers discussion of a topic that has occupied many scholars of different stripes--ranging from those who prefer less (or no) corporate criminal liability to those who wish to reinvigorate it, and virtually all points in between. (1) Instead of delving deeply into any one of these arguments, I take the prompt as given and examine two questions--what might be lost without corporate criminal law and what might arise to replace it. The first question explores whether other liability strategies might be able to cover any gaps arising from the demise of corporate criminal law and the second question examines how the absence of corporate criminal law might result in greater thought about, and perhaps novel approaches to, regulating corporate wrongdoing. On the second question, we can consider many options--some existing and some that might develop. The overall mix of approaches may end up being better than the current state of affairs. Although one need not celebrate the hypothesized fall of corporate criminal law, it does provide an opportunity (and perhaps the impetus) to improve the regulation of corporate wrongdoing. This paper explores that endeavor with some early thoughts but without necessarily choosing one particular approach to regulating corporate wrongdoing in the absence of corporate criminal law. Rather, the goal of this Article is to spur discussion and thought.

   Part II discusses what remains if there is no corporate criminal liability. It focuses on the suite of liability regimes we would still have and how they essentially provide all that corporate criminal liability does with two potential exceptions--the blaming and message-sending functions of corporate criminal law. Part III dives more deeply into these two exceptions to note that both functions were, for most of the history of corporate criminal liability, not important considerations in its growth and application. Rather, filling enforcement gaps was the primary driver. In addition, these potential functions do not always lead to clear regulatory policy and are sometimes inadequately explored. Part IV then goes further and asks what we might gain if there were no corporate criminal liability. Here, the panoply of benefits might include a greater ability to gather information, reduce certain political economy concerns of the current enforcement system, free up funds to be used in enforcement actions that may carry greater deterrent effect, and the opportunity to rethink a few issues about how we might regulate corporate wrongdoing. On this last point, consider the following: greater reliance on direct ex ante regulation (rather than just liability ex post), potentially greater liability for third parties, a new civil agency dedicated to pursuing serious corporate wrongdoing, and perhaps making it more difficult for executives to obtain insurance or indemnification for sanctions relating to certain kinds of wrongs (something that is already done in limited measure). Part V concludes.

2. WHAT REMAINS IF CORPORATE CRIMINAL LIABILITY FALLS?

   The first thing to note is that the hypothesized demise of corporate criminal liability does not leave us bereft of options for regulating corporate wrongdoing. We could rely on corporate civil liability (enforced by government agencies and/or private parties), individual criminal and civil liability targeted at corporate employees and executives, and criminal and civil liability on third parties. As has been argued earlier, these liability strategies essentially possess all the features of corporate criminal liability. (2) Indeed, if anything, these other liability regimes have become stronger than corporate criminal liability on many fronts over time. I briefly explore these key features here, leaving two potential exceptions--the blaming and message-sending features of corporate criminal liability--for Part III.

   1. Sanctions

      Because corporations are not human, one cannot impose a prison sentence on them. That then leaves only monetary penalties, which could, of course, be imposed using civil or criminal liability. There are surely penalties that are imposed more frequently in criminal cases against corporations, but conceptually, nothing prevents the same sanctions from being available in civil proceedings. Thus, if a criminal conviction leads to the loss of a government license to do business, then one can easily imagine a finding of liability in civil proceedings leading to the same effect. (3) Moreover, it appears that civil sanctions are generally larger than criminal sanctions. (4)

      Of course, there is frequent reference to the argument that criminal sanctions on corporate entities generate a greater reputational penalty on the corporation and/or the employees of the firm than civil sanctions would. (5) This stems from the notion that criminal penalties carry the opprobrium of society, and that would be reflected in greater reputational damage than a civil finding of liability. Although plausible, the evidence for such a differential reputational effect for corporations is weak, and it seems difficult to predict or marshal--making it a bit more like an unguided missile (or a poorly directed one). (6)

      Studies on the stock price reaction to announcements of enforcement proceedings do not suggest grand differences between the reputational effect on corporations of criminal versus civil liability. (7) Indeed, even anecdotal evidence often suggests that either the criminal label does not always garner much greater attention or that sometimes the civil sanction may be more salient. An example is the Exxon Valdez oil spill from the early 1990s, where people typically remember the $5 billion punitive damages award (later trimmed to about $1 billion) rather than the $125 million criminal settlement. (8) A simpler way to read some of the studies is that the market price reaction is driven by whatever influences market price (e.g., future sales, future enforcement actions) and that, in turn, is more likely driven by the underlying severity of the wrongdoing rather than the label--criminal or civil--placed on it.

      On the other hand, perhaps the reputational difference is not about the corporation's reputation, but rather that of the corporation's employees who are not directly involved in the wrongdoing (those who are directly involved might presumably be sanctioned under individual liability regimes). These employees might bear a reputational loss that is more severe if the corporation's wrongdoing is labeled criminal rather than civil. (9) Here, the argument is both that employees feel less comfortable at firms labeled as "criminal" and that they may find their future job prospects hurt by the association. There is not much evidence provided for this argument, (10) but even if there were, one might be uncomfortable with it. It presumes that employees not involved in the wrongdoing bear the reputational loss. Why would that be a good thing?

      It might be appealing if we thought that uninvolved employees would make good monitors of corporate wrongdoing. (11) However, if we thought that, perhaps it might be even better to identify such employees (or categories of employees) via regulation, liability, or something else rather than rely on the vagaries of reputational effects. (12) For instance, if these employees were supervisors, then a version of the responsible corporate officer doctrine might be worth considering. (13) Moreover, reliance on these kinds of reputational effects is fraught with challenges because it raises difficult questions such as: is the effect too large or too small; is it sufficiently targeted to the "right" people; can law enforcement really control and target it? (14)

   2. Enforcement Considerations Corporate criminal liability may have features that make it a particularly useful method of enforcing liability compared to corporate civil liability and the other alternatives. Indeed, as argued in Part III, the enforcement differences between corporate criminal liability and its alternatives essentially form the raison d'etre for its historical development and growth until the early 1900s. However, over time, the alternative liability regimes have gained enough enforcement powers to match or exceed those available under corporate criminal liability.

      Initially, corporate criminal liability involved a form of public enforcement that was not easily available on the civil side. (15) That would have been sufficient justification for its existence. But for nearly a century now, the civil side also has public enforcement through a variety of federal, state, and international agencies.

      One might then argue that criminal liability--known in part for its compulsory process--might provide the ability to gather greater amounts of information than civil liability. As with the public enforcement feature, this was certainly a valid justification at some point in time, but it, too, has become less persuasive over time. Now, it appears that gathering information might, arguably, be easier on the civil side. (16)

      Further, the criminal justice system's much-vaunted ability to compel evidence is perhaps less valuable than it used to be in light of firms' relatively recent growth in compliance efforts. When corporations implement internal control or compliance systems that can track in detail what employees are doing while at the office, then it is unclear how...