Legal Backgrounder
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Vol. 25 No. 3
January 15, 2010
VICARIOUS CORPORATE LIABILITY:
COURTS CAN LEND REASON TO
ARCHAIC CRIMINAL LAW PRINCIPLE
by
Martin Kwedar
Throughout last year, policy makers and the public developed a growing appreciation for the
punishing costs that the overcriminalization of commercial conduct imposes on society and the economy.
The year began rather inauspiciously, however, when a federal court in New York sustained a jury verdict
holding a company criminally liable for the acts of its employees – conduct which was directly contrary to
the company’s compliance policies.
The United States Court of Appeals for the Second Circuit’s decision in U.S. v. Ionia Management
applied the theory that companies are vicariously responsible for their employees’ actions even though the
laws under which Ionia was charged were silent on such respondeat superior liability. The court also held
that the existence of an effective corporate compliance program was not a basis for an additional element or
affirmative defense to Ionia’s charged crimes. In doing so, the Ionia court, like others before it, misapplied
the principle of the U.S. Supreme Court’s holding in New York Central & Hudson River Railroad v. U.S.
Furthermore, the Ionia court compounded its mistake by rejecting recent analogous Supreme Court
precedent related to corporate compliance programs and the application of respondeat superior. These
Supreme Court decisions and basic criminal law principles, however, provide a better alternative to the
current state of this problematic area of the law.
Adopting an alternative approach will encourage corporate compliance while grounding the criminal
law in fundamental legal principles. This LEGAL BACKGROUNDER will discuss the holding of New York
Central, the facts and flawed analysis in Ionia, and the opportunity for courts to change their approach to
vicarious corporate criminal liability.
New York Central & Hudson River Railroad v. U.S.:
Its Misapplication and Consequences
The status of vicarious corporate criminal liability in federal case law can be traced back to the
Martin Kwedar is a graduate of George Washington University Law School and clerked at the District of
Columbia Superior Court. Sarah Hody, a student at George Mason Law School, provided research assistance for this
publication.
Supreme Court case New York Central & Hudson River Railroad v. U.S.1 In New York Central, the
appellant railroad company was convicted of violating the Elkins Act, a law which prohibits common
carriers, via its agents or employees, from reducing shipping prices below the published rate. There was no
factual dispute that the railroad company’s employees orchestrated a deal to give a customer a rebate of 5
cents for every 100 pounds of sugar shipped, resulting in a price below the published rate. Thus, the only
question was whether the Elkins Act’s respondeat superior provisions were constitutional.2 The Court held
that the Act was constitutional because Congress “may” pass legislation providing for vicarious corporate
criminal liability pursuant to its Commerce Clause powers.3 The Court did not dictate that courts must read
vicarious corporate criminal liability into federal statutes where Congress is silent. No Supreme Court
decision in the intervening 100 years has addressed the issue. Lower courts, however, have consistently
applied respondeat superior in criminal cases in which the relevant statute has no such provision.
The current broad application of respondeat superior in criminal law is punitive and archaic.
Criminal law is designed to punish morally culpable behavior and deter crime. If an employee flouts his
company’s rigorous compliance program and breaks the law, it is nonsensical to say the company is morally
culpable. Punishing a company that has an effective compliance program does little to deter malfeasance.
Such prosecutions merely punish innocent employees and shareholders with sometimes devastating results.
In certain industries, a criminal indictment can disqualify a company from participating in critical regulated
activities. One needs only look at the dubious indictment of Arthur Andersen to see the damaging effects of
an unnecessary criminal prosecution.4 The current approach also ignores more effective alternatives in
administrative and civil law. The vast growth of federal regulatory agencies has made administrative law the
vehicle to develop sensible rules for corporations and to mete out punishments. Similarly, civil penalties can
effectively compensate parties for the damages caused by corporate employees without the negative
consequences of criminal prosecutions.
U.S. v. Ionia Management:
Vicarious Corporate Criminal Liability Out of Thin Air
The misinterpretation of New York Central’s holding recently reared its head in the Second Circuit
case, U.S. v. Ionia Management.5 In Ionia, the crew of an oil tanker, managed by the defendant corporation,
discharged oily waste water on the high seas via a “magic hose.” The hose bypassed the ship’s oil filtration
equipment contrary to Ionia’s corporate compliance policies. The crew then falsified the ship’s oil record
book to hide the illicit discharges. When the U.S. Coast Guard later inspected the ship, the crew attempted
to hide the falsified oil record book and the “magic hose.” Subsequently, the government charged Ionia with
criminal conspiracy, violations of the Act to Prevent Pollution on Ships (APPS), falsification of records in a
federal investigation, and obstruction of justice.6
The Second Circuit employed a superficial analysis to determine: (1) whether the statutes cited in the
indictment imputed criminal liability from the crew to Ionia, and (2) whether Ionia’s compliance policies
were the basis for an additional element or affirmative defense to the charges. As to the first question, the
court cited U.S. v. George F. Fish, Inc. and U.S. v. Twentieth Century Fox for the general proposition that
corporations may be held liable for the actions of its employees in the scope of their employment. Therefore,
1
212 U.S. 481 (1909).
Id. at 489.
3
Id. at 496-498.
4
Carrie Johnson, U.S. Ends Prosecution of Arthur Andersen, W. POST, Nov. 23, 2005, available at:
http://www.washingtonpost.com/wp-dyn/content/article/2005/11/22/AR2005112201852.html (last visited Nov. 20, 2009).
5
555 F.3d 303 (2nd Cir 2009).
6
Id. at 305-06.
2
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Ionia was criminally liable for the crew’s actions because they acted in the scope of their employment in
dumping the waste water. As to the second question, the court acknowledged Ionia’s compliance program,
but decided that it only was relevant in determining whether or not the employees acted in the scope of their
employment. Citing Twentieth Century Fox, the Court rejected the argument that Ionia should be able to use
the program as an additional element or affirmative defense to the charges.7
The Ionia court’s reasoning is flawed because the cases cited do not support the general proposition
that implied vicarious corporate criminal liability exists in all federal statutes. Fish cited New York
Central’s holding that Congress “may” make laws containing vicarious corporate criminal liability, hinting
that respondeat superior is implied in every statute. Yet the Fish court analyzed the relevant statute, the
Emergency Price Control Act of 1942, to determine if Congress intended to include vicarious corporate
criminal liability in that specific instance.8 The other case cited, Twentieth Century Fox, was a Sherman
Antitrust Act case holding only that “it is settled law that a corporation may be held criminally responsible
for antitrust violations committed by its employees or agents acting within the scope of their authority.”9
Thus, the cases cited in Ionia illustrate that whether or not to imply vicarious corporate criminal liability
where Congress is silent is an unsettled question and permits a case-by-case determination.10 Furthermore,
the court ignored recent Supreme Court precedent related to corporate compliance programs and respondeat
superior.
Recent Supreme Court Decisions and
Vicarious Corporate Criminal Liability
The Supreme Court has never decided whether vicarious corporate criminal liability applies when
Congress is silent on the issue. Three recent civil harassment cases brought under Title VII of the Civil
Rights Act of 1964, however, do provide guidance. The availability of punitive damages makes Title VII
case law analogous to criminal law. Punitive damages operate as private fines, like criminal penalties, to
punish the defendant, deter future wrongdoing, and express moral condemnation.11 In the Title VII cases –
Faragher v. City of Boca Raton, Burlington Industries, Inc. v. Ellerth, and Kolstad v. Am. Dental Ass’n – the
Court restricted vicarious corporate criminal liability to the acts of supervisors, holding that broad
respondeat superior rules do not serve the goals of punishment or deterrence. Furthermore, the Court
decided that reasonable corporate compliance policies should be a defense to vicarious liability in quasicriminal settings.12 The Court reached this decision because broadly applying respondeat superior “would
reduce the incentive for employers to implement antidiscrimination programs.”13 Thus, recent Supreme
Court precedent suggests that vicarious corporate criminal liability should not apply as a default and instructs
courts to allow the use of compliance programs as an affirmative defense.
7
Id. at 309-310.
154 F.2d 798, 801 (2d. 1946).
9
882 F.2d 656, 661 (2d. 1989) (emphasis added).
10
Other Second Circuit cases exemplify this case by case approach. The case U.S. v. Paccione, 949 F.2d 1183 (2d Cir.
1991), cited U.S. v. Demauro, 581 F.2d 50, 53 (2d Cir. 1978) and United States v. Ingredient Technology Corp., 698 F.2d 88, 99
(2d Cir. 1983), for the general proposition that the act of an agent on the corporation’s behalf may be chargeable to the
corporation. Paccione, 949 F.2d at 1200. Yet in Demauro the court based its decision on express language in the Bank Secrecy
Act providing for vicarious corporate criminal liability. Id. at 54. In U.S. v. Ingredient Technology Corp., a tax fraud case, the
court relied on changes to provisions Internal Revenue Code which now included corporations in the definition of “person” to
impute liability to the corporation. Id. at 99.
11
Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974).
12
524 U.S. 775, 780; 524 U.S. 742, 765; 527 U.S. 526, 543.
13
527 U.S. 526, 528.
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A Missed Opportunity and a Chance to Get Back on Track
Analogous case law from the Supreme Court lends some guidance when a federal statute is silent
regarding vicarious corporate criminal liability. The basis for imputing vicarious corporate criminal liability
in the absence of express language in a federal statute, however, remains undefined. The Ionia court
sidestepped this issue by citing largely irrelevant cases. The Second Circuit also ignored the benefits, noted
by the Supreme Court, of employing corporate compliance policies as an element of a crime or an
affirmative defense to respondeat superior. Fortunately, Supreme Court precedent and the basic principles
of criminal law offer better alternatives to the status quo.
The current state of vicarious corporate criminal liability law creates a nation of men rather than
laws. Held criminally liable for the unauthorized acts of employees which were directly contrary to company
compliance policies, businesses’ only defenses are policy arguments appealing to prosecutorial discretion.
Instead of making a legal argument to judges or a factual argument to juries, corporations must negotiate
with the government without a neutral arbiter.14 While many prosecutors do not abuse their discretion, the
potential for abuse often becomes a reality.15 Courts can avoid this pitfall by narrowly applying respondeat
superior in criminal cases and using effective corporate compliance policies as an additional element or
affirmative defense to criminal charges. Commentators from a wide range of professional and ideological
backgrounds, including the American Law Institute, support these alternative ideas because the current state
of the law is so troublesome.16 To remedy the problem, courts should acknowledge that vicarious corporate
criminal liability is not implied in statutes where Congress is silent on the issue. The next step is to
recognize, as the Supreme Court has in analogous Title VII cases, that encouraging effective corporate
compliance policies better serves the goals of punishment and deterrence. Taking this new approach will
serve the goals of the criminal justice system, prevent prosecutorial overreaching, and incentivize
corporations to comply with the law.
Conclusion
Criminally prosecuting a corporation for an employee’s illegal actions despite rigorous compliance
programs serves little purpose. Wrongdoers are not punished or deterred. Negative consequences of this
jurisprudence abound. In light of this, it is vital that courts understand that whether vicarious corporate
criminal liability applies in a statute where Congress is silent on the issue remains unsettled. The Ionia court
is merely one recent example of a court falling into the trap of viewing vicarious corporate criminal liability
as implied in federal case law. Going forward, an opportunity exists for other courts to address the gap in
the law by following analogous Supreme Court precedent and the fundamentals of criminal law.
Capitalizing on this opportunity will clarify the law, allow compliant businesses to create wealth, and punish
bad actors.
14
Gerald E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 LAW & CONTEMP. PROBS. 23, 59
(1997).
15
Though many examples of prosecutorial misconduct in this setting exist, two recent instances are notable. In U.S. v.
Stein, 435 F. Supp. 2d 230, (S.D.N.Y. 2006), the trial judge ruled that prosecutors violated the Constitution by coaxing KPMG to
stop paying its attorneys’ fees. In the Bristol-Myers Squibb deferred prosecution agreement, part of the agreement was to endow a
professorship at the prosecutor’s alma mater. Andrew Weissmann with David Newman, Rethinking Criminal Corporate Liability,
82 IND. L.J. 411, 415 n.5 (2007).
16
Model Penal Code, § 2.07(5) (1962).
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