G O V E R N M E N T E N F O R C E M E N T A N D C O R P O R AT E C O M P L I A N C E
Seeking a Downward
Departure for Small
Business Impact
Sentencing Guidelines
By John R. Mitchell
and Matthew D. Ridings
While the threat to
liberty is usually the
primary concern of small
business owners who face
criminal prosecutions,
the potential loss of their
business is not far behind.
Despite the defense bar’s initial hopes for Blakely v. Washington, 542 U.S. 296 (2004), and United States v. Booker,
542 U.S. 220 (2005), securing a downward sentencing
departure under the United States Sentencing Guidelines
for a client without providing substantial
assistance to the government can be as elusive as a four-leaf clover. Absent a compelling reason for downward departure, many
small business owners face serious consequences in addition to a potential prison
sentence. Because of the vital and often irreplaceable roles that the owners play in the
daily operation of a small business, a prison
sentence can be a death knell for a company, leading to the collapse of a business,
defaults on loan obligations, and the guilt
of seeing loyal employees lose their jobs.
Now more than ever, we must pursue every available opportunity to seek downward
departures from federal sentencing guidelines that offer small business owners the
best opportunity to save their companies.
Section 5K2.0 of the federal sentencing guidelines provides one ground for a
downward departure from the guidelines
that defense attorneys under-use, departure “based on circumstances of a kind not
adequately taken into consideration.” U.S.
Sentencing Guidelines Manual §5 K2.0(a)
(2). Under this section of the sentencing
guidelines, some courts have found that the
loss of a business, and the resulting hardship on the business’s employees and others, have been grounds for departure from
the guidelines. This article considers this
often overlooked argument and examines
the factors that bear on a court’s decision
to depart downward from the guidelines
in imposing criminal sentences based on a
loss of business hardship.
Section 5K2.0 of the federal sentencing
guidelines includes the U.S. Sentencing Commission’s policy statement on appropriate
grounds for departure from the guidelines,
whether upward or downward. The commission identified several circumstances that
can warrant a departure, including:
• aggravating or mitigating circumstances, under section 5K2.0(a)(1);
• circumstances taken into account by the
guidelines but present in an offense to an
unusual degree, under section 5K2.0(a)(3);
John R. Mitchell is a partner and Matthew D. Ridings is an associate in the Cleveland office of Thompson
Hine LLP. Mr. Mitchell is an experienced first-chair trial lawyer, having tried both significant toxic tort and high-­
profile criminal matters to verdict in both federal and state courts. He is a member of DRI and its Government
Enforcement and Corporate Integrity Committee. Mr. Ridings’s practice focuses on criminal and civil litigation
and counseling involving antitrust, the Foreign Corrupt Practices Act and other competition related matters.
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• multiple, existing circumstances that,
viewed separately, would not warrant a
departure from the guidelines but which
viewed together would warrant it, under
section 5K2.0(c); and most important here
• a circumstance that is unidentified in
the guidelines but is relevant to determining an appropriate sentence, under
section 5K2.0(a)(2)(B).
of cases that have recognized the impact
that imprisoning a business owner can
have on the owner’s business, his or her
employees, and the surrounding community. Some of these cases have found that
these factors can, in certain extraordinary
circumstances, weigh in favor of a downward sentencing departure under section
5K2.0. This argument, and these cases, may
be a small business owner’s last, best hope
to save his or her company.
A number of cases have
held that the mere effect
on a business due to a
principal’s incarceration
was an insufficient
ground for downward
sentencing departure.
The Second Circuit Sets the Table
In United States v. Milikowsky, 65 F.3d 4
(2d Cir. 1995), the United States Court of
Appeals for the Second Circuit affirmed a
downward sentencing departure for Daniel Milikowsky, a principal in several companies related to the steel industry. Mr.
Milikowsky was convicted of price fixing
in violation of the Sherman Act, and during sentencing, the court, on the basis of
the effect that Mr. Milikowsky’s incarceration would have on his employees, departed
downward from the recommended guidelines range of eight to fourteen months and
imposed a sentence of two years probation, a fine, home confinement, and community service. Id. at 5–6. The government
appealed the sentence, asserting, among
other things, that the district court erred in
making its sentencing decision by considering the effects to Mr. Milikowsky’s business and his employees. Id.
The Second Circuit affirmed the district
court’s sentence. Id. at 9. After first acknowledging that several courts had found that
the effect on a business of a principal’s incarceration is generally an inappropriate
ground for departing from the sentencing
guidelines, the court held that if the sentencing guidelines do not take into account
extraordinary effects of a defendant’s imprisonment on the defendant’s employees,
a court may justifiably depart downward
from the guidelines in imposing a sentence. Id. at 7–8. Because such a departure
was legally appropriate, the Second Circuit
reviewed for clear error the lower court’s
holding that the facts of Mr. Milikowsky’s
case were so extraordinary that they justified a downward sentencing departure. Id.
The court noted that the lower court had
found that Mr. Milikowsky had an “indispensable” role in his two businesses, he was
the only person with the skills and know-
Despite these seemingly broad categories, not every ground permits a sentencing
departure. The commission explicitly prohibited courts from considering many factors in making decisions about departures,
including race, national origin, religion and
socioeconomic status. Id. at §5K2.0(d). And
while the commission specified that courts
could permissibly consider still other factors, the commission deemed them “not ordinarily relevant in determining whether
a departure is warranted.” Id. at §5H1.11.
These factors include “civic, charitable, or
public service; employment-­related contributions; and similar prior good works.” Id.
In fact, a number of cases have held that the
mere effect on a business due to a principal’s
incarceration was an insufficient ground
for downward sentencing departure. E.g.,
United States v. Reilly, 33 F.3d 1396, 1424
(3d Cir. 1994); United States v. Sharapan, 13
F.3d 781, 785 (3d Cir. 1994); United States v.
Rutana, 932 F.2d 1155, 1158 (6th Cir. 1991).
For a business owner, the sentencing
guidelines and case law often seem to offer
little opportunity to avoid potential incarceration, and even a relatively short prison
sentence would likely collapse a small business. There is, nonetheless, a growing line
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ledge to operate the businesses, the companies were in precarious financial condition,
without Mr. Milikowsky’s continued employment, the companies would certainly
fail, and, if the companies failed, as many
as 200 employees would lose their jobs. Id.
On the basis of the facts found by the
lower court, the Second Circuit held that
the lower court had not erred in departing downward from the guidelines sentence. Id. at 9. In doing so it cautioned,
however, that business ownership, or even
the ownership of a vulnerable small business, did not alone make a downward sentencing departure appropriate. Rather, the
court explained, it is only when imprisonment imposes extraordinary hardships
on the employees that departure is warranted. Id. The Second Circuit has reached
a similar conclusion on other occasions. See
United States v. Patel, 1998 U.S. App. Lexis
22150, at *11–13 (2d Cir. 1998) (affirming
downward departure where the district
court relied on hardship to the defendant’s
family and business if he were incarcerated); United States v. Khan, 94 F. App’x
33, 38–39 (2d Cir. 2004) (reiterating that a
district court can depart downward based
on extraordinary impact to a defendant’s
business if he were to be incarcerated, but
remanding for further fact finding).
The Sixth Circuit Follows Suit
In United States v. Holz, 118 F. App’x 928
(6th Cir. 2004), the defendant, Waldemar
Holz, was convicted of subscribing a false
tax return. Id. at 930. During the sentencing hearing, Mr. Holz argued that he was
entitled to a downward departure based
on family and business impact. Id. Mr.
Holz presented evidence to the court that
his wife had suffered a nervous breakdown
during trial and needed 24-hour care from
a family member for at least one year and
that his daughter had a heart condition that
rendered her unable to work and dependent on her parents for financial support.
Id. Mr. Holz presented evidence that he
and his two brothers were affiliated with
a condominium construction project and
that one of his brothers suffered a stroke
that prevented him from working on the
project. Mr. Holz showed the court that
without his continued involvement in the
project, the project would fail and jeopardize his other brother’s $4.5 million invest-
ment, the majority of which that brother
had borrowed. Id. at 930–31. Furthermore,
if he were imprisoned, Mr. Holz argued, his
other business would fail and at least four
other employees would lose their jobs. Id.
at 931. The district court determined that
the sentencing guidelines specified a prison
sentence of 12–18 months, but it departed
downward, determining that the facts of
the case were extraordinary because of the
effect a prison sentence would have upon
Mr. Holz’s family and business. The court
sentenced Mr. Holz to three years of probation and the payment of a fine. Id. at 930.
The government appealed the district
court’s sentence. It argued, among other
things, that the district court impermissibly had considered the impact of imprisoning Mr. Holtz on his business, which was
an improper socioeconomic factor under
the guidelines, and accordingly, the district
court erred in departing downward in sentencing. Id. at 933. The United States Court
of Appeals for the Sixth Circuit rejected
the government’s position and affirmed
the lower court’s sentence. In so doing, the
Sixth Circuit held that business impact was
fundamentally distinct from a defendant’s
socioeconomic status, which a court cannot consider under the sentencing guidelines. U.S. Sentencing Guidelines Manual
§5K2.0(d)(1); Holz, 118 F. App’x at 935. Business impact, the court explained, correlated
with a defendant’s socioeconomic status, but
because the U.S. Sentencing Commission explicitly had allowed courts to consider other
factors correlated with socioeconomic status,
such as a defendant’s educational skills, employment record, and employment-­related
contributions, interpreting the guidelines
as prohibiting courts from considering other
factors that correlated with socioeconomic
status misinterpreted the guidelines. Id. at
936. Business impact, although correlated
with socioeconomic status, accounted for
the impact on “innocent third parties, such
as other businesses, consumers or clients,
and employees.” Id. at 935.
In affirming the downward sentencing
departure, the Sixth Circuit distinguished
United States v. Rutana, 932 F.2d 1155 (6th
Cir. 1991), which was relied upon by the government. In Rutana, the Sixth Circuit stated
that “even assuming that [the defendant’s]
imprisonment would lead to the failure of
his business and the loss of his employees’
jobs, this fact does not distinguish [the defendant] from other similar offenders.”
Holz, 118 F. App’x at 936 (quoting Rutana,
932 F.2d at 1158). The Holz court held that
Rutana “simply left open the question of the
permissibility of considering business impact” because if business impact were impermissible to consider, the court reasoned,
“it would not have reached the question of
whether the impact on a defendant’s business rendered the circumstances extraordinary compared to other defendants.” Id.
The First Circuit Adopts the Reasoning
of the Second and Sixth Circuits
Similar to the decision of its sister circuit
in Holz, the United States Court of Appeals
for the First Circuit rejected the argument
that business impact is the equivalent of
“vocational skills,” a factor the U.S. Sentencing Commission viewed as inappropriate to consider in sentencing departures,
and, thus, typically was not appropriate for
consideration. In United States v. Olbres, 99
F.3d 28 (1st Cir. 1996), the defendants were
a husband and wife duo convicted of criminal tax evasion. Id. at 29. At sentencing, the
district court judge refused to depart downward based on the business impact of the
Olbres’ imprisonment, stating that business
impact could not serve as a basis for a departure. Apparently framing the issue for
appeal, the judge stated, however, that he
want[ed] the record to be clear that if
the fact that your business were to fail
could serve legally as a basis for departing under the Sentencing Guidelines,
then I would depart, and I would depart
in a manner sufficient to keep the business from failing and putting those people out of work.
Id. at 33. On appeal, the First Circuit examined extensively the Supreme Court of the
United States’ then-­recent decision in Koon
v. United States, 518 U.S. 81 (1996), superseded by statute on other grounds, 18 U.S.C.
§3742(e), to determine the bases that justified departing from the sentencing guidelines. Olbres, 99 F.3d at 34–35. The First
Circuit interpreted Koon to prohibit courts
from categorically refusing to consider
departure factors other than those explicitly included in the sentencing guidelines.
Id. at 34. Therefore, the First Circuit reasoned, because business impact was not a
factor explicitly prohibited by the sentenc-
ing guidelines, the district court must consider it. Id. at 35.
This did not, however, end the First Circuit’s inquiry. It then considered whether
“business impact” is tantamount to the
“vocational skill” factor that the sentencing guidelines discouraged as a factor warranting departing from the guidelines. Id.
(citing U.S. Sentencing Guidelines Manual
The Sixth Circuit held
that business impact was
fundamentally distinct from a
defendant’s socioeconomic
status, which a court
cannot consider under the
sentencing guidelines.
§5H1.2). Holding that “business impact” is
separate from “vocational skills,” the First
Circuit emphasized that a defendant’s skills
in the workplace are entirely divorced from
whether the defendant’s imprisonment will
cause job losses for innocent workers. Id.
The First Circuit remanded the case to the
district court to determine whether the defendants’ incarceration, and subsequent job
losses for defendants’ employees, brought
the defendants’ case outside the “heartland”
of the sentencing guidelines. The First Circuit provided little guidance to the district
court, but, similar to the Sixth Circuit, it
emphasized that the mere fact that third
parties will suffer harm as a result of a defendant’s imprisonment was not a sufficient
reason to depart from the guidelines; rather,
a court must evaluate individually the facts
and nature of each case. Id. at 36.
Other Circuits Have Rejected
the Milikowsky Rule
While the First, Second, and Sixth Circuits
have approved departing from the sentencing guidelines based on business impact,
the circuits have not adopted a uniform approach. At least three United States Courts
of Appeal—the Third, Fourth, and Eleventh
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Circuits—have determined that considering business impact is prohibited under the
sentencing guidelines. E.g., United States v.
Mogel, 956 F.2d 1555 (11th Cir. 1992); United
States v. Sharapan, 13 F.3d 781 (3d Cir. 1994);
United States v. Lawrence, No. 97-4006,
1997 U.S. App. Lexis 23849 (4th Cir. 1997).
In United States v. Mogel, the Eleventh Circuit reversed a district court that departed
The First Circuit
interpreted Koon to prohibit
courts from categorically
refusing to consider
departure factors other than
those explicitly included in
the sentencing guidelines.
downward from the sentencing guildelines
because, among other things, the defendant
had “a business that could go under if she
is not there to take care of it.” Mogel, 956
F.2d at 1557. The court of appeals found this
ground to “represent an indicator” of socioeconomic status and, accordingly, prohibited from consideration by the guidelines.
Id. at 1564. The Eleventh Circuit’s decision
in Mogel, however, was decided before the
Supreme Court’s Koon decision, and the
Mogel holding almost certainly cannot survive Koon’s scrutiny. See Olbres, 99 F.3d at
36 n.12 (distinguishing Mogel). As the First
Circuit explained in Olbres, Koon explicitly
found that “socio-­economic status and job
loss are not the semantic or practical equivalents of each other,” and although that a
career may “relate” to socioeconomic status, the relation does not “justify categorical exclusion of the effect of a conviction on
a career.” Id. (quoting Koon v. United States,
518 U.S. 81, 110 (1996)).
In a second case decided before Koon,
United States v. Sharapan, 13 F.3d 781 (3d
Cir. 1994), an opinion written by thenJudge Alito, the Third Circuit reached a
similar conclusion to that of the Eleventh
Circuit. In Sharapan, the defendant was
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the sole owner and shareholder of Ralph’s
Discount City, which was apparently a
small, consumer goods store that employed
approximately 30 people. Id. at 782. The defendant, along with his brother, who was
the owner of another corporation, were
charged with fraudulently submitting large
quantities of coupons that had not been
redeemed in connection with consumer
purchases. Id. At sentencing, the district
court judge stated that the business “probably could not survive the Guideline dictated
sentence.” Id. at 783. So the sentencing
court departed downward and imposed a
sentence of five years’ probation. Id.
Relying on section 5H1.2 of the sentencing guidelines, which specifies that considering a defendant’s vocational skills is not
ordinarily relevant to determining if a sentencing departure is warranted, the Third
Circuit reversed. Id. at 784. Although thenJudge Alito acknowledged that a court could
grant a downward departure in extraordinary circumstances, he reasoned that the
“Sentencing Commission concluded that
the goals of punishment should generally
take precedence over the objective of protecting society from the harm that it might
suffer if, as a result of a defendant’s incarceration, it were deprived of the work-­related
contribution that the defendant could have
otherwise made.” Id. Because the Third Circuit saw nothing extraordinary in the fact
that the defendant’s imprisonment could
cause harm to his business, it reasoned that
a downward sentencing departure was improper. Id. at 785.
Although the Third Circuit’s opinion in
Sharapan acknowledged that a sentencing court can depart downward based on
extraordinary vocational skills and technically still comply with Koon, the Third
Circuit did not explain what circumstances
may rise to the level of “extraordinary,” and
seemingly prohibited a departure merely
based on the failure of a business and consequent harm to its employees and society.
This appears to foreclose business impact
departures, notwithstanding the Supreme
Court’s decision in Koon. Although Sharapan only controls the law within the Third
Circuit, the opinion’s author will likely lend
it more weight in other courts, although
this has yet to be fully developed.
Finally, in an unpublished opinion, the
Fourth Circuit briefly took on the ques-
tion of business impact departures and
found that downward departures were
inappropriate. In United States v. Lawrence, No. 97-4006, 1997 U.S. App. Lexis
23849 (4th Cir. 1997), the defendant owned
a landscaping business that bid for government contracts. The defendant arranged
to obtain confidential pricing and bidding
information from disgruntled employees
of one of his competitors, and he used that
information to undercut his competitor’s
bid, winning the contract. Id. at *3. Shortly
afterward, the disgruntled employees were
hired by the defendant’s business, triggering a government investigation. Id. at *4.
The district court departed downward in
sentencing on several bases, including that
a prison sentence would result in hardship for defendant’s 80 employees, many of
whom were “downtrodden folk who could
not easily find jobs elsewhere.” Id. at *8–9.
The Fourth Circuit summarily reversed,
holding that there is “nothing atypical”
about an imprisoned boss whose business
is in peril as a result of his incarceration.
Id. at *9. The Fourth Circuit did not discuss
or even mention the Supreme Court’s then-­
recent decision in Koon; the Fourth Circuit
simply cited the Third Circuit’s decision in
Sharapan and the Sixth Circuit’s questionable holding in Rutana. Due to the Fourth
Circuit’s reliance on Rutana and its failure
to consider the impact of Koon, the Lawrence decision seems ripe for challenge,
but, unquestionably, any such defendant
will face a tough row to hoe.
Conclusion
While the threat to liberty is usually the primary concern of small business owners who
face criminal prosecutions, the potential loss
of their businesses is not far behind. Many
are dismayed to learn that criminal prosecutions may destroy their businesses, put their
employees out of work, cause significant financial distress for their companies and
their lenders, and leave them without opportunities to rebuild their lives after their
sentences have concluded. Seeking a downward sentencing departure under section
5K2.0 of the sentencing guidelines can offer the best opportunity to bring these issues
to a sentencing court’s attention, allowing
it to depart from a sentence outlined in the
guidelines to one that can take these compelling issues into account.