Enforcement of Regulations against Corporations | Holger Spamann | April 03, 2016

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Enforcement of Regulations against Corporations

by Holger Spamann Show/Hide

As previously mentioned, corporations are subject to extensive regulations protecting non-shareholder constituencies. Regulatory enforcement is a major practice area, and virtually all corporations now employ dedicated regulatory compliance departments. Examples of such regulations include antitrust, banking regulation, and environmental protection law. While these laws all have their specialized courses, their enforcement presents some common issues that deserve mention even in an introductory corporate law course.

Civil Enforcement

Civil enforcement against corporations is easy, at least conceptually speaking, because it is similar to any other civil litigation. (In practice, corporate civil litigation employs armies of lawyers.) By and large, in civil proceedings, it does not matter whether the defendant is an individual or a corporation. In particular, under the law of agency, acts of individual employees are imputed to the corporation as they would be to an individual employer. Thus, the only question particular to corporate suits is whether the same corporate agent or group of agents — for example, the CEO or the board — had all relevant knowledge or intent where such is required, or whether “collective knowledge” is sufficient. On this question, courts have given divergent answers.

Criminal Enforcement

Unlike civil enforcement, criminal enforcement raises a host of issues particular to corporate defendants. This is because first, a corporation does not have a mind and hence cannot have a “guilty mind” —mens rea—, and second, it does not have a body and hence cannot be incarcerated.

History

At common law, corporations could not be criminally liable. In the 19th century, however, criminal statutes regulating economic behavior through fines proliferated. Some of those statutes explicitly extended criminal liability to corporations. In 1909, the Supreme Court assessed the constitutionality of one such statute in New York Central & Hudson River Railroad Co. v. U.S., holding  that

“Applying the principle [of respondeat superior] governing civil liability, we go only a step farther in holding that the act of the agent, while exercising the authority delegated to him …, may be controlled, in the interest of public policy, by imputing his act to his employer and imposing penalties upon the corporation for which he is acting ….

“It is true that there are some crimes, which in their nature cannot be committed by corporations. But there is a large class of offenses … wherein the crime consists in purposely doing the things prohibited by statute. In that class of crimes we see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them. … If it were not so, many offenses might go unpunished and acts be committed in violation of law, where, as in the present case, the statute requires all persons, corporate or private, to refrain from certain practices forbidden in the interest of public policy.”

212 U.S. 481, 494–95 (1909).

Nowadays, federal criminal statutes targeting a “person” — almost all statutes — presumptively apply to corporations (cf. 1 U.S.C. §1), as long as the agent acted within the scope of her employment and sought, at least in part, to benefit the corporation.

Policy

Is this extension of criminal liability a good idea? Or is civil liability sufficient?

Basics: Deterrence and Incapacitation

Leaving aside moral blame and retribution, there are two main arguments for why civil liability is insufficient for individuals: deterrence and incapacitation. Do these two arguments also support criminal liability for corporations?

For individuals, the threat of (criminal) imprisonment can improve deterrence beyond (civil) monetary liability, which is limited by an individual’s wealth. Corporations, however, cannot be imprisoned. They can only pay monetary fines. Thus, as far as penalties go, criminal liability does not improve deterrence for corporations beyond what civil liability could do. But criminal law does offer procedural enhancements that matter for corporate deterrence. First, certain aggressive enforcement tools, such as wiretaps, are only available in criminal prosecutions. These tools increase deterrence by increasing the probability that a violation will be discovered. Second, in criminal proceedings the government can act as a central enforcer on behalf of a dispersed class of injured parties, none of whom might have individual incentives to pursue a civil claim (but note that class actions would achieve the same purpose). For example, these two procedural enhancements are crucial for the government's enforcement of insider trading rules (but note that the majority of insider trading enforcement actions are brought by the S.E.C. in civil or administrative proceedings) and of antitrust rules against price fixing.

The second argument for individual criminal liability is incapacitation. Some individuals cannot be deterred, and society may be better off keeping them in prison. Similarly, if an organization is prone to illegal behavior despite the threat of civil liability, society may be better off shutting down that organization or at least excluding it from certain activities or businesses. In particular, some corporations may have more “aggressive” corporate cultures — the ingrained norms of behavior inside the organization — than others.

Overdeterrence?

Some commentators worry that corporations can offend with impunity because their well-financed legal defense teams overwhelm prosecutors' resources and resolve.

However, other commentators have the opposite concern — corporate criminal liability may overdeter. The optimal amount of certain crimes, such as the bribing of foreign officials, may well be zero. But shareholders, or even boards, do not have direct control over such crimes, which may be committed by lower-level employees. Therefore, shareholders and boards can prevent such crimes only through costly compliance programs. In other words, what is an intentional crime at the level of the acting individual (and, in the eyes of the law, for the corporation as a whole) is essentially a negligent tort at the level of the overseeing board and shareholders.

If the criminal penalty equals the societal harm caused by the crime, then corporations will be incentivized to spend only the socially optimal amount on compliance programs. However, if the penalty is higher than the social harm, then compliance spending may be socially excessive. A similar problem arises when it is unclear what constitutes lawful behavior, which is frequent in heavily regulated areas. For example, a bank might violate anti-money-laundering rules by not disclosing some transactions to its regulator, and violate privacy rules by disclosing too much. The net social benefit of disclosure is likely to vary little as the bank discloses a little bit more or less. But the bank itself is affected drastically if there is any small variation which leads to illegal disclosure or non-disclosure, since such violations can carry heavy sanctions. Again, the bank would be incentivized to spend more than the socially optimal amount on ensuring compliance.

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  1. 1 Show/Hide More Federal Sentencing Guidelines: Introductory Commentary to Chapter 8 - Sentencing of Organizations

    How do the Federal Sentencing Guidelines address the concerns described in my introductory note on enforcement? Do they profess to aim at optimal deterrence or optimal incapacitation? Do they achieve either? If not, what else do they aim to do, and does that make sense?

    The complete Guidelines for organizations are available here.

  2. 3 Show/Hide More U.S. Attorney S.D.N.Y.: Deferred Prosecution Agreement with General Motors (2015)
    Original Creator: Holger Spamann

    The complaint below memorializes the outcome of the federal government's investigation into General Motor's ignition switch scandal. Judge Nathan of the S.D.N.Y. entered the forfeiture order sought in December 2015.

    What exactly did the government prosecute General Motors for? Was GM's prosecution necessary for deterrence? For incapacitation?

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March 24, 2018

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