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End, Don't Mend, Corporate Criminal Liability

July 27, 2009 8:00 AM

I would like to thank the Manhattan Institute for inviting me to participate in this online exchange on "Criminalizing Corporate Conduct: How Far Is Too Far?" It's my job to open the dialog, so I will do so by answering the question directly. It is all too far. There is no justification for criminalizing any corporate conduct.

Let's be clear about what I am asserting. Plenty of criminal activity takes place within corporations and other business organizations. (Given the extremely broad and amorphous nature many federal criminal statutes, e.g., mail and wire fraud, money laundering, RICO, obstruction of justice, this is almost necessarily the case.) The individuals who perpetrate such crimes are subject to prosecution for any crime they commit. I am expressing no opinion about whether the federal government has overcriminalized such individual conduct (although I have one). What I am asserting is that when individuals engage in criminal conduct within a business, there is no justification for imposing criminal punishment on the business as a corporate entity. There should be no corporate criminal liability.

Criminal law is penal law. Its about punishment. It is not designed to compose disputes, provide compensation to wronged parties, or impose administrative sanctions. It is designed to punish. This means that criminal sanctions may be properly imposed only on those persons and entities that can be deserving of punishment, that is, to those capable of acting in a morally blameworthy way. That's why infants, the incompetent, and the legally insane are excluded from criminal punishment. Thus, moral responsibility is a necessary condition for the application of the criminal sanction.

But corporations are not morally responsible agents. In fact, corporations, as opposed to the individuals who comprise them, are not agents at all. There is no ghostly corporate entity hovering above and separate from the set of individuals that labor for the corporation. There is no corporate brain within which intentions that are distinct from the intentions of these individuals can form. This fact is implicit in the current respondeat superior standard of corporate criminal liability that must attribute the mental states of a business organization's employees to the corporate entity.

Corporate criminal liability is theoretically incoherent because it imposes punishment, which requires morally blameworthy action, on an entity that is not a moral agent.

Perhaps you don't like that argument. Maybe it's too philosophical. OK, ignore it. Assume for the sake of discussion that corporations can be morally responsible for their employees' conduct. There is still no justification for imposing criminal punishment on them. That is because punishing corporations does not serve any of the legitimate purposes of punishment.

Theorists perennially dispute whether the purpose of punishment is retribution, deterrence, rehabilitation, or some combination of these. There is no need for us to speculate about how this dispute should be resolved because punishing corporations does not serve any of these ends.

Retribution can justify punishment only for those who have acted in a blameworthy way. Retribution clearly justifies punishing those who personally commit an offense. But how can it justify punishing a corporation? Corporations, as collective entities, cannot be imprisoned; they can only be fined. When a corporation is fined, it is the owners, i.e., the shareholders, who pay the fine. But the defining characteristic of modern corporation is the separation of ownership and control. The shareholders, who own the corporation, have no control over the actions of the employees who commit the offense. Hence, inflicting punishment on a corporation's shareholders (and its other employees who had no hand in the wrongdoing but may nevertheless lose their jobs) is punishing the innocent. Punishing those who are innocent of wrongdoing cannot be justified on retributivist grounds.

How about deterrence? A major purpose of criminal punishment is to deter wrongdoing. But not by any means; not by punishing the innocent. Much of the crime attributable to teenagers could undoubtedly be deterred by punishing parents for their children's offenses. The Nazis sought to deter acts of resistance by punishing innocent members of the communities in which such acts occurred. Although such measures may be effective, they are not permitted under our system of law. Deterrence as a justification for criminal punishment refers to punishing those who engage in wrongdoing to deter others from similar activities. It does not refer to punishing the innocent to pressure them into suppressing the criminal activity of their fellow citizens. Threatening innocent shareholders (and employees) with punishment for the offenses of culpable corporate employees may be an effective means of reducing criminal activity within business organizations, but it does not constitute the type of deterrence that can justify criminal punishment in a liberal legal system.

Perhaps punishment can be justified for purposes of rehabilitation. I have heard prosecutors argue that corporate criminal liability can be justified on rehabilitative grounds because fear of corporate prosecution will make business people behave better. But consider the nature of this argument. For punishment to be justified on rehabilitative grounds, it must be designed to reform the character of the wrongdoer, or at least, reduce the tendency of the wrongdoer to engage in future wrongful acts. One can rehabilitate only wrongdoers. Threatening those who have not engaged in wrongful conduct with punishment in order to make them "behave better" is not rehabilitation. It is coercing them to act in the way the coercive agent believes they should. "Rehabilitating" the innocent is simply depriving them of their liberty. This form of rehabilitation was familiar in the Soviet Union and Mao's China in which those whose conduct was unacceptable to the government were sent to psychiatric hospitals and "re-education" camps. Threatening to punish shareholders (and innocent employees) in order to make corporate executives behave in ways that prosecutors believe that they should is not a form of rehabilitation that can be countenanced in a liberal system of justice.

I have encountered the argument that punishing corporations for the actions of their employees is not distinct from any other form of criminal liability. After all, criminal punishment always wreaks harm on the innocent. The families and dependents of convicted criminals are inevitably adversely affected by the incarceration or impoverishment of the offender, both materially and emotionally. Hence, criminal liability always punishes the innocent, and corporate criminal liability is no different.

This line of reasoning elides a crucial distinction, however. In the case of traditional criminal liability, punishment is directed solely toward the wrongdoer. The harm that results to innocent third parties is not the intended object of the punishment regime. Such harm is always viewed with regret as an unfortunate collateral effect of visiting punishment on the blameworthy that should be minimized as much as possible. In the case of corporate criminal liability, however, punishment is intentionally directed toward those who have not committed an offense. Punishing the innocent is not a regrettable side effect and is certainly not to be minimized, but is the very object of the punishment regime. It may be true that all criminal punishment wreaks incidental harm on innocent parties, but this fact cannot justify a form of vicarious criminal liability that is intended to punish those who have not themselves broken the law.

This is the one hundredth anniversary of New York Central & Hudson River R.R. Co. v. United States, the Supreme Court decision that created corporate criminal liability. New York Central was a mistake when it was decided, remains a mistake today, and should be explicitly overruled. I make this statement fully aware that advocating for the reversal of a century-old precedent that is the foundation for much of federal criminal jurisprudence and law enforcement policy is quixotic. Few precedents are so deeply entrenched and have been so repeatedly affirmed in subsequent decisions. As the recent decision in United States v. Ionia Management S.A., 555 F.3d 303 (2009) summarily dismissing a challenge to the New York Central standard of corporate criminal liability makes clear, the prospects of the judiciary seeing the light on this issue are not good. Nevertheless, the process by which society determines who or what should be subjected to criminal punishment should not be like jazz, which I once heard defined as the musical form in which one legitimizes a mistake by repeating it. After one hundred years, it is time we stopped repeating the New York Central court's mistake.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.