One of the now-standard storylines about the global financial crisis is that despite all the chaos very few corporate executives were prosecuted and even fewer went to jail. However, rather than interpreting these circumstances to suggest that there was insufficient evidence to convict corporate executives beyond a reasonable doubt, some observers have decided that the problem was that there is something wrong with our criminal justice system.
One observer who has made a hobby horse out of these issues is the U.S. Senator and Presidential Candidate, Elizabeth Warren. Senator Warren has now introduced new legislation that would lower the standard of criminal liability for corporate executive. Among other things, the new legislation would make corporate executives criminally liable for mere negligence in certain circumstances, even in the absence of the degree of intent that has for centuries been viewed in our legal system as the indispensable basis for a criminal conviction. As discussed below, this legislation is not only a bad idea in terms of our country’s corporate competitiveness, it also threatens one of our legal system’s bedrock principles.
The Proposed Legislation
As reflected in her office’s press release (here), on April 3, 2019, Senator Warren introduced the Corporate Accountability Act, which, according to the press release, “holds corporations criminally responsible when their companies commit crimes, harm large numbers of Americans through civil violations, or repeatedly violate federal law.” At the same time, Senator Warren also introduced the Ending Too Big to Jail Act, which the press release describes as “a comprehensive bill to hold big bank executives accountable when the banks they lead break the law.” The text of the Corporate Accountability Act can be found here. The text of the Ending Too Big to Jail Act can be found here.
According to Senator Warren’s summary of the Corporate Executive Accountability Act the bill “makes it easier to send executives to jail” by “expanding criminal liability” to executives of corporations with more than $1 billion in annual revenues who “negligently permit or fail to prevent” violations of the law at their companies.
This expanded executive liability would not only apply when corporations are found guilty of, plead guilty to, or enter a deferred prosecution agreement for any crime, but would also apply when corporations are found liable under or enter a settlement with any state or Federal regulator for the violation of any civil law that affects the health, safety, finances, or personal data or 1% of the U.S. population or 1% of the population of any state. The expanded liability would also mandate jail time for executives at companies that are found guilty of a second violation while operating under a civil or criminal judgment of any court or under deferred prosecution agreements with any court.
The bill mandates that any violation will require up to a year in jail, with a second violation requiring up to three years in jail. In addition to this expanded criminal liability, the bill would also require executives at companies with over $10 billion in annual revenues to certify that there is no criminal conduct or civil fraud within the institution.
The obvious motivation for this legislation is an underlying belief that there is something defective with our existing system if we can’t put those corporate bastards in jail when things go wrong. Whatever you may think about this proposition as a general principle, the problem with the various “solutions” that Senator Warren has proposed is that they are deeply contrary to centuries-old bedrock principles of our legal system.
One of the most basic notions in our legal system is that criminal liability attaches only to those who act with intent or knowledge. It has been called a “bedrock principle” of our legal system that criminal liability cannot be imposed without “mens rea,” or a guilty mind. A “negligence” standard of the type that Senator Warren’s legislation seeks to introduce, is, as one commentator noted in a April 21, 2019 Wall Street Journal column relating to the legislation, “an extremely low standard, normally reserved for civil enforcement and tort law.” The real problem with the proposed negligence standard is that it means that people could wind up in jail even if they lack the criminal intent that our system has traditionally required before anyone can be deprived of their liberty and put in jail.
To be sure, there are, as Senator Warren’s press release notes, already existing laws that allow for the imposition of criminal liability in the absence of criminal intent. In the areas of food, drug, health and safety law, as well as in environmental law, there are circumstances in which individuals can be held liable even if they were not involved in or even aware of the legal violation. These imposition of criminal liability in these circumstances are supported by the so-called “Park doctrine” in the case of the health and safety cases, or more generally, under the “Responsible Corporate Officer” doctrine.
These existing doctrines do indeed represent examples of where criminal liability can be imposed in the absence of proof of criminal intent. I have long been a critic of the creeping tendency to expand the narrow exceptions these examples represent. I previously have criticized the increasing willingness of legislatures and even courts to impose criminal liability on corporate officials in the absence of culpability.
The idea that liability can be imposed on an individual for corporate misconduct, in apparent disregard of the corporate form and without culpable involvement or even a requirement of a culpable state of mind, is inconsistent with the most basic concepts surrounding the corporate form. The doctrine arguably imposes liability for nothing more than a person’s status. The word “responsible” in the “Responsible Corporate Officer” doctrine does not mean that the individual is responsible for the misconduct, but only that that the individual is responsible for the corporation.
More fundamentally, the imposition of imprisonment without any fault or even culpable state of mind is fundamentally inconsistent with the fault-based framework of our criminal justice system.
Even if there are circumstances where, as the U.S. Supreme Court has recognized, public health and welfare may justify the imposition of liability without culpability under certain circumstances, the enormous burden this possibility imposes on the civil rights and liberties of the affected individuals would seem to argue that these principles are used to impose liability on individuals only in the rarest and most extreme situations.
Senator Warren’s proposed legislation does not seek to impose criminal liability – and more specifically imprisonment – in a narrow way or in narrow circumstances. Instead, it proposes to impose liability across a broad spectrum of potential legal violations, and it proposed to impose criminal liability not just where a company has committed a criminal violation, but even where the company has merely settled an allegation of civil liability, if a minimal number of people were affected by the alleged misconduct.
Not only does the legislation propose a wholesale expansion of criminal liability, it does so in an odd, unbalanced way that arguably runs contrary to the equal protection of the laws. Under her proposed legislation only corporate executives at larger companies can be held criminally liable while executives at smaller companies cannot; persons responsible for other types of enterprises where criminal misconduct takes place (say, for example, the office of a member of Congress) are not subject to this expanded liability.
The proposed bill’s imposition of criminal liability even to executives of companies that merely settle regulatory claims of civil liability introduces some deeply complicated incentives. As the Wall Street Journal commentator I cited above notes, “It’s one thing for your company to pay a fine, another for your life to be ruined.” CEO’s, the commentator notes, “may simply refuse to settle, and victims will either lose out on the money they are due or have to spend exorbitantly to get it.”
As Wayne State University Law Professor Daniel Henning put it in an April 22, 2019 article in the New York Times Dealbook column (here), “Executives may even cover up violations rather than reporting them if they are more worried about personal exposure to a prison term than in ensuring their companies are in compliance with the law.” That is without even considering what would happen to the competitiveness of U.S. companies in the global economy if U.S. corporate executives, unlike their foreign counterparts, have to constantly be looking over their shoulder for corporate mishaps that could put them at risk of imprisonment.
The fundamental problem with Senator Warren’s legislation is that it is premised on the idea that there is something wrong with our existing system because it really ought to be easier to put corporate fat-cats in jail. Underlying this premise is a willingness to demonize corporate executives; once they are demonized it is of course easier to argue that they should be put in jail even in circumstances when “real people” would not.
However, the reason it has proven hard to criminally convict corporate executives is that our criminal justice system is founded on the notion that before anyone can be deprived of their liberty and put in jail, or subject to all of the other loss of status and reputation that goes with a criminal conviction, there must be a finding that the accused individual acted with intent.
In other words, our system is built on the notion that criminal liability cannot be imposed without criminal culpability. This principle protects everyone. The value of this protection would be apparent to anyone who finds themselves accused of a criminal offense. There is no principled basis to deprive only executives of corporations above a certain size of these protections while everyone else retains the protections.