United States: Corporations, Directors, And Officers: Potential Criminal And Civil Liability

Last Updated: November 30 2018
Article by Jodi L. Avergun, Ellen Holloman, Lex Urban, Hyungjoo Han and Christian Larson

Most Read Contributor in United States, April 2019

This practice note provides an overview of the law and legal standards governing the imposition of criminal liability on officers, directors, and corporations for the acts of employees. The practice note discusses the federal government's policies and procedures in corporate criminal investigations and prosecutions, and the most common areas of corporate civil liability under the federal securities laws.

This practice note specifically addresses the following key issues in civil and criminal corporate liability:

  • Vicarious Criminal Liability for Corporations and Executives
  • Assessing Potential Criminal Liability under Department of Justice (DOJ) Guidelines
  • Criminal Liability under Federal Employment Laws
  • Corporate Sentencing and Establishing Effective Compliance Programs
  • Civil Liability in SEC Enforcement Actions
  • Civil Liability in Shareholder Direct and Derivative Actions

Although this practice note covers federal law, many of the topics addressed below also may implicate state laws, depending on the circumstances.

Be mindful that what begins as a commercial or civil matter may ultimately have consequences under criminal statutes as well. Similarly, regulatory investigations into potentially criminal conduct often result in civil litigation brought by contractual counterparties or shareholders. Thus, it is important to involve counsel with both criminal and civil expertise at the onset of a dispute or investigation. Finally, we emphasize the importance for corporations to develop and nurture a culture of rigorous compliance with the laws and regulations applicable in their respective industries. A substantive compliance program is both a significant mitigating factor considered by prosecutors in assessing penalties and a bedrock best corporate practice in a post-Enron, post-credit crisis environment.

VICARIOUS CRIMINAL LIABILITY FOR CORPORATIONS AND EXECUTIVES

Corporations can be charged with committing crimes. Federal criminal statutes apply to "whoever" or to any "person" who violates their prohibitions, terms which include not only individuals, but also corporations, companies, associations, firms, and partnerships. See, e.g., 18 U.S.C. §§ 371, 1956; 1 U.S.C. § 1.

As a legal entity that exists only in documents, a corporation is incapable of independently forming the mens rea necessary to commit a criminal act. Instead, the corporation acts through its employees and agents. Some U.S. states hold corporations criminally liable only for the acts of directors or senior managers. See, e.g., Model Penal Code § 2.07; Ariz. Rev. Stat. Ann. § 13-305. By contrast, federal law generally ignores an employee or agent's level of responsibility. See, e.g., United States v. Singh, 518 F.3d 236, 249–50 (4th Cir. 2008).

Respondeat Superior

The most prominent theory of corporate criminal liability is respondeat superior. Originally developed in tort law, respondeat superior holds corporations both civilly and criminally liable for the acts of their employees and agents, so long as the acts were carried out within the scope of their authority and, at least in part, for the benefit of the corporation. New York Cent. & Hudson R.R. Co. v. United States, 212 U.S. 481, 494–95 (1909).

The general proposition that a parent corporation is not liable for the criminal acts of a subsidiary does not apply in all circumstances. A parent's liability for a subsidiary's bad acts can arise under one of two variations on respondeat superior:

  • First, the subsidiary may be the agent of the parent, and the employees of the subsidiary may be the sub- agents of the parent.
  • Second, the two corporations may be so intertwined that the two companies are treated as a single enterprise, such that the employees of the subsidiary are effectively the employees or agents of the parent.

See, e.g., United States v. Johns-Manville Corp., 231 F. Supp. 690, 698 (E.D. Pa. 1963).

Liability for the Conduct of Employees and Agents

Under respondeat superior, two elements must be present for a corporation to be liable for the criminal acts of an employee or agent:

  • First, the employee or agent must have committed a criminal act within the scope of his or her authority with the corporation.
  • Second, the employee or agent must have acted with the intent, at least in part, to benefit the corporation.

New York Cent. & Hudson R.R. Co. v. United States, 212 U.S. 481, 494–95 (1909); United States v. Demauro, 581 F.2d 50, 53 (2d Cir. 1978).

Scope of Authority and Scope of Employment

The scope of authority requirement generally is met when the employee or agent had actual or apparent authority to engage in the type of act that gave rise to liability. Actual authority, also called express authority, arises when a corporation, through its words or actions, objectively leads its employee or agent to reasonably believe that he or she may act on behalf of the corporation. Restatement (Third) of Agency § 2.01. Apparent authority is the authority that outsiders would normally assume the agent to have, judging from his or her position within the corporation and the circumstances surrounding his or her past conduct. See, e.g., United States v. Bi-Co Pavers, Inc., 741 F.2d 730, 737 (5th Cir. 1984).

Similarly, the term "scope of employment" has been defined to include acts committed on the corporation's behalf "in performance of the agent's general line of work." See United States v. Hilton Hotels Corp., 767 F.2d 1000, 1004 (9th Cir. 1972); Hamm v. United States, 483 F.3d 135, 138 (2d Cir. 2007). Courts generally have found that an employee or agent acts within the scope of authority or the scope of employment for attributing individual conduct to a corporate entity so long as he or she is performing a job-related duty, or an act of the kind he or she is authorized to perform, even if the specific act is contrary to express instructions or to company policy. See, e.g., United States v. Agosto-Vega, 617 F.3d 541, 552–53 (1st Cir. 2010); United States v. Hilton Hotels Corp., 467 F.2d 1000, 1004 (9th Cir. 1972); United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir. 1989).

Intent to Benefit the Corporation

For the corporate benefit element to be met, an employee must be motivated at least in part by a desire to serve the corporation. See, e.g., United States v. Demauro, 581 F.2d 50, 54 & n. 3 (2d Cir. 1978). The key question is what the employee intended. The employee's act need not actually confer a benefit upon the corporation, and may instead result in harm to the corporation. See, e.g., United States v. Ionia Management S.A., 526, F. Supp. 2d 319, 323 (D. Conn. 2007), aff'd, 555 F.3d 303 (2d Cir. 2008). So long as at least one of the employee's intentions was to benefit the corporation, the corporate benefit element is met. See, e.g., Standard Oil Co. of Texas v. United States, 307 F.2d 120, 128–29 (5th Cir. 1962). Courts may then impute the employee's conduct to the corporation. Notably, a corporation can be held criminally liable for "willful blindness" to illegal activity by its personnel. See, e.g., Acclaim Sys., Inc. v. Infosys, Ltd., 679 Fed. App'x 207, 212 (3d Cir. 2017). Corporations also may be found criminally liable based on the collective knowledge of its employees of the wrongdoing at issue. See, e.g., United States v. Pac. Gas & Elec. Co., 2015 U.S. Dist. LEXIS 171577, at *8 (N.D. Cal. Dec. 23, 2015).

Liability for the Conduct of Corporate Subsidiaries

A parent corporation may be held liable for the criminal acts of a subsidiary. This may be true even when a parent corporation acquires a subsidiary through a merger or acquisition that takes place after the criminal act occurs. See, e.g., United States v. Wilshire Oil Co. of Tex., 427 F.2d 969, 973–74 (10th Cir. 1970); United States v. Countrywide Fin. Corp., 961 F. Supp. 2d 598 (S.D.N.Y. 2013). Courts have reasoned that to do otherwise would permit companies to avoid liability by reorganizing themselves. See, e.g., United States v. Alamo Bank of Tex., 880 F.2d 828, 830 (5th Cir. 1989).

A parent corporation's liability for the acts of a subsidiary generally arises under one of two legal theories:

  • First, under the agency theory, liability may attach to a parent corporation where its subsidiary or the subsidiary's employees are agents or sub-agents of the parent.
  • Second, under the mere instrumentality or veil piercing theory, a parent may be liable for its subsidiary's actions when the parent does not treat the subsidiary as a separate entity and uses the subsidiary to commit a crime.

Agency Theory

The agency theory of criminal liability applies in the parent-subsidiary context. The fact that a subsidiary is wholly owned by its parent, or even shares an identical board of directors with its parent, is normally insufficient for a court to find that the subsidiary is the parent's agent. See, e.g., Schmidt v. Burlington N. & Santa Fe Ry. Co., 605 F.3d 686, 689 (9th Cir. 2010) (citing Kelley v. S. Pac. Co., 419 U.S. 318 (1974)). However, if the subsidiary acts on the parent's behalf, and under the parent's control, the subsidiary may be the agent of the parent, and the employees of the subsidiary may be the sub-agents of the parent. In such circumstances, the acts of the agents or sub-agents may impute criminal liability to the parent. See, e.g., United States v. Johns-Manville Corp., 231 F. Supp. 690, 698 (E.D. Pa. 1963); United States v. Watchmakers of Switzerland Info. Ctr., 134 F. Supp. 710, 711 (S.D.N.Y. 1955).

Mere Instrumentality or Veil Piercing

The general principal that a parent corporation is not liable for the acts of its subsidiaries is inapplicable when a parent treats its subsidiary as a mere instrumentality and uses the subsidiary for a wrongful purpose. In such a situation, courts may pierce the corporate veil and hold the parent accountable for its subsidiary's acts.

Determining whether to pierce the veil is a question of fact. One hundred percent ownership and common directors and officers, even together, are, by themselves, an insufficient basis for piercing the veil. See, e.g., United States v. Bestfoods, 524 U.S. 51 (1998).

Courts consider numerous other issues in the veil-piercing analysis, including the following factors:

  • The subsidiary is grossly undercapitalized.
  • The subsidiary does business solely with the parent.
  • The parent provides financing to the subsidiary.
  • The parent and subsidiary consolidate their financial statements.
  • The parent uses the subsidiary's assets as its own assets.
  • The parent and subsidiary operate physically as a single enterprise.
  • The parent and subsidiary fail to observe corporate formalities, including holding required shareholder meetings.

See, e.g., United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985).

Veil piercing for criminal acts remains relatively rare. However, even when a parent and subsidiary are insufficiently intertwined for a court to pierce the veil, subsidiaries or their employees may nonetheless be agents or sub-agents of the parent, resulting in the parent's liability for the criminal acts of its subsidiary's employees.

For guidance on steps that employers can take to help deter criminal activity by its employees and therefore lower the risk of vicarious criminal liability, see Corporate Sentencing and Establishing Effective Compliance Programs below.

The Responsible Corporate Officer Doctrine

Under the Supreme Court-created Responsible Corporate Officer (RCO) doctrine, a corporate officer may be found criminally liable for regulatory offenses even when he or she is unaware of and not involved in the wrongdoing if he or she is in a position of authority regarding the activities giving rise to the illegal conduct and failed to prevent or correct the conduct. United States v. Park, 421 U.S. 658, 672–74 (1975); United States v. Dotterweich, 320 U.S. 277, 284–85 (1943). Penalties under the RCO doctrine can include fines and imprisonment. Meyer v. Holley, 537 U.S. 280, 287 (2003).

When defending against an RCO charge, consider the following two key defenses:

  1. The executive could not have prevented or corrected the violation at issue.
  2. The executive used extraordinary care and was not able to prevent the violation.

See, e.g., United States v. Wiesenfeld Warehouse Co., 376 U.S. 86, 91 (1964).

To read this article in full, please click here.

Originally published by LexisNexis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions