February 10, 2009

The Second Circuit Rejects Challenge to Vicarious Corporate Criminal Liability for Actions of Non-Management Employees in Connection With Oil Discharge

Holland & Knight Alert
Christopher A. Myers

On January 20, 2009, the United States Court of Appeals for the Second Circuit rejected the argument that a corporation should not be held criminally vicariously responsible for the actions of non-management level employees acting in violation of company policy. The Court refused to accept the position -
advanced in an amicus brief by a coalition of business, legal and defense organizations and authored by a former Enron prosecutor – that corporate criminal liability can stem only from the actions of “managerial” employees. The Court further rejected the argument that in order to establish vicarious corporate criminal liability, the government had to affirmatively prove that the company did not have effective compliance policies and procedures.
In United States v. Ionia Management S.A. 2009 WL 116966 (C.A.2 (Conn.)), the Second Circuit upheld the criminal vessel pollution conviction and a $4.9 million criminal fine against a vessel management company, adopting the reasoning of a significant recent case in the Fifth Circuit on substantive maritime issues and providing guidance on general corporate criminal law principles that pertain to all industries. The evidence in the case established the crew of the vessel, under the direction and participation of the chief engineer and second engineer, had routinely discharged oily waste water into the high seas through a “magic hose” designed to bypass the vessel’s pollution control equipment. While the discharges occurred on the high seas, the government successfully prosecuted the company because the vessel’s crew maintained falsified records in United States waters and obstructed justice.
The Court considered and rejected three defense arguments that have broad implications for the corporate community at large.

  1. The Court rejected the defense argument that the evidence was insufficient to convict the company on a respondeat superior theory of corporate liability, i.e., that the company is responsible for illegal conduct by its employees who were working within the scope of their employment. The defense argued that the vessel’s crew members were not acting within the scope of their employment when they made the discharges and false entries in the Oil Record Book. The Court held that there was “ample evidence” that the crew acted in the scope of their employment because they were responsible for maintaining the engine room, discharging waste and recording relevant information when they made the discharges. Further, the Court found that the crew acted at the direction of their supervisors when they made the discharges, made the false entries and lied to the Coast Guard.
  2. The Court rejected the defense argument that the company could only be prosecuted under the respondeat superior theory for the acts of “managerial” employees. The Court cited its contrary view in a 1989 case and found, in any event, that the government presented “overwhelming evidence” that supervisors directed the crew to take the actions at issue.
  3. The Court rejected an argument made in amicus curiae briefs filed by major U.S. business interest groups that the government must prove as an element of the offense that the corporation “lacked effective policies and procedures to deter and detect criminal actions by its employees.” In other words, the amicus briefs contended that the lack of an effective compliance and ethics program must be proved as an affirmative element of corporate criminal liability. The Court held that the existence of a corporate compliance and ethics program might be relevant to whether an employee was acting within the scope of his/her employment, but the government need not prove its absence in the prosecution of a company.

Maintaining an effective compliance and ethics program is still an important component of good corporate governance. As the Second Circuit noted, the existence of a compliance program may be relevant to whether or not the company, acting through its employees, can have the required criminal intent to be convicted. For example, in the Ionia Management S.A. case, if the defense had been able to establish that it had a fully implemented comprehensive pollution compliance program, it might have been able to argue effectively that the employees on the ship who had discharged oily waste through the “magic hose” were rogue employees, acting outside the scope of their employment. The District Court apparently allowed such an argument to be made, but the evidence of supervisory involvement and the ineffectiveness of the compliance program were, apparently, overwhelming.
Although an effective compliance and ethics program could be useful in defeating a criminal charge at trial, and, under the U.S. Sentencing Guidelines for Organizations, such a program can help to substantially reduce the fine imposed after a conviction, the primary benefit of an effective program is its use in persuading Department of Justice prosecutors not to bring charges in the first place. Department of Justice policy mandates that federal prosecutors take into account whether or not a company has an effective compliance and ethics program as part of the decision whether or not to charge a company. In our experience, most companies with comprehensive, fully implemented compliance and ethics programs, which can demonstrate to prosecutors the company’s commitment to the program, are rarely charged. The standard used to evaluate compliance and ethics programs in the pre-charging context are the standards set forth in the Sentencing Guidelines.
In addition, the Environmental Protection Agency has developed two Audit Policies that apply to both criminal and civil environmental violations of environmental law. The first, issued in 2000, is generally applicable. Companies that have an audit program in place that complies with the Policy, and promptly disclose and remedy violations, are eligible for significant reductions in civil penalties and are generally not referred for criminal prosecution. See, Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, 65 Federal Register 19618 (April 11, 2000). The second Audit Policy is directed specifically toward new owners of property. It is based on the general Policy, but includes revisions that take into account the special circumstances of new owners. See Interim Approach to Applying the Audit Policy to New Owners. 73 Federal Register 44991 (August 1, 2008).
Companies that use the Sentencing Guidelines criteria, together with other agency guidance such as the Environmental Protection Agency’s Audit Policy, to design and implement their programs will reap the benefit in reduced costs in government investigations and reduced penalties where violations may occur, as well as the intangible benefits associated with the reduction or elimination of enforcement actions.

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