Responsible Corporate Officer Doctrine: Strict Criminal Liability For Regulatory Violations
Kelley Drye & Warren LLP Paper
October 24, 2013

By David Frulla, Julian Solotorovsky and Matthew Luzadder

 

Introduction

Historically, corporate officers faced the potential for vicarious criminal liability for the actions of their subordinates in a very limited context.  The legislature created a discrete subset of offenses based on violations of administrative regulations relating to the public health and welfare that did not contain a mens rea element, and the courts construed these crimes to be strict liability offenses.  However, these crimes had two principal distinguishing characteristics – the potential criminal exposure was basically limited to misdemeanor level penalties and stigma, and the offenses involved protecting the public health and welfare from patent dangers.

Recently, courts are applying the theory of liability developed in the public health and welfare context, termed the Responsible Corporate Officer (RCO) doctrine, to expand the scope of vicarious criminal accountability to a wider array of regulatory violations.  The doctrine's expansion has also seen its application to regulatory crimes with harsher, felony criminal exposure for individuals.  Over the past few years, there has been an increase in the number of prosecutions of executives who may not have had actual knowledge of the corporate wrongdoing in the food and drug area, among others.  While the increase in prosecutions based on strict criminal liability pursuant to the RCO doctrine has not been explosive, the risk to corporate officers is notable.

This presentation does not mean to denigrate what may be the prevailing public sentiment that favors holding senior corporate executives liable in cases of high-profile losses.  That said, the same doctrines, once developed and applied, can be used against a wide range of neglectful corporate executives and middle managers, not simply the prominent figures profiled on the front pages of business journals and newspapers more generally.  Today, a wide range of corporate officers can face even felony criminal exposure for the bad acts of a subordinate, even if the officer either did not intend for the bad acts to occur or was not aware of the regulatory regime that was violated.

While ensuring corporate accountability is important, so is the traditional criminal law unity of bad act and bad intent, actus reus and mens rea, respectively.  As U.S. Supreme Court Justice Jackson aptly explained, "Crime, as a compound concept, generally constituted only from concurrence of an evil-meaning mind with an evil-doing hand, was congenial to an intense individualism and took deep and early root in American soil."  United States v. Morissette, 342 U.S. 246, 251-52 (1951).  These twin standards of criminal accountability have stood the test of time in the common law, where judges and legislatures have, through the years, faced a wide range of economic scoundrels and schemes.

This presentation will describe the development of the RCO doctrine, and then discuss cases in which courts have expanded and are continuing to expand it via their construction of what can prove to be quite malleable criminal intent standards.  It concludes with a brief description of the potential for significant expansion of vicarious criminal exposure, especially in the recent food and drug area.
 

Development of the Diminished Intent Standard for Responsible Corporate Officers Convicted of Low-Level Regulatory Crimes

The Responsible Corporate Officer Doctrine makes certain regulatory crimes essentially strict liability offenses for corporate officers by not  requiring a mens rea, or criminal intent, element as part of the offense.  Originally, courts only applied the RCO doctrine where Congress was silent as to the intent standard, the regulation carried a light sentence, and the matter involved public health and safety.  Through time, certain courts began to impute certain knowledge elements of a criminal regulatory offense to the defendant corporate officer for certain regulatory offenses where Congress had in fact expressly required a knowledge element for criminal liability, but the penalties remained light.  More recently, courts have imputed knowledge and willful intent for felony regulatory offenses with heavier penalties, thus extending the RCO doctrine even further from its historic scope and justifications.

The modern RCO doctrine was articulated in United States v. Dotterweich, 320 U.S. 277 (1943).  In that case, the Supreme Court addressed whether a corporate officer had to have personal knowledge of a regulatory violation to be criminally responsible for it.  Id. at 284.  Mr. Dotterweich was the president of a corporation which purchased and repackaged drugs that the original manufacturer had misbranded and adulterated.  The jury found Mr. Dotterweich -- but, ironically not his corporate employer, which was also charged -- guilty under the criminal provisions of the Federal Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. §§ 301-392. In upholding Dotterweich's conviction, the Court explained that the "legislation dispenses with the conventional requirement for criminal conduct – an awareness of some wrongdoing.  In the interest of the larger good it puts the burden of acting at hazard upon a person otherwise innocent but standing in responsible relation to a public danger." 320 U.S. at 281. Dotterweich determined that in order to protect the public's health and safety, Congress could place a great burden on corporate officers to comply with regulations that directly affect public health and welfare. Id. at 284-85. Dotterweich has been cited in virtually all, if not all, public welfare offense cases that have applied the RCO doctrine since.

Next, in Morissette, Justice Jackson eloquently explained how the Industrial Revolution and other technological and societal advances have yielded "dangers [that] have engendered increasingly numerous and detailed regulations which heighten the duties of those in control of particular industries, trades, properties or activities that affect public health, safety or welfare."  342 U.S. at 253-54.  Justice Jackson further explained, "Many of these are not in the nature of positive aggressions or invasions, with which the common law so often dealt, but are in the nature of neglect where a duty requires care, or inaction where it imposes a duty."  Id. at 256.  However, in recognizing, albeit somewhat grudgingly, the development of this new category of offenses, Morissette was careful to limit these offenses to misdemeanors as opposed to more infamous felonies and to offenses with little or no risk of incarceration.  Id. at 256-58.  Indeed, the case ultimately invalidated a defendant's conviction for the unauthorized conversion of government property in violation of 18 U.S.C. § 641 (spent ordnance the defendant thought was abandoned) because the lower court had treated the felony offense in question relating to dishonesty as not requiring mens rea because the statute had not contained an intent element.  Id. at 273.

United States v. Park was the next seminal Supreme Court case applying the RCO doctrine. 421 U.S. 658 (1975).  Park, like Dotterweich was an FDCA case, and it involved food contaminated by rodent waste at the defendant's company's warehouse.  In Park, the Court confirmed that vicarious criminal liability extended to those corporate officers that had authority to prevent or correct the prohibited condition.  Id. at 673.  The Court held that Congress intended to impose a high duty of vigilance on a corporate officer who is responsible for preventing or overseeing a regulated action. Id.  Park also reaffirmed that a responsible corporate officer does not have to be aware, or have knowledge, of the wrong committed to be held criminally liable for that wrong.  Id. at 672.  In conclusion, after Park, according to the RCO doctrine, a court could, for strict liability offenses, impute knowledge of the regulation and the subordinate's act upon a responsible officer.

Park and Dotterweich imputed knowledge of the regulation to the corporate officer under the FDCA, where Congress was silent regarding an intent standard. Thus, applied literally, Dotterweich and Park involve regulatory offenses where Congress did not specify a mens rea element for a regulatory offense, and where the potential criminal penalty was modest.

The extension of liability under the FDCA was recently discussed by United States Court of Appeals for the District of Columbia Circuit in the context of senior corporate officers who pleaded guilty to misdemeanor misbranding.  "Criminal liability under the RCO doctrine extends not only to those corporate agents who themselves committed the criminal act, but also to those who by virtue of their managerial positions or other similar relation to the actor could be deemed responsible for its commission.  A corporate officer may therefore be guilty of misdemeanor misbranding without knowledge of, or personal participation in the underlying fraudulent conduct."  Friedman v. Sebelius, 686 F.3d 813, 817 (C.A.D.C. 2012) (internal cites and quotations omitted).  See also The Obstacles of Outsourcing Imported Food Safety to China, 43 Cornell Int'l L.J. 249, 259 (Spring 2010).

Courts have since extended the RCO doctrine to cases where Congress has in fact expressly specified a mens rea element. United States. v. Int'l Minerals & Chem. Co., involved the violation of an Interstate Commerce Commission (ICC) regulation controlling the transportation of corrosive liquids. 402 U.S. 558 (1971). In contrast to Dotterweich and Park, however, the criminal liability provisions of the ICC's regulations relating to the transportation of corrosive liquids required that the actor "knowingly" violate an agency regulation. 18 U.S.C. § 834.  In this later case, the Supreme Court imputed knowledge of that ICC regulation to the corporate officer, finding that the defendant's awareness that his company was shipping such a dangerous corrosive material (as opposed to something benign like distilled water, for instance) was sufficient to put the defendant on adequate notice of the existence of the regulatory requirements.  Int'l Minerals 402 U.S. at 563.  The Court thus imputed knowledge of the law on the basis that sulfuric and other acids were so dangerous that "the probability of regulation was so great that anyone who is aware that he is in possession of them or dealing with them must be presumed to be aware of the regulation."  Id. at 565.  Even though the Court in Int'l Minerals imputed knowledge of the law on the officer, this holding is still tethered to the RCO doctrine insofar as the public welfare offense in question carried a light sentence.

Conversely, in applying the Park decision, courts have held that a conviction under the FDCA cannot solely be based on the individual's corporate position.  In reversing the conviction of an executive under the FDCA for causing certain foodstuffs to become adulterated, the court stated that:  "The line drawn by the Court between a conviction based on corporate position alone and one based on a responsible relationship to the violation is a fine one, and arguably no wider than a corporate bylaw."  Therefore, to support a conviction there must be finding that the defendant had the responsibility and authority to correct the violations. U.S. v. New England Grocers Supply Co.,  488 F.Supp. 230, 234 (D.C.Mass. 1980)[.]

Similarly, as in Morissette, where the offense is punishable by a felony, a court should not so readily presume knowledge on the defendant.  More recently, the Supreme Court confirmed that because a felony carries a much harsher stigma, a court should be careful not to dispose of a felony mens rea requirement on the same basis as when applying the RCO doctrine.  Staples v. United States, 511 U.S. 600, 618 (1994) (government should have been required to prove beyond a reasonable doubt that defendant knew that he possessed a machinegun in violation of 26 U.S.C. § 5861(d)).  This is especially true where Congress expressly includes a knowledge requirement in the felony criminal offense provision for the regulatory violation. United States v. MacDonald & Watson Waste Oil Co., 933 F.2d 35, 52 (1st Cir. 1991).

More specifically, in MacDonald & Watson, the Resource Conservation and Recovery Act (42 U.S.C. § 6928(d)(1)), and the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. §§ 9602, 9603), imposed felony liability for knowing violations of their respective, related regulatory regimes. 933 F.2d at 39. The First Circuit held that, "Simply because a responsible corporate officer believed that on a prior occasion illegal transportation occurred, he did not necessarily possess knowledge of the violation charged. In a crime having knowledge as an element, a mere showing of official responsibility under Dotterweich and Park is not an adequate substitute for direct or circumstantial proof of knowledge."  Id. at 55.

Courts Are Expanding the RCO Doctrine to Diminish Intent Standards for Regulatory Offenses Carrying Harsh Penalties

Not all courts are as faithful to the RCO doctrine's historical antecedents as the First Circuit was in MacDonald & Watson.   For instance, the Tenth Circuit has broadened the RCO doctrine by applying the Park standard to a criminal regulatory offense containing a negligent and willful criminal intent element.  In United States v. Brittain, the court held a public utilities director strictly liable for violating the Clean Water Act (CWA), 33 U.S.C. § 1319(c), because that Act's definitional provisions had been amended to extend its obligation to comply with the strictures of federal discharge permits to "responsible corporate officer[s]."  931 F.2d 1413, 1418 (10th Cir. 1991).  The court explained that, under the RCO doctrine, the Government was not required to demonstrate the officer's negligent or willful violation (the requisite statutory standard for criminal liability), because "the willfulness or negligence of the actor would be imputed to him by virtue of his position of responsibility."  Id. at 1419. See also Joseph E. Cole, Environmental Criminal Liability: What Federal Officials Know (or Should Know) Can Hurt Them, 54 A.F. L. Rev. 1, 27 (2004).

The decision conflates two concepts: The CWA was amended to ensure that responsible corporate officers and not just the CWA permittees could be held criminally liable for a violation; however, its criminal offense provisions still specifically prescribed a criminal intent standard.  The Tenth Circuit nonetheless concluded that extending criminal liability to a responsible corporate officer entailed extending that liability solely by virtue of the officer's position of authority.

The Ninth Circuit has also applied the RCO doctrine to a Clean Water Act offense and upheld the defendant officer's felony conviction in United States v. Weitzenhoff, 35 F.3d 1275, 1284 (9th Cir. 1993).  Even though the CWA had been amended to require a knowing violation for felony criminal liability, id. at 1283-84, the court relied on Int'l Mineral and held it was irrelevant whether the defendant was "cognizant of the requirements or even the existence of the permit" for knowingly causing a violation of the CWA.  Id. at 1284.  In so doing, the Ninth Circuit applied the RCO doctrine, finding that even though there are harsh penalties attached to the violation of the CWA criminal offense charged, the "criminal provisions of the CWA are clearly designed to protect the public at large from the potentially dire consequences of water pollution."  Id. at 1286.  In so doing, Weitzenhoff distinguished the Supreme Court's decision in Staples, supra, which the Ninth Circuit conceded had specifically recognized that the RCO doctrine had been developed in the context of misdemeanors. Id.

Furthermore, an accumulation of consecutive sentences for misdemeanors, especially under the United States Sentencing Guidelines which do not necessarily maintain the common law distinctions between crimes, can provide for a harsh vicarious criminal penalty, even in the absence of felony liability.  In United States v. Ming Hong, the Fourth Circuit applied the RCO doctrine to the CWA in holding that neither knowledge of the act nor the regulation is required for a responsible officer, as the only requirement is authority to prevent or rectify the criminal act.  242 F.3d 528, 531 (4th Cir. 2001).  While the court justified the use of the RCO doctrine in Ming Hong because misdemeanor liability was at issue under the CWA criminal offense charged, the defendant was convicted of multiple misdemeanors resulting in an aggregate sentence under a fairly complex United States Sentencing Guidelines calculation of three years in jail and a $300,000 fine.  Id. at 534.  Three years of jail time and a mid six-figure fine is a strong punishment for a corporate officer as to whom the Government obtained a conviction principally and admittedly based on his position of authority within the wrong-doing company.

The Government is Consistently Using the RCO Doctrine to Hold Individuals Accountable for Regulatory Violations

Over the past couple of years, the government has used the RCO doctrine to try and "change the corporate culture" of companies.  This thinking is based on the premise that penalties imposed on companies do not sufficiently impact a corporation's culture.  In an interview with The Philadelphia Inquirer in late 2010, the FDA litigation chief stated that the FDA was going to be targeting companies for off-label marketing. "They need to take this seriously and find out what is going on in the marketing and sales divisions of their companies," he said of pharmaceutical executives.  "In my view, one thing that will get executives' attention is a few cases in which we have convicted two-legged defendants."  Christopher K. Hepp, Big Pharma Executives Facing Legal Threat, The Philadelphia Inquirer, Oct. 31, 2010, available at http://articles.philly.com/2010-10-31/business/24952706_1_fines-rodent-drug-companies.

This statement in consistent with comments previously made by Margret Hamburg, the Commissioner of Food and Drugs, in a letter to Senator Charles Grassley addressing issues raised by a Government Accountability Office (GAO) report entitled Food and Drug Administration:  Improved Monitoring and Development of Performance Measures Needed to Strengthen Oversight of Criminal Misconduct Investigations.  This report focused on the FDA's Office of Criminal Investigations (OCI).  With regard to a recommendation to "increase the appropriate use of misdemeanor prosecutions... to hold responsible corporate officers accountable," she stated that the FDA would revise its policies and procedures to address this issue. Senator Grassley News Release on March 4, 2010.

What directly resulted from the GAO's report and subsequent congressional inquiry was a change in the FDA Procedures Manual's Special Procedures and Considerations for Park Doctrine Prosecutions, 6-5-3.  This section emphasizes that "[w]hen considering whether to recommend a misdemeanor prosecution against a corporate official, consider the individual's position in the company and relationship to the violation, and whether the official had the authority to correct or prevent the violation.  Knowledge of and actual participation in the violation are not a prerequisite to a misdemeanor prosecution but are factors that may be relevant when deciding whether to recommend [to the Department of Justice] charging a misdemeanor violation."  The section includes a non-exhaustive list of other factors to be considered in whether or not to make the recommendation:

  1. Whether the violation involves actual or potential harm to the public;
  2. Whether the violation is obvious;
  3. Whether the violation reflects a pattern of illegal behavior and/or failure to heed prior warnings;
  4. Whether the violation is widespread;
  5. Whether the violation is serious;
  6. The quality of the legal and factual support for the proposed prosecution; and
  7. Whether the proposed prosecution is a prudent use of agency resources.

Even before the GAO's report and changes to the FDA Procedures Manual, there was already a shift underway at the FDA and DOJ to use strict liability prosecutions as an enforcement tool.  For example, in 2009 the government criminally charged the medical device company Synthes and four of its executives for testing spinal repair products on patients without FDA approval.  Four corporate officers pled guilty in 2011 in the District Court for the Eastern District of Pennsylvania and received sentences ranging from six to nine months and given fines of $100,000 each.  As part of their pleas, the executives accepted responsibility for the company's crime of running unauthorized clinical trials and for engaging in off-label marketing. This was the first time that executives had gone to prison for such a charge.  U.S. v. Synthes, Norian, et al., No. 09-cr-403 (E.D. Pa. 2009).

Rather than plead guilty, some executives have chosen to fight charges brought under the RCO doctrine, with varying degrees of success.  In U.S. v. Schulte and Pham, a case involving the alleged importation and marketing of unapproved medical devices, the government charged two former executives with felony violations of the FDCA stemming from an investigation that began in September 2008.  The company, Spectranetics Corp., paid $5 million to settle the matter in December 2009.  However, it wasn't until March 2012 that two of the executives were acquitted after a five-week jury trial.  The CEO was not as successful and was convicted of making false statements during the FDA's investigation.

The defendants in U.S. v. Stryker Biotech were even more successful than those in SchulteU.S. v. Stryker Biotech LLC, No. 09-cr-10330 (D. Mass, 2009).  There, the government charged Stryker Biotech's executives with mail and wire fraud, conspiracy to defraud the FDA, and misbranding in connection with a bone surgery device.  However, on first day of trial in February 2012, the government's case fell apart.  It appeared that the allegedly concealed reports of adverse events related to the unapproved use of the product were extremely low; the evidence showed that there were 63 reported adverse events out of 10,000 unapproved uses.  Therefore, the defense argued that nothing material had been concealed from the medical community and there was no harm.  The DOJ dropped its charges against the individuals and accepted a misdemeanor guilty plea against the company.  Although there is no guarantee that the defendants' successes in Schulte and Stryker can be repeated, what is guaranteed is that the cost of defending these cases over three years was high.

Moreover, there is not a well-defined body of law supporting defenses to the RCO doctrine.  Obviously, the strongest defense is showing that the regulations in question were outside of the executive's area of responsibility.  Affirmative defenses based on arguments that it was impossible for the defendant to prevent the regulatory violations, the executive took extraordinary care to prevent the violations, or the violation was caused by a subordinate's failure to follow orders have not been consistently successful and often depend on the specific facts of each case.  Compare, United States v. New Eng. Grocers Supply Co., 488 F. Supp. 230, 234 (D. Mass. 1980) (defendants were entitled to present evidence to establish an affirmative defense that they exercised extraordinary care) with United States v. Starr, 535 F.2d 512 (9th Cir. 1976) (rejected defense that executive could not prevent rodent infestation because a subordinate didn't follow his orders).

In the end, then, despite sometimes detailed textual and analytical evaluations of the underlying regulatory statute and its purpose, the courts are deciding whether to impose strict liability on corporate officers based on essentially ad hoc judicial assessments of how blameworthy that officer is for having been neglectful.  This appears to be the same criteria used by the government in its exercise of prosecutorial discretion at the outset of a case.  At both stages, there is a real peril, not to mention a lack of inherent stability and predictability, in this kind of regime.