Prosecuting the Corporate Mind

Authored by Timothy Crudo and Andrew Schalkwyk

Originally published in ABTL Northern California Report, Volume 25, No. 2, Spring 2017. Republished with permission.

It is an age-old principle of corporate law: corporations can act only through their agents. Ensley v. City of Nashville, 61 Tenn. 144, 146 (1872) (“Corporations can only act through their agents, and must be held accountable for their acts, otherwise citizens may be ruined through irresponsible citizens.”)  Companies therefore are generally liable, both civilly and criminally, for the conduct of agents acting on their behalf.  But what about their thoughts?  Do corporations think only through their agents, or do they have a mind of their own?  The answer is more than a philosophical one, and it can have real consequences, as shown by two recent federal criminal trials in the Northern District of California.

In the olden days, it was accepted under the common law that “a corporation cannot commit treason, or felony, or other crime, in its corporate capacity: though its members may, in their distinct individual capacities.” 1 BLACKSTONE, COMMENTARIES ON THE LAWS OF ENGLAND 464 (1765).  The modern view is quite different, and criminal prosecutions of corporations have been widely accepted for more than a century.  In the seminal case, N.Y. Central & H.R.R. Co. v. United States, 212 U.S. 481, 492–93 (1909), the railroad argued that as a corporation it could not be held liable for payments of illegal rebates.  The Supreme Court rejected the argument, quoting a contemporary treatise: “[s]ince a corporation acts by its officers and agents, their purposes, motives, and intent are just as much those of the corporation as are the things done. If, for example, the invisible, intangible essence or air which we term a corporation can level mountains, fill up valleys, lay down iron tracks, and run railroad cars on them, it can intend to do it, and can act therein as well viciously as virtuously.”  At least for offenses where the crime consisted in purposely doing the thing prohibited (in N.Y. Central it was paying a rebate), the Supreme Court saw “no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents.”

But corporations often act through the acts of a combination of employees.  What  happens where no individual agent has the knowledge or intent necessary to be held criminally responsible for the corporation’s act – can the corporation still be legally culpable?  More recently, courts have considered the aggregation of individual employees’ knowledge in evaluating corporate knowledge.  This doctrine of “corporate collective knowledge” traces back primarily to the First Circuit’s decision in United States v. Bank of New England, 821 F.2d 844 (1st Cir. 1987).  In that criminal case, which involved alleged violations of the Currency Transaction Reporting Act by the Bank of New England, the government had to prove that the bank had acted “willfully.”  Proof of willfulness required evidence that the bank had “knowledge” of the reporting requirement and, separately, the “specific intent” to commit the crime.  On the issue of knowledge, the court applied the “collective knowledge” doctrine and determined that the bank knew everything that all of its employees knew, even if no single agent had sufficient knowledge to meet the elements of the offense: “So, if Employee A knows one facet of the currency reporting requirement, B knows another facet of it, and C a third facet of it, the bank knows them all.”  Id. at 855.  The court determined that the specific intent element could be satisfied either through the willful failure of a bank employee to file the necessary reports or through the bank’s own “flagrant indifference” to its reporting obligations.  Id. at 857.

Since Bank of New England, courts have applied the collective knowledge doctrine to determine what a corporation knew.  But few have applied that doctrine to determine what a corporation intended, and there has been little discussion of whether specific wrongful intent of a corporation can be found without the prosecution identifying a particular individual who had such intent.  The idea raises some profound philosophical problems.  If, as N.Y. Central and many later cases have held, the actions, motives, and intent of an individual can be attributed to a corporation for purposes of criminal culpability, what evidence is needed to prove that the corporation itself had such intent even if no individual employee did?

As the First Circuit observed in the language above taken from Bank of New England, knowledge can exist in discrete portions.  It can be measured, combined, and added to.  Although the corporate collective knowledge doctrine has been criticized (See e.g. Thomas A. Hagemann & Joseph Grinstein, The Mythology of Aggregate Corporate Knowledge: a Deconstruction, 65 GEO.WASH L. REV. 210, 226-36 (1997)), there is some logic to the idea that employees’ knowledge can be “collected” and attributed as a whole to the corporation.

But can intent be similarly combined and accumulated?  Whereas sufficient knowledge is primarily a question of quantity, sufficient intent is a question of quality. If a specific intent is required for finding culpability of a specific intent crime, can the otherwise innocent intent of individuals be combined to create a collective intent that is of a distinctly different – i.e., guilty — character?  In other words, can the corporation be deemed to have the necessary criminal intent if none of its agents does?

There is scant law on the question, itself perhaps a clue to the answer.  One case that did address the question of corporate willfulness is United States v. T.I.M.E.- D.C., Inc., 381 F. Supp. 730 (W.D. Va. 1974), which upheld a criminal conviction that a trucking company knowingly and willfully violated federal regulations concerning driver safety.  The court held that because the corporation knew, under the collective knowledge doctrine, that it was not complying with its duties under the regulations and declined to act on that knowledge, there was sufficient evidence to find that it had thereby acted willfully, a holding consistent with the later result in Bank of New England.

But other cases have noted the problem with attributing intent to a corporation absent an individual wrongdoer who harbors the required state of mind. In Saba v. Compagnie National Air Fr., 78 F. 3d 664, 670 n. 6 (D.C. Cir. 1996), the court cited Bank of New England for the proposition that while knowledge of facts by employees could be attributed to the corporation, “the proscribed intent (willfulness) depended on the wrongful intent of specific employees.”  See also, e.g., First Equity Corp. v. Standard & Poor’s Corp., 690 F. Supp. 256, 260 (S.D.N.Y. 1988) (“A corporation can be held to have a particular state of mind only when that state of mind is possessed by a single individual.”); Gutter v. E.I. Dupont De Nemours, 124 F. Supp. 2d 1291, 1311 (S.D. Fla. 2000) (“The knowledge necessary to form the requisite fraudulent intent must be possessed by at least one agent and cannot be inferred and imputed to a corporation based on disconnected facts known by different agents.”)

Even T.I.M.E. itself has been cited for the idea that, unlike knowledge, “specific intent cannot be similarly aggregated [and therefore] there must be evidence from which a jury could reasonably determine that at least one agent of LBS had the specific intent to join the conspiracy to defraud the government.”  United States v. LBS Bank-New York, Inc., 757 F. Supp. 496, 501 n. 7 (E.D. Pa. 1990).  In one case decided shortly before Bank of New England the court, in a bench trial, was required to determine whether the defendant corporation intended to commit mail fraud.  Citing T.I.M.E., the court determined that to find the defendant liable “for fraud, I must find that a[n] employee had the specific intent required” by the statute.” Louisiana Power and Light Co. v. United Gas Pipe Line Co., 642 F. Supp. 781 (E.D. La. 1986).  (That said, the court found the company had committed fraud based on the fact that the corporation was “blind[] to obvious truths” and so violated the mail fraud statute, without identifying, or even discussing, an individual employee’s specific intent.)  Similarly, in State v. Zeta Chi Fraternity, 696 A.2d 530 (N.H. 1997), the New Hampshire Supreme Court cited to T.I.M.E. in upholding the conviction of a college fraternity, finding that there was sufficient evidence that fraternity members were aware of the facts surrounding underage drinking.  Because the fraternity’s “mental state depend[ed] on the knowledge of its agents,” the fraternity could be said to have acted recklessly in conscious disregarded of the risks involved.  Id., at 535.

Fast forward to 2016, when simultaneous corporate criminal trials were unfolding in the Northern District of California against PG&E (Case No. 3:14-cr-00175) and FedEx (Case No. 14-cr-00380).  PG&E was accused primarily of violating the Pipeline Safety Act.  FedEx was accused of conspiring with online pharmacies to deliver illegal prescriptions.  No individuals were prosecuted in either case.  The corporations alone stood trial.

Both corporate defendants argued that when prosecuting a corporation for a specific intent crime the government must prove that at least one individual acting on behalf of the corporation had the sufficient intent necessary for conviction.  Both lost on the issue.  In PG&E, the court brushed aside concerns raised with the collective knowledge doctrine, focusing instead on collective intent.  The court ultimately followed T.I.M.E., noting the similarity in the regulatory violations at issue in both cases.  The Court held that because PG&E had an affirmative legal duty to follow safety regulations (such as the Pipeline Safety Act) and “where the knowledge of the corporation’s employees demonstrates a failure to discharge that duty, the corporation can be said to have ‘willfully’ disregarded that duty.”  PG&E, 2015 WL 9460313 at *5.  In FedEx, the court cited to the PG&E order and, without further discussion, held that FedEx had “failed to identify controlling authority that calls into doubt any instructions on ‘collective knowledge’ or ‘collective intent.’”  United States v. FedEx, No. C14-00380 CRB, slip op. at 2 (N.D. Cal. Apr. 18, 2016).

The result in FedEx was perhaps more surprising, given that the charges there involved a conspiracy to distribute illicit drugs rather than the type of regulatory and/or reporting violation at issue in PG&E, T.I.M.E., and Bank of New England.  PG&E was accused of not fulfilling affirmative regulatory obligations imposed by law, and distilling corporate intent from collective knowledge in such cases is perhaps not that big a jump from already accepted concepts of “reckless disregard” or willful blindness.  (The nature of the charged crimes in PG&E was crucial in the court’s decision on the collective intent instruction.)  FedEx, on the other hand, was accused of agreeing to commit affirmative acts with the knowledge and intent to achieve an unlawful result, the first time that the collective intent doctrine had ever been applied in a criminal prosecution to a non-regulatory offense.

To be fair to the FedEx trial court, the case resolved before it was required to rule on the final instruction for corporate intent, and perhaps it would have ruled differently.  (Its prior ruling on collective intent occurred during pretrial skirmishing.)  We will see whether the rulings in PG&E and FedEx embolden prosecutors to pursue criminal charges against corporate defendants in the absence of at least one culpable individual.  Criminal prosecutions against corporations are rare enough, especially when no individual is prosecuted as well, and even with the favorable rulings on collective intent the ultimate result in PG&E and FedEx may cause prosecutors to think twice before prosecuting a corporation standing alone.