Second Circuit Upholds Vicarious Corporate Criminal Liability

January 27, 2009

On January 20, 2009, the Second Circuit issued its decision in United States v. Ionia Management S.A., upholding the longstanding rule that a corporation may be held vicariously liable for the activities of a rogue employee, even where the company maintains a strict corporate policy and compliance program prohibiting such activities.

In Ionia, Ionia Management S.A., a ship management company, was convicted by a jury in the United States District Court for the District of Connecticut for violating the Act to Prevent Pollution on Ships by failing to ensure accurate oil record books. Central to the conviction was the court's jury instruction, which provided that Ionia could be held criminally liable for the acts of its employees, so long as the act was performed within the scope of their employment, even if the act was not specifically authorized. The defendant subsequently appealed its conviction, arguing, among other things, that the jury instruction on vicarious liability was erroneous.

In support of Ionia's appeal, a group of defense lawyers argued that the current view of corporate criminal liability, which may arise from the fraudulent acts of individual employees, evolved from the misinterpretation of prior Supreme Court precedent. The group further contended that the current application of corporate liability in criminal cases does not comport with recent, analogous Supreme Court decisions that have restricted the use of such vicarious corporate liability. The group pointed out that the Supreme Court has narrowed the applicability of corporate liability in civil sexual harassment cases brought under Title VII, specifically by (1) limiting liability to the acts of supervisors, and, (2) permitting the employer to an affirmative defense if it has reasonable policies to deter the offending conduct. The group's brief argued that similar limitations should apply in the corporate criminal liability context. 

 Additionally, the group sought to persuade the Court that adopting such limitations in corporate criminal prosecutions is consistent with the main objectives of criminal law – deterrence and punishment. In support of that argument, they noted that a corporation is not morally culpable for the criminal conduct of an employee where it has done everything possible to prevent such criminal conduct, such as enforcing a comprehensive compliance policy. Moreover, the current rule effectively disincentivizes corporations from doing what is necessary to expose the wrongful conduct because of the risk that unearthing such conduct may lead to the company's own liability.

Despite these arguments, the Second Circuit affirmed the defendant's conviction, finding that the broad application of corporate criminal liability for acts committed by an employee is consistent with long-established precedent. The Court found that precedent allows the extension of corporate criminal liability for acts of all employees, not just management. Further, the Court refused "to adopt the suggestion that the prosecution, in order to establish vicarious liability, should have to prove as a separate element in its case-in-chief that the corporation lacked effective policies and procedures to deter and detect criminal actions by its employees."

The Ionia decision confirms that courts will, at least in the near future, continue to impose principles of vicarious corporate criminal liability, even where the criminal conduct was committed by low-level employees. Further, the Ionia decision represents a major setback for corporate counsel and defense lawyers seeking to limit liability of corporations facing criminal prosecution based on the acts of individual employees. Any limitations to corporate criminal liability may require Congressional action, which is likely improbable in light of the corporate and financial frauds currently filling the headlines.