Respondeat Superior and Compliance

oil tanker

Back in January, a company was found criminally liable for the action of its employees. (Second Circuit Affirms Ionia Management Case.) Under respondeat superior (Latin for “let the master answer”) a company can be held vicariously liable for crimes committed by employees acting within the scope of their employment.

Ionia operates and manages shipping vessels which transport oil to the United States. These ships produce oil-contaminated bilge waste, which they have to store for proper disposal. The Act to Prevent Pollution from Ships, makes it a crime to knowingly dispose of this waste improperly.

Ionia’s engine room crew, under the direction and participation of the Chief Engineers and Second Engineer, routinely discharged oily waste water into the high seas through a “magic hose” designed to bypass the vessel’s Oily Water Separator, which would have cleaned the waste to prepare it for disposal as required by law. Furthermore, the Kriton’s crew made false entries in the ORB to conceal such discharges, and obstructed a federal investigation (a) by hiding the “magic hose” from Coast Guard inspectors during a March 20, 2007, inspection and (b) by lying to Coast Guard officials.

There was some hope that the court would alter the doctrine of respondeat superior and include a good faith defense or limit the doctrine to higher level employees. A company can be brought down by lower level employees violating company policies.

In One Rogue Worker Can Take an Entire Company Down Stanley A. Twardy Jr. and Daniel E. Wenner wrote that “the trial court charged the jury that a corporate defendant could be held criminally responsible for the conduct of a single low-level employee, even if that employee acted in direct contravention of corporate policy and a robust compliance program.”

I didn’t read the case as taking that position and I still don’t.

First, there was a structural problem in the appeal. Ionia did not challenge the jury instruction at trial, so the Second Circuit was limited to a review for plain error.

Second, Ionia took the position that corporate criminal liability can “can only stem from the actions of so-called ‘managerial’ employees.” That contention seems at odds with United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir.1989) In the Second Circuit, “[i]t is settled law that a corporation may be held criminally responsible for [criminal] violations committed by its employees or agents acting within the scope of their authority.” United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir. 1989). Regardless, evidence show that the Chief Engineers specifically directed the deck hands to commit the criminal acts.

Third, the prosecution does not need to prove as a separate element that the corporation lacked effective policies and procedures to deter and detect criminal actions by its employees. “A corporate compliance program may be relevant to whether an employee was acting in the scope of his employment, but it is not a separate element.” The mere existence of contrary company policies is not by itself a defense to criminal liability. Whether a company has an official position on the course of conduct undertaken by its agents is merely one factor to be considered when assessing whether to impose vicarious liability.

I think this case show the importance of a compliance program. Merely having policies in place in not enough to defend the company from criminal liability. Policies alone are not enough to cause employee behavior to conform to policy. Compliance programs need training, procedures and enforcement to be effective.

I am sure it was Ionia’s policy to not dump the untreated bilge water in violation of the law.  They just were not doing enough to prevent it.


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2 Responses to Respondeat Superior and Compliance

  1. Jeff Kaplan August 6, 2009 at 7:48 am #

    I agree with your reading of Ionia, and think it is unfortunate that many have interpreted the holding there too broadly – and in a way which suggests that compliance programs cannot serve as a legal defense. In fact, in both the antitrust (e.g., US v Basic Construction, 711 F2d 570) and AML (e.g., US v Bank of New England, 821 F2d 656) areas jury instructions allowing consideration of the effectiveness of compliance programs in determining corporate liability have been approved by courts. The defense may be difficult to establish, but notably in US v. Stolt-Nielsen SA (524 FSupp 2d 586 (EDPa 2007), the court enforced an antitrust amnesty agreement against the gov’t where a) the gov’t claimed that the defendant hadn’t fully ceased its illegal activities after signing the agreement; but b) the court was persuaded by the implementation of the defendant’s antitrust compliance program that the defendant had in fact transformed its “corporate culture and reform[ed] its business practices.”

    • Doug Cornelius August 6, 2009 at 9:46 am #

      Jeff –

      Thanks for chiming in. Some recent stories made me question my original view of Ionia, so I went back and re-read it.

      I think the defense is difficult to prove because the DOJ would probably not have tried to indict the company in the first place if there had been an effective compliance program.

      Of course, if the compliance program was effective, there would have been a lesser chance of the bad act happening.