Rethinking Successor Criminal Liability, for the First Time

Mihailis Diamantis is Associate Professor of Law at the University of Iowa College of Law. This post is based on a recent article authored by Professor Diamantis, forthcoming in the Yale Journal on Regulation.

It’s axiomatic that the criminal justice system should punish corporations that commit crimes and not punish those that don’t. But when a criminal corporation reorganizes—whether by merging with others or spinning off lines of business—how can we tell which, if any, of the successors “committed” the predecessor’s crime? A lot turns on this question. Whether, how, and to what extent criminal liability flows through corporate reorganization affects how corporations treat past and future misconduct. Yet the answer—the doctrine of successor criminal liability—has been largely overlooked by legal scholars as a pressure point for tailoring corporate incentives. In an article forthcoming in the Yale Journal on Regulation, Successor Identity, I discuss the simplistic automaticity of successor criminal liability under current law. I propose that a better approach to successor liability would only punish successors who share compliance vulnerabilities with criminal predecessors.

Given the criminal justice stakes and the complexity of corporate reorganization, the general rule of successor criminal liability is far too easy to state: Assuming the statute of limitations has not run, successors (all of them) are liable for previously unpunished crimes (all of them) of their predecessors (all of them). The DOJ agrees. If an innocent and a criminal corporation merge, it does not matter what features of the two predecessors survive the merger or how those features change in the reorganization. For spin-offs, it does not seem to matter how the attributes of the parent are distributed between it and the spin-off; there’s a case to be made that prosecutors have the option of going after either, and perhaps both.

We should be asking whether there are other ways to structure successor liability and whether we could be doing better. I think there are, and that we can. To motivate the search for alternatives, consider that there are two ways to prevent corporate crime. One is to threaten punishment and thereby disincentivize corporate misconduct ex ante, i.e. deterrence. With the right mix of detection, prosecution, and penalty, corporations will implement compliance programs designed to catch misconduct before it occurs. However, no compliance program is perfect, and some criminal activity will slip past even the best of efforts. So, we need a second way to prevent corporate crime—rehabilitation—that encourages corporations to detect misconduct that has already occurred and reform the compliance vulnerabilities that caused it. This will prevent the offense from recurring.

The current law of successor liability may initially seem appealing, at least so far as deterrence is concerned—liability for punishment sticks to corporate criminals through reorganization no matter what. That assumes, though, that authorities can adequately detect corporate misconduct when it occurs. In the actual world, where companies like Volkswagen can sell eleven million cars with illegal defeat devices before getting caught, corporate crime can be quite hard to uncover. Prosecutors need the help of the corporations themselves. But corporations will often respond to the deterrent incentives of current law by adopting better concealment programs rather than better compliance programs. Which course any corporate criminal opts for depends on a case-by-case assessment of costs and benefits.

When it comes to encouraging rehabilitation, the current law of successor liability falls flat. It gives corporations weak incentives to detect misconduct and reform their compliance programs. The same internal policing that corporations must use to gauge the need for reform risks alerting authorities to the same previously undetected misconduct. This is a serious risk for corporations with potentially little upside; even if the process is successful, it does nothing under current law to mitigate liability. Some corporations may find that ignorance is preferable.

A better approach to successor liability would try to weaken the incentives corporations have to conceal their misconduct and strengthen their incentives for self-reform. We could do this by dropping the current law, which automatically transfers criminal liability from predecessors to successors. Rather, liability should follow whatever compliance vulnerability encouraged, permitted, or failed to catch the crime in the first place. When a criminal corporation merges with an innocent corporation, we should only punish the successor for past crimes if it inherits the defective features of the criminal predecessor’s compliance program. If, in the course of the merger, the successor adopts the innocent corporation’s compliance program or otherwise reforms the defects, it should emerge from the reorganization free of criminal liability. When a criminal corporation spins off a division, liability should follow whichever successor(s) the compliance vulnerability stays with. In some cases, this will be both successors. In others, it may be just one. And, on rare occasion, spinning off a division may eliminate a compliance vulnerability that arose from the interaction between two lines of business—neither successor would be liable for the predecessor’s crime.

This brief post no doubt raises more questions than it answers. Should it apply to all criminal sanctions, or just some? I think the argument is strong for punitive sanctions (like fines), but not for remedial sanctions (like victim restitution or environmental cleanup). Even so, won’t the modified approach to successor liability be open to manipulation? How do we determine what compliance vulnerability led to crime? Who should make the determination? At what point in the criminal process? I offer responses, or at least the start of them, in Successor Identity. At this stage, the project is as much about posing questions as answering them. Successor criminal liability has gone unquestioned for too long.

The complete article is available here.

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