Back to Industry Newsletters
 

By Paul W. Berning
Thelen Reid Brown Raysman & Steiner LLP

Businesspeople, beware. Although a fundamental conception about criminal law is that a person can be guilty of a crime only if he or she acted in some specified unlawful manner and had the intent to do so, recent legal developments demonstrate that this is not true. Managers and executives can be criminally prosecuted as individuals for the actions of their businesses, even if they neither knew about nor had any role in the crime. Thus, managers can be sentenced to jail time simply for company violations that occurred on their watches.

Most of these convictions are based on statutes and regulatory provisions known as "public welfare" legislation. The Supreme Court has defined a "public welfare offense" as a crime for which "a reasonable person should know [that the proscribed activity] is subject to stringent public regulation and may seriously threaten the community's health or safety." Liparota v. United States, 471 U.S. 419, 433 (1985). Courts consistently have held that convictions under these statutes do not require a showing of intent or even negligence. This strict liability rule means that people can be convicted of a violation without knowledge of the illegality of the action or even knowledge of the action itself.

Public welfare regulations and statutes concern such diverse areas of law as the environment, public health and safety. The purpose of this article is threefold: first, to help business people better understand the risks they face; second, to provide concrete examples of public welfare statutes and prosecutions under them; and finally, to offer some practical advice for avoiding liability and minimizing the impact of a violation.

Rising Criminal Liability for Managers

In the 1960s, two developments drastically increased the criminal liability exposure of individual members of the business community. First, prosecutors became much more willing to take action against individual managers for criminal offenses by their businesses. Second, both Congress and the states incorporated criminal penalties for responsible individuals into an increasing number of regulatory statutes. Third, courts became more willing to interpret these statutes as public welfare legislation and to hold businesses and their executives and managers strictly liable for the consequences of a violation.

The rationale is as follows: While imposing monetary sanctions on a corporation might not lead to material changes in conduct, holding executives and managers criminally liable, with the probability of jail time, surely should force responsible parties to sit up and take notice. The purpose appears to be to deter executives and managers from using cost-benefit analysis in their decision-making and from treating fines against their corporations simply as a cost of doing business.

Moreover, the viability of the "responsible corporate officer" is being questioned. That doctrine holds that the only way to convict high-level corporate officers of crimes is to prove that the officers: (1) had knowledge of the conduct constituting the violation; (2) had the authority and capacity to prevent or correct the violation; and (3) failed to do so. 1/

But recent events, and one case in particular, have raised questions about this doctrine. United States v. Hanousek, 176 F.3d 1116 (9th Cir. 1999); cert. den., 120 S.Ct. 860, 145 L.Ed.2d 710. The case involved Edward Hanousek, Jr., roadmaster for the White Pass & Yukon Railroad in Alaska and Canada. As roadmaster, Hanousek's contract made him responsible "for every detail of the safe and efficient maintenance and construction of track... of the entire railroad... and [was to] assume similar duties with special projects." One of them was a rock-quarrying project along the railroad. An employee of a subcontractor on the project accidentally struck an oil pipeline with a backhoe, resulting in the spill of 1,000 to 5,000 gallons of oil into the Skagway River. That section of the pipeline was not protected from such accidents. When the project began, portions of the pipeline were protected with sand, ballast and railroad ties. After Hanousek took over responsibility for the project, no further sections of the pipeline were protected. The accident involved an unprotected section of the pipeline. However, the accident occurred only after the employee of a subcontractor -- on his own volition -- moved his backhoe 50 to 100 yards from where he was working (in a protected area) to clear some fallen rocks. Although Hanousek was off duty when the spill occurred, he was convicted under the federal Clean Water Act of negligently discharging oil into a navigable waterway. He was sentenced to six months in jail, six months in a halfway house and six months of supervised release and fined $5,000.

The trial court, in jury instructions, used the definition of negligence from civil law ("failure to use reasonable care") rather than the more stringent criminal negligence definition ("gross deviation from the standard of care that a reasonable person would observe in the situation"). Hanousek objected at trial and on appeal, but his objections were rejected. The Court of Appeals wrote: "It is well established that a public welfare statute may subject a person to criminal liability for his or her ordinary negligence without violating due process."

Under the traditional responsible corporate officer doctrine, Hanousek would not have been convicted because he lacked the requisite knowledge. However, the court chose not to apply the traditional doctrine, reasoning that because the Clean Water Act could be interpreted as public welfare legislation, Hanousek could be held accountable for the spill even if he had no direct involvement. The court reasoned that as long as he knew he was dealing with a dangerous device of a character that placed him in responsible relation to a public danger, he should have been alerted to the probability of strict regulation.

The Hanousek shows how managers and executives can be prosecuted and face jail sentences for failure "to use reasonable care." Aggressive prosecutors can charge business executives with crimes despite any evidence of either direct participation or actual knowledge. Under Hanousek, the prosecutor need only prove that a violation occurred and that the executive or manager failed to act reasonably. An especially troubling aspect of the Hanousek ruling is that even the intervening actions of subordinate employees or independent contractors do not preclude the conviction of an executive or manger who was responsible for oversight or compliance.

The Laws at Issue

Hanousek is but one example of public welfare legislation that can be used to impose liability on businesspeople who are "merely in proximity to criminal activity." What exactly are the public welfare statutes that impose strict liability on businesspeople? Although no court has provided a comprehensive list of statutes that fall into this category, public welfare statutes typically share the following traits:

1. The legislation seeks to protect public health and safety.

2. Intent is not a necessary element of a violation.

3. The statutes lack directly analogous common-law offense.

4. The mere threat of injury to individuals or property, not actual injury, constitutes a violation.

5. They are offenses against the authority of the state.

6. The violation can be prevented by exercising a reasonable level of care. 2/

Laws and regulations that courts interpret to concern the public welfare arise in several areas commonly encountered in the construction industry, including environmental laws and public health and safety regulations.

Environmental Laws

Until a decade ago, environmental prosecutors primarily targeted corporations for criminal environmental investigations. Today, these prosecutors are more aggressively pursuing executives and managers in addition to or in lieu of corporations. According to a 1999 Department of Justice report, two of every three environmental criminal suspects investigated by U.S. attorney's offices are individuals. 3/  The prosecutors' shift toward charging employees and others has resulted in a dramatic increase in fines and prison terms. In 1995, for example, environmental enforcement resulted in $23.2 million in criminal fines and 74 years of prison time. In 1999, just four years later, criminal fines tripled to $61.6 million, and courts handed down 208 years of prison time, both records. 4/

Executives and managers need to be particularly cautious regarding environmental matters. Under the newly developed Hanousek doctrine, they face indictment any time their corporation's activities result in an illegal discharge into a waterway or into the air or result in the improper handling or disposal of hazardous waste. Now, all the prosecutor need establish is that the corporate officer failed to "use reasonable care" in some manner and that the failure "caused" the violation. "Failures" sufficient for liability may include a failure to train subordinates adequately, failure to adequately monitor their activities, failure to follow up a subordinate's report of a violation or failure to implement an acceptable environmental management system.

Some of these statutes seemingly require that defendants "knowingly" violate the statute and thus would not hold wrongdoers strictly liable for noncompliance. However, the trend is to liberally construe statutes so that they are found to concern the "public welfare." Thus, courts can, and likely will, interpret the criminal provisions of these environmental laws to impose strict liability on executives and managers.

Following are federal environmental statutes that are especially pertinent:

1. The Clean Water Act (CWA) applies to any discharge of pollutants in violation of a discharge permit. 5/

2. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) concerns failures to report a release of hazardous substances into the environment. 6/

3. The Resource Conservation and Recovery Act (RCRA) involves both the transportation of hazardous waste to a landfill that is not licensed to accept hazardous waste and the treatment, storage or disposal of hazardous waste without the required permit. 7/

4. The Rivers and Harbors Act concerns the discharge of pollutants into navigable waters in violation of the statute or applicable permit requirements. 8/

5. The Toxic Substances Control Act (TSCA) involves the disposal of toxic substances in violation of applicable regulations. 9/

United States v. Hayes International Corp., 786 F.2d 1499 (11th Cir. 1986) provides one example of a prosecution under an environmental statute that was deemed "public welfare" legislation. Louis Beasley, the employee of Hayes responsible for disposal of hazardous wastes, was convicted of eight counts of violating RCRA for transporting hazardous waste to a facility lacking the required permit. 10/  Although the language of the statute requires that the defendant act "knowingly," the court held that the section "is undeniably a public welfare statute, involving a heavily regulated area with great ramifications for the public health and safety." 11/ For this reason, the court suspended the "knowing" requirement and allowed prosecution of Beasley on the basis of strict liability.

Construction executives and managers should be especially aware of these federal statutes and the potential ramifications of noncompliance. Those involved with excavation, grading and the transportation of hazardous waste should take particular care to avoid liability under these federal statutes, for these activities often are closely monitored. In addition, executives and managers need to familiarize themselves with laws from all jurisdictions in which they conduct business. Often, states enact their own environmental statutes.

An example of a state law that further defines and restricts conduct otherwise permissible under a federal statute is found in People v. Martin, 211 Cal.App.3d 699 (1989). Ray Martin was the president and principal operating officer of the Chem-O-Lene Co., a chemical blending plant located in Southern California. He was arrested, charged with and convicted of violating a California statute that regulates the transportation and disposal of hazardous waste. 12/ Although Martin was found not guilty of violating RCRA, the federal statute governing these actions, he was convicted of violating state law because "California law is more stringent than federal law." 13/ The court went on to hold that although "persons who commit an act through misfortune or by accident with no evil design, intention or culpable negligence are not criminally responsible for the act… yet [violation of this statute] is a public welfare offense in that it protects the public health, safety and welfare by regulating the industries which use hazardous materials." Thus, a corporate officer was found criminally liable for unintentionally violating a public welfare statute.

Public Health and Safety Laws

The imposition of criminal liability without proof of criminal intent affects other areas besides environmental regulation. Whenever public health and safety are at stake, public welfare legislation can be interpreted to impose strict liability. Many of the first strict liability convictions for violations of public welfare legislation came under the federal Food, Drug and Cosmetic Act. 14/ Since then, strict liability convictions under public welfare legislation have expanded into diverse fields, including occupational safety and health.

OSHA Standards

Although criminal sanctions are rarely imposed, construction executives and managers should be familiar with the potential for criminal liability under safety and health laws. For example, while the federal Occupational Safety and Health Act imposes criminal liability only for knowing violations, the California counterpart statutes criminalize far more activities. In California, a supervisory employee who, because of mere negligence, causes a serious health and safety violation is subject to criminal penalties, including fines and jail time. 15/  Under California Labor Code §6425, if a violation causes death or serious disabling injuries, a supervisory employee convicted of violating the safety or health standard or order also may be subject to criminal fines and jail time. Because these state statutes are considered public welfare legislation, courts may impose strict liability standards. Executives and managers should familiarize themselves with the applicable OSHA standards for all the jurisdictions in which their companies operate.

Building Code Violations

Violation of building codes is another area of risk. Because building codes specify design and construction standards for the purpose of protecting public health and safety, 16/  courts could interpret building codes as "public welfare" legislation and hold individuals strictly liable for violations of them.

Other Laws Related to Occupational Safety and Health

In 1990, California enacted the Corporate Criminal Liability Act, popularly known as the "Be a Manager, Go to Jail" Act. This law subjects individual managers of corporations and limited liability companies to criminal liability for failing to disclose "concealed hazards." 17/

A manager or executive of a corporation must notify the Department of Occupational Safety and Health and warn employees in writing immediately if there is imminent risk of great bodily harm or death. Criminal penalties can be imposed simply for a failure to warn affected employees. This apparently includes employees of subcontractors or other employers working at a facility. The act imposes fines and jail time on violators. Courts have not fully interpreted the act, so employers should proceed cautiously, assuming that courts will strictly enforce the act.

The presence of hazardous substances in the workplace also may pose the risk of criminal liability for executives and managers, regardless of knowledge of wrongdoing. State laws dealing with health and safety issues often are deemed public welfare legislation. In California, the Health and Safety Code provides for criminal penalties, including fines and imprisonment, for the improper disposal or treatment of hazardous waste materials. People v. Matthews, 7 Cal. App. 4th 1052 (1992) exemplifies the potentially serious nature of these offenses. There, the president of a corporation pleaded nolo contendere to violations of the Health and Safety Code. He then asked the court to seal and destroy his records, arguing that he had proven his innocence. The lower court granted the request. The appellate court reversed, holding that the defendant's lack of personal involvement in criminal violations did not absolve him from liability. The court interpreted sections of the Health and Safety Code as public welfare legislation, imposing strict liability. The court reasoned that as a corporate officer, the president had a positive duty to seek out and correct violations when they occurred and to implement measures to ensure that violations would not occur. Cases like Matthews make it clear that corporate executives and managers must be proactive regarding health and safety issues. The very real threat of criminal liability looms for those who do not do so.

Ways to Avoid or Minimize Liability

While corporate executives and mangers face prosecution for violations of public welfare laws, instituting a corporate compliance program can help reduce the risk of criminal liability. A corporate compliance program is a formal system designed to prevent, detect and appropriately respond to unethical and criminal conduct as well as civil misconduct by a corporation, its employees and other agents. 18/  Such programs involve identifying potential hazards and developing mechanisms to prevent such hazards from occurring. But, if wrongdoing does occur, corporate compliance programs facilitate the immediate and complete rectification of the hazard and reporting to the authorities. Thus, compliance programs are the legal equivalent of preventative medicine.

In addition to the preventative benefits of corporate compliance programs, the U.S. Sentencing Commission rewards companies that search out and report illegal activities within their own organizations. Companies and their executives and managers can avoid the most severe penalties by instituting a compliance program that encourages employees to monitor, detect and report any criminal wrongdoing. Companies and executives that blow the whistle on themselves in a timely fashion can find their fines and prison sentences reduced by as much as 95 percent while companies that do not comply with the guidelines can face a fourfold increase in sentence severity. To create an effective program, a company should:

1. Set up a program that can prevent and detect possible criminal offenses by the corporation or its agents.

2. Give over-all responsibility to a specific, high-ranking individual with a significant policy role in the company. If a corporation has many subsidiaries, it should consider appointing a compliance officer for each subsidiary or division.

3. Avoid conflicts of interest that might occur in assigning significant authority to any employee in a position vulnerable to the allure of illegal activities.

4. Communicate the company's conduct code and its compliance program to all employees and to anyone who acts on the company's behalf. Forms of communication might include employee training programs, company publications and videotape messages to employees. Communication needs to flow two ways, so programs should include a system to report wrongdoing and protect these whistleblowers from reprisals.

5. Monitor the program's implementation. Monitoring could take place via on-site inspections of subsidiaries and audits of disbursement records and expense accounts.

6. Enforce the program consistently by promptly and thoroughly investigating any allegations of company wrongdoing and by swiftly disciplining any employees involved. Companies are expected to report illegal activity to appropriate governmental officials, to cooperate fully in any formal investigations and to accept responsibility for wrongdoing.

7. Review the program regularly to determine its effectiveness and to update it as needed. If a company discovers wrongdoing within the organization, it should modify its compliance program to prevent similar offenses in the future. All company efforts should be documented. 19/

Together, these seven steps provide the basis for an effective in-house compliance program, according to the U.S. Sentencing Commission. In addition, governmental and trade organizations often provide services that aid in reducing the risk of criminal liability for corporations and their executives and managers. Following are examples of such services.

1. The Web site for the Kentucky occupational safety and health program gives an overview of the services provided by Kentucky's OSHA, including free and confidential consultative surveys to promote safety in the workplace by identifying potential hazards. Monetary penalties are not assessed for hazards identified during consultative surveys. However, the employer must agree to correct all "serious hazards" identified. www.labor.ky.gov/osh/

2. Maine's Department of Labor offers SafetyWorks!, a comprehensive program of workplace safety and health services at no cost. The services include training classes, consultations, publications, and loans and grants to facilitate workplace safety.

3. The Minnesota Department of Labor and Industry provides information about OSHA compliance and safety consultation visits. Using this free service, employers can find out about potential hazards at their worksites, improve their safety management systems and even apply for a safety grant of up to $10,000 to abate safety hazards. No citations or penalties are issued as part of a consultation visit. www.doli.state.mn.us

4. The National Roofing Contractors Association offers technical, safety, management and worker training publications available for sale and lists NRCA-sponsored safety education programs. www.nrca.net.

In Case of Investigation

Even if precautionary measures are taken, it is possible that wrongdoing will occur, resulting in a governmental investigation. What should a company do when it receives a grand jury subpena for documents or when government investigators arrive with a search warrant? The first step is to retain expert outside criminal defense counsel. A company needs to understand the scope of the investigation, the targets and what information investigators are seeking -- and criminal defense lawyers know how to acquire that information. Second, it is imperative that a company begin its own internal investigation under the direction of legal counsel once it discovers a governmental inquiry is under way. This can pay huge dividends. For example, prosecutors may decide against further action if it is shown that efforts are being taken to correct the problems. It always is better to take affirmative action in addressing a problem rather than appear as if the situation is being ignored.

If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form.

For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.

ENDNOTES

1/ United States v. Iverson, 162 F.3d 1015 (9th Cir. 1998).

2/ Tarun and Harvey, "From Weitzenhoff to Ahmad: Mens Rea Under the Federal Criminal Environmental Statutes," White Collar Crime 1997, American Bar Association (1997).

3/ Department of Justice, Bureau of Justice Statistics Special Report, "Federal Enforcement of Environmental Laws, 1997," November 1999.

4/ "Stiff Jail Terms: Cost of Doing Business," Pollution Engineering (September 1997).

5/ "Any person who... knowingly violates [certain CWA provisions] or any permit condition or limitation implementing any of such sections in a [CWA] permit" is subject to criminal penalties. 33 USC §§1311 (a), 1319 (c)(2)(A).

6/ "Any person... in charge of a facility from which a hazardous substance is released, other than a federally permitted release, in a quantity equal to or greater than that determined pursuant to section 9602 of this title who fails to notify immediately the appropriate agency of the United States Government as soon as he has knowledge of such release or who submits in such a notification any information which he knows to be false or misleading" is subject to criminal penalties. 42 USC §9603 (b).

7/ "Any person who knowingly transports, or causes to be transported any hazardous waste identified or listed under this subchapter to a facility which does not have a [required] permit" is subject to criminal penalties. 42 USC §6928 (d)(1). "Any person who… knowingly treats, stores, or disposes of any hazardous waste identified or listed under this subchapter… without a [required] permit" is subject to criminal penalties. 42 USC §6928 (d)(2)(A).

8/ "It shall not be lawful to throw, discharge, or deposit or cause, suffer, or procure to be thrown, discharged, or deposited either from or out of... the shore [or]... manufacturing establishment... any refuse matter of any kind or description... into any navigable water of the United States." 33 USC §407.

9/ "It shall be unlawful for any person to... fail or refuse to comply with" certain rules, orders of requirements issued pursuant to the statute. 15 USC §2614.

10/ 42 USC §6928 (d)(1).

11/ Id. at 1503.

12/ California Health and Safety Code §§25100 et seq.; 22 California Code of Regulations §§66001 et seq. Defendant was charged with violating §25189.5 (b), which provides: "Any person who is convicted of knowingly disposing... or who reasonably should have known that he or she was disposing or causing the disposal of any hazardous waste, at a facility which does not have a permit from the department issued pursuant to this chapter... shall, upon conviction, be punished by imprisonment.…"

13/ Martin at 708.

14/ United States v. Dotterweich, 320 U.S. 277 (1943); United States v. Park, 421 U.S. 658 (1975).

15/ California Labor Code §6423.

16/ 1 Stein, Construction Law, Chapter 1, §1.03, p. 1-62 (2000).

17/ "Serious concealed danger" is a condition in which there is a "substantial probability of death, great bodily harm, or serious exposure to an individual, and the danger is not readily apparent to an individual who is likely to be exposed." California Penal Code §387 (a).

18/ Romrell, "Why Companies Should Be Concerned About Corporate Compliance," National Association of Credit Management Business Credit (March 1997).

19/ Roberts, "Preventative Medicine for Corporate Crime," Business and Society Review (June 1995).

©2000 Thelen Reid Brown Raysman & Steiner LLP