sion may hinder the effective implementation of the very regulatory policies which it seeks to enforce.

8. By virtue of Section 404 (a), individuals may be indicted and prosecuted under Sections 403(b) and (c) without even informing them that the charges are brought under these sections.

The Business Roundtable believes that there are other provisions of S. 1437, in addition to Chapter 4, which also merit careful consideration. The provisions on sanctions and sentencing contain serious shortcomings. These and some other provisions of S. 1437 which require further consideration are listed at pages 25-30 of this memorandum. If the Subcommittee deems it timely and helpful, we would welcome the opportunity to elaborate on our positions on these provisions as well.

DISCUSSION

SECTION 403-LIABILITY OF AN AGENT FOR CONDUCT OF AN ORGANIZATION

This section seeks to define the circumstances under which individuals may be charged with or held criminally liable for the unlawful acts of an organization. It merits careful scrutiny because, as the Senate Judiciary Committee frankly acknowledged in its Report, the concepts under which Chapter 4 exposes the individual to criminal liability extend to "the outermost limits of the criminal law for, in some instances, they operate to hold liable persons who took no part in the conduct and who had no agreement with the actor." Senate Report, p. 67. Consequently, as the Committee again acknowledges, "there is an inherent risk of overreaching. ***”

Under current Federal law, an individual who actually engages in unlawful conduct on behalf of an organization is as subject to the criminal sanction as the organization itself, whether or not the statute contains a specific provision for individual criminal liability. In addition to these "participant" or accomplice liability provisions of the Federal law, the courts have found officers or employees of an organization criminally responsible under certain strict liability statutes." Sections 403 (b) and (c), however, go beyond current Federal law in many significant respects. These sections would have the effect of "overcriminalizing" the decisionmaking process and conduct of organizations and their personnel. This result affects not only corporate business enterprises (which may have been the principal focus of the draftsmen) but also all entities within the Code's broad definition of “organization." Section 111 of the Code defines "organization" to encompass a wide variety of unincorporated and incorporated voluntary associations, such as unions, political groups, religious groups, and other groups whose causes and beliefs might be unpopular at a particular moment of our history. The term would include, for example, political committees (of both majority and minority candidates and parties); and in the event of an alleged violation by such a committee of the highly complex provisions of federal campaign financing laws, Section 403 (c) would enable a prosecutor to charge the volunteer campaign treasurer, and perhaps the candidate himself, with "reckless failure to supervise" the committee's work.

Thus, the issues presented by Sections 403 (b) and (c) are issues regarding the proper and legitimate extent of Federal power and criminal jurisdiction and should not simply be characterized and addressed by the Congress as issues affecting "white collar crime." The basic question is whether S. 1437 grants excessive power to the Federal Government, and its prosecutorial arms, to police the conduct of individuals who serve in a wide variety of nongovernmental institutions in our society-institutions which may from time to time have adversary relationships with, or positions antagonistic to, some agency of the Federal Government.

Section 403(b)

Section 403(b) imposes liability on individuals for an organization's failure to perform a statutory duty. It provides:

2 Only in very rare instances has Congress, or have the courts found that Congress, decided to hold only the organization and not its agents subject to the criminal sanction. 3 See United States v. Dotterweich, 320 U.S. 277 (1934); United States v. Park, 421 See Senate Report. p. 78. U.S. 658 (1975), discussed infra. In Park, the Supreme Court implied that the individual liability found in Dotterweich would be limited to strict liability statutes of a public welfare nature.

"(b) Omission to perform a Duty of an Organization-Except as otherwise expressly provided, whenever a duty to act is imposed upon an organization by a statute, or by a regulation, rule, or order issued pursuant thereto, an agent of the organization having significant responsibility for the subject matter to which the duty relates is criminally liable for an offense based upon an omission to perform the duty, if he has the state of mind required for the commission of the offense, to the same extent as if the duty were imposed upon him directly." According to the Senate Committee, this provision purportedly "covers and continues the teachings of Dotterweich and related cases" (Senate Report, p. 80). In reality it is a significant extension of Dotterweich into areas where its doetrine has never been applied; and no need for its extension into such areas has been demonstrated."

In Dotterweich, where a corporate officer was held liable under the Food Drug and Cosmetic Act (21 U.S.C. § 301 et seq.) for the corporation's introduction of adulterated and misbranded drugs into interstate commerce, the Court stated:

"Such legislation dispenses with the conventional requirement for criminal conduct-awareness of some wrongdoing. In the interest of the larger good it puts the burden of acting at hazard upon a person otherwise innocent but standing in responsible relation to a public danger.” 320 U.S. at 280-81. (Emphasis supplied.)

The rationale for the strict liability imposed by the Act was further explained in United States v. Park, 421 U.S. 658 (1975):

"The requirements of foresight and vigilance imposed on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products effect the health and well being of the public that supports them." 421 U.S. at 672. (Emphasis supplied.)

Since Section 403(b) requires that the individual have "the state of mind required for the commission of the offense," it imposes strict liability for crimes on individuals only where strict corporate liability is Congressionally mandated. However, Section 403(b), in combination with Section 303 (a) (2)* and those technical and conforming amendments of Title VI of S. 1437 that remove the mens rea requirements of criminal statutes outside of Title 18, creates strict individual liability for a far greater range of offenses than might at first appear from a casual reading.

If Section 403(b) "continues the teachings of Dotterweich," the Senate Report can only mean that it “continues" them in the sense of extending those "teachings" into every area where federal law imposes criminal liability for failure to perform a required duty. The provision is not limited to violations of statutes concerned with the “health and well being of the public." It applies to violations of regulations, rules or orders as well as of statutes, and it draws no distine tion, for example, between prosecutions for violating airline safety regulations on the one hand, and prosecutions relating to airline pricing infractions on the other. This wholesale expansion of Dotterweich is unwarranted, and making it under the guise of perpetuating existing case law is misleading. The dangers that may arise in the enforcement of this provision are discussed at pages 22-23 below.

Section 403(b) may also create liability for a far larger number of persons than is initially apparent. It holds liable "an agent of the organization having significant responsibility for the subject matter to which the duty relates.” This

• United States v. Dotterweich, 320 U.S. 277 (1943).

The lack of need is even more apparent in light of the provisions of Section 401(a) of S. 1437. Section 401(a) effectively extends the scope of liability for aiders and abetters beyond the scope of existing law. 18 U.S.C. § 2, by relaxing the scienter requirements of some of the existing Federal case law. (See Senate Report, pp. 70-73).

64

Section 303 (a) (2) provides that:

... no state of mind must be proved with respect to any element of an offense described in a statute outside [title 18] . if the description of the offense does not specify any state of mind with respect to that element and the legislative purpose of the statute does not indicate a contrary interpretation."

It should be noted that, with respect to prosecutions under the Food, Drug and Cosmetic Act, the Department of Health, Education and Welfare has recently recommended passage of a bill which would require proof of a defendant's "lack of due care" in place of the existing standard of strict liability. HEW Press Release, March 16, 1978, concerning S. 2755, 95th Cong., 2d Sess., § 162 (a) (the Drug Regulation Reform Act of 1978).

phraseology is even vaguer than that considered earlier by the Senate Committee, which would have imposed liability only upon those with "primary responsibility." Even that provision was noted to pose serious problems:

"By failing to define 'primary responsibility' or given any guidelines as to the application of the words in practical operation this Section places an impossible burden on the whole concept of delegated authority and responsibility. Is primary responsibility shared by all in the line of authority, or if not where does it rest-with the line supervisor, with the Board of Directors, or at what point in between?" 8

If a zealous prosecutor could argue that "primary responsibility" rests along the entire length of the "line of authority," he could do so even more credibly if liability attaches to persons with "significant responsibility." Literally scores of employees in a large organization could be threatened with prosecutions based upon a single violation.

The Senate Committee itself presents the most telling argument against Section 403 (b). It acknowledges the "inherent risk of overreaching" in the concepts included in Chapter 4 of S. 1437, but claims that it averted this risk by seeking "to draft the provisions with particular precision." In discussing Section 403 (b), however, the Committee candidly recognized that it had opted for an ambiguous standard of criminal conduct by adopting the test of "significant responsibility." In the Committee's classic description, the quoted phrase is "designedly rather amorphous." 10

We believe that amorphous standards should have no place in our criminal law. Leaving this ambiguous standard to be interpreted in the first instance by prosecutors as the Senate Committee proposes (Senate Report, p. 80) is an invitation to overreaching and abuse. Everyone, whether a business executive, church leader, union official, or political candidate or volunteer, who wants to avoid entanglement in the processes of the criminal law, is entitled to more precise guidance. An acquittal would be a limited consolidation for a person who had been indicted because a prosecutor interpreted the "amorphous" standard too broadly.

Section 403 (c)

This section is concededly "new to Federal law." " It provides that a person responsible for supervising particular activities for an organization who, by his reckless failure to supervise those activities adequately, permits or contributes to the commission of an offense by the organization, is criminally liable for the offense himself even though he is not conscious of any wrongdoing.

The first problem with Section 403(c) is that it expands greatly the class of cases involving no consciousness of wrongdoing.

One of the virtues of our system of government is that, generally, our criminal justice system requires proof of a consciousness of wrongdong by a defendant for conviction of a serious offense. Exceptions have been carved out by Congress on a statute-by-statute basis. In so doing, Congress has balanced the hardship

12

Charles S. Maddock, speaking with respect to Section 403 (2) of S. 1400 on behalf of the Section on Corporation, Banking and Business Law of the American Bar Association, Hearings on S. 1 and S. 1400 before the Subcommittee on Criminal Laws and Procedures, U.S. Senate Committee on the Judiciary, 92d Cong., 2d Sess., 1635 (1972). Senate Report, p. 67.

10 Id., p. 80.

11 Senate Report, p. 80. The section provides:

(c) RECKLESS FAILURE TO SUPERVISE CONDUCT OF AN ORGANIZATION.-Except as otherwise expressly provided, a person responsible for supervising particular activities on behalf of an organization who, by his reckless failure to supervise adequately those activities, permits or contributes to the commission of an offense by the organization is criminally liable for the offense, except that if the offense committed by the organization is a felony the person is liable under this subsection only for a Class A misdemeanor. "Reckless" is defined in section 302:

(c) "Reckless"-A person's state of mind is reckless with respect to:

(1) an existing circumstance if he is aware of a risk that the circumstance exists but disregards the risk;

(2) a result of his conduct if he is aware of a risk that the result will occur but disregards the risk;

except that awareness of the risk is not required if its absence is due to self-induced intoxication. The risk must be of such a nature and degree that to disregard it constitutes a gross deviation from the standard of car ethat a reasonable person would exercise in such a situation.

12 For example, in the recently enacted Foreign Corrupt Practices Act of 1977, Congress set the level of culpability at "knowing" or "having reason to know." The latter standard was enacted because of problems of proof in this particular area of the law.

of convicting an individual who did not actually engage in, or know about, the wrongdoing (but who was in such a position that he could have discovered and prevented illegal conduct), against the hazard to the public that the wrongdoing posed.

Section 403 (c) dispenses with this balancing of hardships. It subjects supervisors to potential criminal liability for any offense committed by the organiza. tion, regardless of the purpose of the penal statute or its relation to the public welfare and regardless of the fact that the defendant has no consciousness of wrongdoing. This across-the-board expansion of the scope of Federal criminal sanctions is alarming in light of the myriad of regulatory statutes, e.g., recordkeeping, reporting, occupational safety, trade and marketing laws, which carry criminal penalties.

The mischief in this subsection derives from the fact that the default in supervision need not be knowing: a "reckless" failure to supervise will suffice. This means that officers and administrators who have no intention of violating the substantive law, no criminal purpose and, in fact, no knowledge of the facts giving rise to their vicarious liability, can nevertheless be convicted of a crime for a default in supervision.

The extreme departure from our traditional requirement of consciousness of wrongdoing for crimes will occur under Section 403 (c) when the "offense" committed by the organization (exposing the supervisor to liability under Section 403 (c)) involves no consciousness of wrongdoing but arises from strict liability or negligent or reckless behavior. In that case, wrongdoing by the organization, of which its employees or members were not conscious, can impose criminal liability on an officer or supervisor who also had no consciousness of any wrongdoing. This overreaching potential of Section 403(c) violates basic fairness.

13

A second problem with Section 403 (c) is that it establishes a standard that is so vague and so variable in different contexts, that organizations will be uncertain how to comply with it. What is a "reckless failure to supervise"? What is a safe course of conduct for an officer or administrator? There are obvious difficulties with respect to defining the extent to which an officer of a nationwide corporation must be aware of its far-flung operations. Is the Board of Direc tors responsible for supervision in all instances, or the President, the chief executive officer in charge of a subsidiary, the division manager, or some subordinate? Furthermore, what management philosophy will ensure that there is no default in supervision? Different organizations employ different management philosophies. Some are tightly structured while others delegate authority to other managers or supervisors on down through the whole structure of the organization.

This section, instead of marking clearly the scope of criminal liability, poses a dilemma to the executive in terms of delegating authority. In order to supervise the activities of his employees to ensure full compliance with all the laws on the books, he may be compelled to delegate authority and responsibility to others. But in certain instances the very act of delegation may, in the light of the hindsight afforded to a prosecutor, and ultimately to a jury, be considered unreasonable failure to supervise and make officers alleged or convicted criminals.

Section 403 (c) appears to open the door for the Federal government to estab lish standards for management and supervision in private organizations. The judgment of prosecutors and government agency administrators on the proper degree of supervision and the management of operations may be entirely antithetical to the judgment of supervisors and managers. The structure of an organization and its management could become more dependent on the threat of criminal prosecution under Section 403(c) than on sound business judgment of what is appropriate for the particular organization.

A provision imposing liability for defaults in supervision might arguably be required in some particular defined area because of a special regulatory need to protect the public from specific, serious, unlawful activity. Such a specification would at least mark clearly the limits of responsibility for the executive or manager. But applying this concept of individaul liability indiscriminately to all offenses runs afoul of established principles of basic fairness.

13 See Kadish, "Some Observations on the Use of Criminal Sanctions in Enforcing Economic Regulations," 30 U. Chi. L. Rev. 423, 430-433 (1963).

The Senate has given no adequate justification for adopting section 403(c)

No adequate case has been made in the Senate Committee report, or elsewhere, for such broad extension in the scope of Federal criminal sanctions. The Committee states: [t]he subsection is necessary in order to emphasize that a "do it but don't tell me about it" attiude on the part of responsible officers or agents of an organization will not suffice to avoid criminal sanctions."

However, under the doctrine of "willful blindness" or "connivance", such action on the part of responsible officers would not insulate them from criminal liability. This doctrine has been recognized by both English and American authorities for over a hundred years.15 Professor Perkins' well-known treatise on criminal law sets forth the rule:

"One with a deliberate anti-social purpose in mind ** may deliberately 'shut his eyes' to avoid knowing what would otherwise be obvious to view. In such cases, so far as criminal law is concerned, the person acts at his peril in this regard, and is treated as having 'knowledge' of the facts as they are ultimately discovered to be." 16

In United States v. Jewell, 532 F. 2d 697 (9th Cir., 1976), the Ninth Circuit, after canvassing the law on "willful blindness", found that "Courts of Appeals

* have approved the premise that 'knowingly' in criminal statutes is not limited to positive knowledge, but includes the state of mind of one who does not possess positive knowledge only because he consciously avoided it." " Indeed, the Senate Report, in its commentary on the definition of "knowing," states that the conceps of "willful blindness" or "connivance" are intended to be codified in that term. (Senate Report, p. 59).

18

The Senate Committee also justified the proposed Code provision by referring to two law review articles and Congressional hearings. The focus of the two cited articles and the hearings, however, was on the scope of liability for anitrust offenses, an area of the law where the scope of liability has historically been treated differently. The example cited in one of the articles-a Yale Law Journal Comment "-and in the hearings as justification for an increase in the scope of criminal liability was the electric equipment industry antitrust case, which had involved billions of dollars worth of sales over an extended period of time. The government was said by the trial judge, Judge Ganey, to be "unable to uncover probative evidence which could secure a conviction beyond a reasonable doubt of those in the highest echelons of the corporations." 20 Judge Ganey further observed that "one would be most naive indeed to believe that these violations of the law, so long persisted in, affecting so large a segment of the industry and finally, involving so many millions upon millions of dollars, were facts unknown to those responsible for the conduct of the corporation ***"21 But such awareness, if in fact it existed and were proven, would appear to be tantamount to knowledge under S. 1437 thereby making high echelon corporate officers subject to criminal liability under Section 403(a). Even if the evidence in that particular antitrust case did not satisfy the "knowing" standard, the electric equipment case cannot stand for a wholesale extension of the scope of liability through the entire range of Federal offenses. It is far different from situations involving reporting and recordkeeping statutes, rate rebate regulations, OSHA regulations, and myriad other provisions carrying criminal penalties under which managers and administrators could be held vicariously liable if Section 403 (c) is enacted in its present form.

As stated earlier, there may be specific situations where the Congress finds it necessary for the public welfare to extend individuals' vicarious criminal liability. But carving out carefuly defined liability in specific areas of the law is consistent with the fundamental conception of "the criminal sanction as a last resort to be

14 Senate Report, p. 81.

15 Edwards. The Criminal Degrees of Knowledge, 17 Modern L. Rev. 294, 298 (1954). 16 R. Perkins, Criminal Law 776 (2d ed. 1969).

17 See also Turner v. United States, 396 U.S. 398 (1970) ("studied ignorance" tantamount to knowing); United States v. Jacobs, 475 F. 2d 270, 287-88 (2d Cir. 1973) ("the requirement of knowledge is satisfied by proof of a conscious purpose to avoid learning the truth").

18 See Senate Report, p. 80, n. 95.

19 "Comment, Increasing Community Control over Corporate Crime-A Problem in the Law of Sanctions, 71 Yale L. J. 280 (1960) (hereinafter "71 Yale L. J.").

20 Statement of Judge Ganey, N.Y. Times, Feb. 7, 1961, p. 26.

a Id.