Faulty Liability Frameworks for Organizational Employees

Posted: 10 Sep 2014

See all articles by J.S. Nelson

J.S. Nelson

Villanova Law School; Villanova School of Business; The Wharton School, University of Pennsylvania; Institute for Corruption Studies

Date Written: August 1, 2014

Abstract

Especially in the wake of the financial crisis, prosecutors and the public are searching for new tools to combat corporate conspiracy. The powerful intracorporate conspiracy doctrine immunizes an enterprise and its agents from conspiracy prosecution based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. As the statute of limitations expires on most other types of crimes that employees committed during the financial crisis, the most obvious and tested tool would be to roll back the intracorporate conspiracy doctrine. In the absence of this solution, however, frustration with applying the doctrine has led to over-reliance on alternative methods of holding agents of enterprises responsible for their actions.

To overcome the bar of the intracorporate conspiracy doctrine in conspiracy cases, U.S. Supreme Court precedent requires the existence of a separate underlying cause of action. One natural response of regulators has been to prosecute new duties for employees. These duties focus on the employee as an individual responsible to third parties harmed by the employee’s actions in furtherance of a corporate conspiracy. The number of these alternative regulatory frameworks has ballooned in recent years.

Each of these frameworks attempts to regulate personal liability for the behavior of employees within corporations. But, fundamentally, such duty-based frameworks impose faulty incentives on corporations and employees to curtail wrong-doing when their actions are coordinated as part of a corporate conspiracy.

First, imposing new duties on corporate employees without the ability to pursue conspiracy prosecutions artificially severs the connection between principal and agent that exists in business organizations, but that cannot be evaluated in these new duty-based frameworks. The law’s blindness in this regard may, in fact, encourage the spread of corporate conspiracies by encouraging coordination and the growth of perverse corporate cultural incentives. If there is no penalty for the coordination of individuals when forming a corporate conspiracy, only penalties for on the individual employee who takes too much action him or herself, then the savvy corporation divides up duties among its employees to protect everyone.

Second, if, as many commentators have argued, bankers in the financial crisis and other employees who may have participated in corporate conspiracies have not committed enough wrong-doing as individuals to be prosecuted, the regulator who attempts to build a purely duties-based case against the individual is defeated. If each pawn on a chessboard takes one step, that is not a large step for the pawn, but together those movements may create significant negative impact. Meanwhile, the regulator both pursues cases against each pawn in the least cost-efficient manner, and the regulator misses the cumulative effect of the pawns’ actions across the chessboard.

Third, these frameworks’ blindness towards the coordination of employee actions fails to reward the employee, such as a whistle-blower, who abandons the corporate conspiracy. In traditional conspiracy prosecutions, a conspirator who abandons the conspiracy is protected. By contrast, under these duty-based frameworks, a conspirator who abandons the conspiracy has no argument to make in his or her defense about the greater good. Instead, the employee already has to defend him or herself, which gives the employee more incentive simply not to investigate the conspiracy or not to get caught.

Accordingly, in the absence of the more comprehensive solution of rolling back the intracorporate conspiracy doctrine, the growth of alternative frameworks will fail to yield the results that regulators fundamentally require to change employee behavior in corporate conspiracies.

Suggested Citation

Nelson, Josephine, Faulty Liability Frameworks for Organizational Employees (August 1, 2014). Available at SSRN: https://ssrn.com/abstract=2488913

Josephine Nelson (Contact Author)

Villanova Law School ( email )

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Villanova, PA 19085
United States

Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
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The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Room 668 Jon M. Huntsman Hall
Philadelphia, PA 19104-6340
United States

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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