Crime and Punishment in Business Law: A Conference

Punitive Damages: What Do They Deter?

Punitive damages in civil lawsuits are commonly seen as a potent way of deterring wrongdoing. Donald Elliott of Yale Law School argued that they presently fail at that purpose. Years can go by between misconduct and eventual punishment, and the ones who ultimately pay the bill are often corporate stockholders—not employees or officers who committed the wrong. Personal responsibility for actions gives way to a notion of institutional guilt—although "corporations don't kill people, people kill people." Such damages, Elliott said, are like unguided missiles: because the geography of their fall can never be anticipated, they serve to engender general terror but little specific avoidance behavior. But, rejoined Marc Galanter of the University of Wisconsin Law School, if punitive damages are ineffective, "the question is: compared with what?" Galanter said such damages are being assessed more often because expectations naturally rise with affluence and education; people are coming to see risks as often avoidable and expect powerful enterprises to be held to account for harms they could have prevented.

Peter Huber of the Manhattan Institute argued that the dual objectives of today's liability law, deterrence and compensation, are at war with each other. Effective deterrence calls for fixing blame with precision, but generous compensation calls for muddling the lines of responsibility so as to reach deep pockets as often as possible. The current system makes it easy to sue in hopes of getting money to the needy, but once a case gets into court, "no-fault" principles are forgotten and the plaintiff demands punishment of his adversary.

Theodore Olson of Gibson, Dunn & Crutcher called punitive damages an anomaly in the justice system because they allow juries to take on the function of sentencing without fixed standards. (Civil Justice Memo #15, "Some Thoughts on Punitive Damages", summarized his comments.) The enormous variation among juries' ideas of suitable punishment leads to "capricious, random, destructive, uncontrolled, and unpredictable" outcomes, "the very antithesis of due process." (In Browning-Ferris v. Kelco Disposal, the Supreme Court on July 26 rejected a challenge to punitive damages based on the Excessive Fines Clause of the Eighth Amendment but virtually invited a challenge based on the Due Process Clause.)

A Threat to Civil Liberties?

The next panel took a civillibertarian look at whitecollar law enforcement, especially the controversial RICO (Racketeer Influenced and Corrupt Organizations) statute. Ira Glasser of the American Civil Liberties Union called RICO "the most comprehensive assault on civil liberties principles of any statute I've seen in many years." When Congress originally enacted it in 1970, he said, the ACLU's objections were prophetic: "We suggested that it would be used against the First Amendment, to deny people the ability to hire a lawyer, [and] that the vagueness and lack of definition of what 'enterprise' and 'racketeering' meant would allow prosecutors to roam far afield. We suggested that pretrial seizures and freezing of assets were draconian punishments that would preclude a fair trial." All these things happened. Citing controversies over tobacco advertising, privacy of bank records and compulsory drug testing, Glasser went on to suggest that business people share a wider interest in Bill of Rights protections with groups like his, even though in other respects the two might be politically at odds.

Walter Olson of the Manhattan Institute said many RICO and punitive damages actions share a basic, drastic failing: they violate the rule-of-law principle that conduct can be punished only if it has been spelled out clearly in advance as prohibited. RICO is commonly based on "predicate acts" of mail, wire or securities fraud that are vaguely defined at best. Punitive damages are today levied against acts that when they were taken were not clearly subject even to ordinary compensatory liability, let alone punishment. The "principle of legality" demands that both kinds of punishment be, at least, narrowed and clarified.

Philip Lacovara of General Electric Corporation, former counsel to the Watergate special prosecutor, explained that some courts have interpreted the federal mail fraud statute to criminalize "any kind of conduct that according to contemporary business ethics is objectionable." Although this is "wonderful for prosecutors," he said, it is "very difficult for the legitimate business person to know whether, after the fact, someone is going to say that his hard bargaining, his aggressive techniques" are unlawful. To make matters worse, "notions of fair play, due process, fair warning, fair trials, presumption of innocence and so forth are absent from the prosecution of whitecollar defendants."

Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit, commenting, said that applying RICO and similar laws to business at least has one positive side effect, in that it provides a political force for reining in abuses of these laws; few people seem to care when ordinary criminals are the target of prosecutorial overreaching.

Ideas on RICO Reform

RICO provides for civil as well as criminal liability and offers treble damages plus attorneys 'fees to successful private complainants. The idea is to enlist civil plaintiffs as (in effect) private prosecutors. Yet there is no equivalent of "prosecutorial discretion," to rule out cases that public policy or common sense would suggest should not be filed. As a resultsaid Norman Abrams of UCLA School of Lawthere is a strong sense among lawyers that many "abusive" civilRICO suits get filed that would never have gone forward had they been up to a public prosecutor, quite aside from budget constraints. Abrams outlined a new proposal of his own: creating an agency in the Justice Department to review and approve civil RICO filings. Lawsuits without such approval—which is to say, inconsistent with prosecutorial policycould not go forward.

G. Robert Blakey of the Notre Dame School of Law, primary author of the RICO law, countered that lawyers working on contingency fees do better at screening meritorious from frivolous cases than prosecutors would, and said the enormous price of taking a RICO case to trial ($100,000$150,000) discourages nuisance filings. On the vagueness problem, "RICO does not make anything criminal that is not already criminal," Blakey said. "If the mail fraud statute is too broad, narrow the mail fraud statute. You will then also narrow RICO. One of the beneficial effects of RICO will be the narrowing of the mail fraud statute."

Other panelists warned that the treble-damages threat and the intense stigma of RICO charges can coerce a settlement even when a defendant would probably have won at trial. Jed Rakoff of Mudge, Rose, Guthrie, Alexander and Ferdon argued that RICO permits "very severe sanctions for very minor offenses, unfairly stacking the deck in favor of the protagonist whether it be the prosecutor in a criminal case or the plaintiff in a civil case."

The criminal side of the RICO law provides for forfeiture of assets before trial, the idea being that organized crime monies tend to disappear before the law completes its course. Gordon Crovitz of the Wall Street Journal observed that this threat is particularly effective in coercing pleabargains and testimony from mainstream Wall Street firms, which fear that investors will pull out their money lest it wind up frozen. "if you're on the board of Drexel Burnham and your choice is between coughing up $650 million or going through the extremely costly procedure of being RICO'd, your responsibility is probably to settle." And yet "if somebody pleads guilty, the public is entitled to believe they were guilty. In the case of RICO, [because targets] couldn't stick around to defend themselves, we are never going to know."

Blakey maintained that RICO was never aimed solely at the less respectable strata of society—tailoring a criminal law that way would be unconstitutional—and said anyone who commits a crime should be punished. "If there's a David and Goliath relationship, I suggest the government is David, the securities industry Goliath and RICO the slingshot." Crovitz retorted that this was a "moral relativity defense of RICO," "equating the activities of organized criminals with the activities of legitimate businesses."

Wall Street: Regulation By Prosecution?

The final session took up some of the same themes, expanding the discussion beyond RICO. Arthur Liman of Paul, Weiss, Rifkind, Wharton and Garrison said stock parking and other whitecollar crimes are nowadays viewed as the "moral equivalent of drug dealing" because 'We want to have an equal society." On the theme of the rule of law, Liman said it was not in itself improper "in the light of changing circumstances and changing mores [that formerly lawful activities] become unlawful." The problem comes when law enforcers forget "one of the first principles of justice”—that "there should be fair notice when conduct is regarded as criminal." He said criminal prosecutions are now being waged against conduct that only a few years ago would not have been subject even to civil SEC charges.

Jack Coffee of Columbia Law School elaborated on this point. He said fairness dictates that "the appropriate role of the criminal law is to come into play after the civil law has defined the field, defined the abuse, [and] given fairly consistent rules that the public knows." Today's prosecutors are not "power mad," he said, but they do tend to "rush into a vacuum" when one appears. And "the most important criminal law development" of the moment is "the erosion of the line between the civil law and the criminal law. . . . [A]lmost any violation of an administrative rule or regulation can possibly result in a felony indictment." Independent attorney Stanley Arkin, discussing this trend, said he had calculated that more than 300,000 different federal regulations had been criminalized.

Gary Lawson of Northwestern University Law School called into question the entire "private attorney general" rationale for civil RICO and securities lawsuits, with special reference to the "fraud on the market" theory, which he said allows successful suits on behalf of shareholders who were not in fact harmed by a failure to disclose news or some other lapse. "if what's really going on here is law enforcement, then we ought to wonder what has become of the checks usually associated with law enforcement"—in particular, the procedural protections of criminal law and the need to prove guilt beyond a reasonable doubt, both of which are missing from privatized "prosecutions."