On Friday, June 17, federal prosecutors made the unusual decision to suddenly drop a drug prosecution after a week of trial, some two years after indictment. The judge in the case, Charles R. Breyer, had expressed skepticism, calling it a "novel prosecution." And indeed it was: the defendant in the trial was not an individual but the delivery company FedEx-though the government invoked some of the same statutes it's used to go after the Mexican kingpin "El Chapo."
Without any finding of wrongdoing, or any judicial oversight, attorneys at the DoJ are assuming vast, extralegal regulatory authority. We've dubbed this practice "the shadow regulatory state."
Federal prosecutors had accused the package-delivery company of delivering packages that contained pharmaceuticals illegally ordered from Internet pharmacies. As FedEx's lawyers argued, it is more than strange for a criminal conspiracy to operate "with its name emblazoned on a truck." Judge Breyer observed that the government had failed to show any ill intent, and he pointedly noted that prosecutors have not gone after the U.S. Postal Service for the same conduct.
The FedEx case was unusual in another respect: it is exceptionally rare for the federal government to criminally prosecute a large corporation. Most often, companies and the Department of Justice agree to a deferred- or non-prosecution agreement that resolves criminal allegations without a trial. Indeed, that is precisely how federal prosecutors dealt with FedEx competitor UPS for the same alleged conduct: in 2013, the same U.S. Attorneys prosecuting FedEx entered into a non-prosecution agreement with UPS.
Deferred- and non-prosecution agreements are the major way in which the Department of Justice interacts with corporations. Since 2010, 17 of the Fortune 100 companies have been operating under the terms of one of these agreements. Last year, the federal government entered into 100-a record. By comparison, the government reached only 142 deferred- or non-prosecution agreements in all of American history prior to President Obama's inauguration.
Without trial, the Department of Justice collects billions of dollars annually through these agreements-more than $6 billion in 2015. But these hefty levies are the least-unusual parts of these arrangements. Instead, under the terms of a deferred- or non-prosecution agreement, companies make concessions to the government that include dramatic changes to business practices. In its 2013 non-prosecution agreement, UPS agreed to hire a new corporate officer as well as an "independent" auditor who reported to the government. In some cases, companies have been strong-armed into firing senior officers and directors.
Regularly, they agree to new training programs, to modifying sales practices, and to adjustments in employee compensation.
While federal prosecutors regularly insist on such business restructurings for companies to avoid prosecution, none of these "remedies" are authorized by statute or would be available as sanctions upon the company's conviction at trial. Moreover, in most cases, the federal government has failed to prosecute a single individual for any criminal offense imputed to the corporation. So without any finding of wrongdoing, or any judicial oversight, attorneys in the Justice Department are assuming vast, extralegal regulatory authority. We've dubbed this practice "the shadow regulatory state."
With onerous terms and hefty fines in deferred- and non-prosecution agreements, why do companies so regularly agree to them? Why was the FedEx prosecution so anomalous? Comparing its case with UPS's agreement is illuminating. In its 2013 non-prosecution agreement, UPS paid the government $40 million. By contrast, in its prosecution of FedEx, the government sought fines of $1.6 billion.
FedEx could afford to take that risk, and fight back, in part because the criminal charges levied against it were fairly ludicrous, but also because the case was easy to understand for its customers. More or less, the shipping company took its customers' side. As Judge Breyer suggested, the government was essentially asking FedEx to snoop on its customers and open their packages-which has privacy-law implications, in addition to being bad for business.
FedEx was also able to take the government to court because it is not similarly positioned to many other businesses that face collateral consequences from a criminal conviction, or even indictment, which can amount to a corporate death sentence. A defense contractor that loses its rights to enter into government contract, a pharmaceutical company that loses the ability to be reimbursed under Medicare, or a bank that loses its banking license cannot afford to roll the dice and take on the government at trial. Like Don Vito Corleone in The Godfather, the Department of Justice often makes businesses an offer they can't refuse.
It makes little sense to give broad powers to reshape businesses... to the English majors with law degrees in the federal Department of Justice.
With more than 4,000 crimes in federal statutes and more than 300,000 more crimes specified in various federal regulations, every complex commercial enterprise is inevitably vulnerable to federal prosecution-and thus, given federal prosecutors' leverage, to oversight through a deferred- or non-prosecution agreement. What that means is that the Department of Justice has sweeping regulatory authority, which according to the D.C. Circuit's April decision in United States v. Fokker Services, federal judges have next to no power to review.
There's a place for deferring prosecution. Congress clearly has an interest in combatting crimes committed under corporate auspices. But it makes little sense to give broad powers to reshape businesses, without statutory authorization or judicial oversight, to the English majors with law degrees in the federal Department of Justice.
Congress should act to bring the shadow regulatory state out of the shadows. Until then, we're just glad FedEx called the government's bluff and won its case.
This piece originally appeared on RealClearMarkets
James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute.
Rafael Mangual is the project manager for legal policy at the Manhattan Institute.
This piece was adapted from their new report, Justice Out of the Shadows: Federal Deferred Prosecution Agreements and the Political Order.