October 19, 2006
Enterprise Liability
Posted by Lisa Fairfax

A theme raised at Maryland's conference on federalism focused on the increased use of enterprise liability--that is imposing liability on the corporation as an entity both in the civil and criminal context.   The concerns people raised were familiar.  That is, enterprise liability seems to harm shareholders because to the extent the corporation must make some payment, that ultimately means the shareholders must make some payment.  Hence, the liability strategy imposes a kind of double penality on shareholders--one related to whatever misconduct they had to suffer through and the second related to having to pay for that misconduct.  Then too, people talked about the harm such liability, particularly criminal liability resulting in the destruction of the enterprise, imposed on other groups such as creditors, consumers and employees.  In fact, with regard to employees, it strikes me that in the context of enterprise liability, the greatest harm is suffered not by those executives who either engaged in misconduct or had some power to prevent it, but rather by the rank and file who--if they lose their job because an entity suffers the fate of Arthur Andersen--may not be able to recover as quickly.

The discussion got me thinking about rationales for entity liability.  My impression is that such liability, particularly when we are talking about the sort that could destroy the entity, makes the most sense when the corporation has become corrupt in some sense.  That is my short-hand way of saying: (a) the individuals in the corporation engaging in wrongdoing out-number the individuals who are "innocent"; (b) the corporate culture breeds an enviornment that encourages and facilitates misconduct; and/or (c) even if only a few indidivuals engage in misconduct, the harm they inflict is tremendous and they are using the entity to shield themselves from responsibility.  In my mind, these scenarios suggest that there is no way to get at the individual bad actors other than through some form of enterprise liability and/or that there is a significant danger of continued misconduct.

I recall someone saying that the problem with enteprise liability, especially in the criminal context, is that it stems from laws and tactics developed in response to criminal enterprises, where the enterprise's sole or primary purpose was to engage in criminal activity.  Hence, the purpose of the liability was to destroy the enterprise.  If that is not our purpose, it seems to me we need to develop better standards regarding how and under what circumstances to use such liability.

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