June 27, 2007
Kim Krawiec on Baer's Insuring Corporate Crime
Posted by Christine Hurt

Many thanks to Christine and the other Glommers for inviting me to comment on Miriam Baer’s timely and provocative draft, Insuring Corporate Crime. In this piece, Baer advocates the abolition of corporate criminal liability, thus shifting determinations of entity liability for employee wrongdoing into the civil liability system. In exchange, corporations would be required to procure "compliance insurance" policies that would cover the entity’s civil penalties associated with employees’ criminal conduct.

Baer contends that her proposed system would rectify the tendency toward overly expensive monitoring and compliance systems and suboptimal settlement terms common in the composite corporate criminal liability system, eliminate "mindless devotion to compliance for the compliance industry’s sake," and encourage more efficient levels of risky corporate activity and liability avoidance. Although I am sympathetic to Baer’s concerns, I fear that her proposal, as currently envisioned, will not ameliorate many of the inefficiencies of the corporate criminal system that she so carefully identifies.

Let me begin by addressing the paper’s strengths, of which there are many. As Baer notes, commentators have long debated whether corporate criminal liability provides benefits unattainable by the civil system. In this paper, Baer provides yet more ammunition to those who would eliminate corporate criminal liability. She persuasively documents problems with corporate criminal liability stemming from prosecutorial discretion, conflicts of interest created by prosecutors’ willingness to provide lenience to the corporate entity in exchange for targeting culpable individual employees, and the high costs often associated with a corporate criminal indictment (which can include the loss of licenses, permits, and an inability to participate in certain regulated industries).

But the bulk of the paper is reserved for a critique of the compliance-based corporate criminal liability system, as detailed in the OSGs and implemented by prosecutors (with guidance from the McNulty and Thompson memos). This is where I begin to resist Baer’s proposal, not because she errs in her skepticism toward compliance-based composite liability systems (indeed, I share her cynicism on this point), but because the same compliance-based composite system that she lambastes in the corporate criminal liability system also pervades the corporate civil liability system. As a result, Baer’s proposal, which relies on a shift from criminal to civil liability, is unlikely to deliver the promised benefits of a movement away from overly costly and uncertain compliance-based liability and a reliance on the compliance industry that promotes it.

The pervasiveness of, and problems inherent in, compliance-based liability in the modern civil and regulatory systems have been much discussed, not only by legal scholars, but by theorists in sociology and management science as well. Although the role of compliance and monitoring systems in employment discrimination law is particularly well-documented, compliance-based liability systems that not only mirror, but in some cases are explicitly modeled after, the OSGs pervade liability and damage inquiries in environmental, tort, health care, corporate, and securities law, among others. (Rather than boring Conglomerate readers with a long list of citations here, let me just suggest to Miriam that if she wants sources on these points to drop me a line or call me and I’m happy to help).

These compliance-based liability regimes pose the same dangers identified by Baer in the criminal context. For example, as is the case in the corporate criminal system, entity-level mitigation rules in the civil system are overly vague and crafted by those who lack the requisite information and incentives to set compliance and cooperation at efficient levels. In both the civil and criminal contexts, firms have incentives to implement compliance systems more carefully tailored to satisfy courts’ ex post inquiries into the corporation’s due care than to detect and deter misconduct if doing so is more cost-effective. Settlements in civil cases (particularly employment discrimination cases) routinely require the implementation of monitoring, compliance, or training measures whose propensity to deter the prohibited conduct at issue is questionable, at best. And although judges and juries in civil trials may not present the same problems of broad discretion and conflicted interests as do prosecutors, they suffer from similar biases, heuristics, time-constraints, and information-flow problems that render them highly unlikely candidates to effectively evaluate the quality of any entity’s compliance efforts.

Finally, although provocative, I fear that Baer’s compulsory compliance insurance proposal is unlikely to mediate the forgoing problems and, in fact, may exacerbate some of them. Although the introduction of an intermediary such as an insurance company might prove beneficial were the task of the insurance carrier limited to evaluating and pricing the likelihood of employee misconduct, this is not the task contemplated by Baer’s proposal. Instead, compliance insurance policies price the likelihood and magnitude of employer liability for employee misconduct. Although the propensity for employee misconduct within the given organization is surely one component of that price, the likelihood and magnitude of employer liability is based on an ex post judicial finding of adequate compliance and monitoring measures (a variable over which corporations and their insurers have more control than the level of employee misconduct, which will never be zero despite the employer’s best efforts). By definition then, insurance companies will base their prices and policies on the same considerations that motivate courts now, and which currently determine the types and levels of corporate compliance. In other words, I suspect that Baer’s new system is likely to operate much like the current one that she rejects.

Now, Miriam may disagree with the foregoing points and, of course, is free to reject them. But if she does not, let me suggest a method to address the objections of other readers who, like me, view compliance-based corporate civil liability as posing similar problems to compliance-based corporate criminal liability. First, retain the proposal to decriminalize entity liability for employee misconduct, moving such determinations into the civil system. Further, retain the insurance provision (I assume that Sean will have something to say about the insurance aspects of Baer’s proposal, and so I leave any critique about its workability to him, if he chooses to address it). But come down much harder on compliance-based defenses to entity-level civil liability, at least as currently operationalized. The raw material for such an approach is already in the paper, and I fear that failing to do so leaves the paper open to a criticism that the proposed regime merely replicates the old one, albeit without some of the complications unique to the criminal system that Baer identifies.

In conclusion, I find much to like in Miriam Baer’s Insuring Corporate Crime. It is interesting, informative, and I recommend it to all Conglomerate readers with an interest in corporate compliance or corporate misconduct in its many forms. Moreover, I am sympathetic to her skepticism towards the current corporate criminal liability system and its focus on ill-defined and largely unexamined assumptions regarding efficient monitoring and compliance levels. The civil system that Baer prefers, however, suffers from these same defects in evaluating entity liability for employee misconduct and, on balance, the proposed compliance insurance scheme is unlikely to redress Baer’s concerns.

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