The Responsible Corporate Officer Doctrine Gets an Administrative Extension

 One of the more troublesome trends in recent years has been the increasing willingness of lawmakers and regulators to try to impose liability on corporate officials without regard for the requirements of the corporate form and even without reference to whether the officials are culpable in any way. (Refer here for my most recent discussion of these concerns).

The theoretical basis for these efforts to impose liability on corporate officials often is the “responsible corporate officer” doctrine (sometimes referred to as the Park doctrine in reference to the U.S. Supreme Court case in which the doctrine was first recognized by the Court). As discussed at greater length here, under this doctrine, senior corporate officials can be held responsible for the corporation’s legal violations not because they are “responsible” for the violation but because they are “responsible” for the corporation.

An October 29, 2013 New York Times article entitled “Buckyball Recall Stirs a Wider Legal Campaign” (here) describes the latest attempt to use this doctrine to impose personal liability on corporate officials for alleged legal violations of their company. The article describes an action being pursued by the federal Consumer Product Safety Commission to require a product recall by Maxfield & Oberton, the manufacturer of Buckyballs, which are tiny magnetic stacking balls. The agency declared the balls to be a swallowing hazard to young children and filed an administrative action against the company to require a recall.

The company challenged the recall order, arguing among other things that packaging labels clearly warned that the product is unsafe for children. The company went out of business last December, citing the costs associated with the recall dispute. At that point, lawyers for the CFPC “took the highly unusual step of adding the chief executive of the dissolved firm, Craig Zucker, as a respondent, arguing that he controlled the company’s activities.” Zucker claims that the action could “ultimately make him personally responsible for the estimated recall costs of $57 million.”

The basis of the Commission’s action against Zucker is the “responsible corporate officer” doctrine. But while this doctrine is well established in many contexts, the Commission’s use of the doctrine in the recall proceeding arguably is unprecedented. The Times article cites unnamed “experts” who “say its use is virtually unheard-of in an administrative action where no violations of the law or regulations are claimed.” The article also cites a spokesman for the Commission as saying that the Commission “had never used it in a recall action,” without specifying why it was being used in this case.

The Times article reports that a number of business groups, including the National Association of Manufacturers, the National Retail Federation and the Retail Industry Leaders Association, had come together to urge the administrative law judge reviewing the recall case to drop Zucker from the action. However, to this point the ALJ has declined to drop the case against Zucker.

Along with these industry organizations, I have serious concerns about the Commission’s use of the responsible corporate officer doctrine in an administrative proceeding and without regard to whether Zucker himself is alleged to have violated law or regulations. I want to make it clear that my concerns in this regard having nothing to do (either way) with merits of the Commission’s recall action against the company. In that regard, the article describes the concerns that had led the Commission to seek to recall the Buckyballs. The Commission apparaently has reports of 1,700 emergency room visits involving children that had swallowed Buckyballs, and a spokesman for the Commission quoted in the article explaining the recall action said that the agency was concerned that “we did not see progress on safety to children” and that “the labels were not effective.”

The agency may well have appropriate grounds to seek a recall. The question is whether the cost and burdens of the recall appropriately should be imposed on Zucker. The problem with the Commission’s attempt to impose the recall costs on Zucker is that they are not seeking to impose these costs on him based on allegations that his personal actions as an individual provide a basis for holding him liable; rather, the Commission is seeking to impose these costs on him simply because of his position with the company. The Commission is saying that he should be held liable not because he is “responsible” for the problems that the Commission says justify the recall; they are saying the he should be held liable because he is “responsible” for the company.

The problem with this approach is that it disregards the now centuries-old recognition of the fact that corporations are legally separate from the individuals who run them. The idea that liability can be imposed on an individual for corporate misconduct, in apparent disregard of the corporate form and without culpable involvement or even a requirement of a culpable state of mind, seems inconsistent with the most basic concepts surrounding the corporate form. Used in this way, the responsible corporate officer doctrine imposes liability for nothing more than for a person’s status. Keep in mind that the agency has not alleged that Zucker has culpably violated a specific standard of liability; rather, the agency is saying only that Zucker should be liable because of his position, in complete disregard of the corporate form and without any regard to whether is culpable.

I understand that public policy advocates might well argue that corporate officials should have to pay out of their own resources for corporate misconduct so that the liability threat would deter future violations and motivate compliance. These kinds of arguments seem most compelling to someone who is secure in the knowledge that they will never have to worry about having liability imposed on them for conduct or activity in which they may have had no culpable involvement.

I appreciate that there is a current popular sentiment that corporate officials need to be held liable more frequently or perhaps even that regulators do not do enough to hold corporate officials accountable. Just the same, I am concerned that with the increased tendency to impose liability on corporate executives without any showing or requirement for a showing that the officials were culpable, there is a contrary danger that corporate executives could be held liable too frequently, or at least in instances where they have done nothing themselves to deserve it.

Even if there are circumstances where, as the U.S. Supreme Court has long recognized, that public health and welfare may justify the imposition of liability without culpability under certain circumstance, the enormous burden this possibility would impose on the civil rights and liberties of the affected individuals would seem to argue that these principles be used to impose liability on individuals only in the rarest and most extreme circumstances.

But rather than restrict its use of these principles out of an appropriate respect for basic notions of fairness and individual liberty, regulators are moving in the exact opposite direction and apparently seeking new opportunities to use these principles to expand their regulatory reach.

The regulators may well feel this approach may be justified in order to accomplish regulatory goals and ensure that somebody pays the price for wrongdoing. The problem is that scapegoating individuals for misconduct in which they not been proved to be culpably responsible is fundamentally unfair. In my view, this approach is inconsistent with some of the most basic assumptions of a well-ordered society governed by law.

If there are circumstances where public health and welfare might sometimes require the imposition of responsibility on a strict liability basis, the use of those circumstances should be infrequent and unusual. Regulators should be looking for ways to avoid relying on these powers rather than looking to expand their use. The imposition of penalties without regard to fault or culpability is a fundamentally unfair practice that should be discouraged at every possible opportunity.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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