Prosecuting Beyond the Rule of Law: Corporate Mandates Imposed through Deferred Prosecution Agreements

PROSECUTING BEYOND THE RULE OF LAW: CORPORATE MANDATES IMPOSED THROUGH DEFERRED PROSECUTION AGREEMENTS Jennifer Arlen* ABSTRACT U.S. corporate criminal enforcement policy allows prosecutors to enter into deferred and nonprosecution agreements (D/NPAs) that impose corporate reform mandates on firms with detected misconduct. This article concludes that the process governing prosecutors’ use of D/NPA mandates is inconsistent with the rule of law. The rule of law requires that individual executive branch actors not be given sufficient authority to restrict the rights of others to achieve personal aims, including idiosyncratic conceptions of the public interest. To satisfy the rule of law, modern governments granting discretion to executive branch actors constrain this authority by limiting the scope of authority granted and requiring external oversight of decisions. Formal enforcement through pleas and formal agency rule-making employ both mechanisms to constrain discretionary authority. By contrast, prosecutors who use D/NPAs to create and impose new duties face few limitations on the scope of their ex ante authority to intervene. They also face little oversight through judicial review. This broad grant of discretion to individual prosecutors’ offices is inconsistent with the rule of law. 1. INTRODUCTION Corporate criminal liability has undergone a dramatic transformation over the last several decades. Today, federal prosecutors rely on informal enforcement (Rubin 2016) which gives them broad discretion to both sanction and regulate * Norma Z. Paige Professor of Law, New York University School of Law and Director, NYU Program on Corporate Compliance and Enforcement, E-mail: . This article was prepared for a conference at Stanford University’s Hoover Institution, The Role of Executive Power and Discretion under the Rule of Law. I thank the Hoover Institution important for its generous support, and other conference participants for their helpful feedback. I also would like to thank the following for their helpful comments and discussions: Rachel Barkow, Miriam Baer, Richard Epstein, Marcel Kahan, Jeffrey Knox, Allan Meltzer, Geoffrey Miller, Judge Jed Rakoff, Mark Ramseyer, Daniel Richman, Edward Rubin, Kenneth Scott, Stephen Schulhofer, Serina Vash, and Jeremy Waldron. Finally, I would like to thank my excellent research assistants, Tal Elmsted, Jerry Goldsmith, Alice Phillips, Max Rodriguez, Katya Roze, Stephanie Spies, Stephen Thompson, and Cristina Vasile, as well as Jerome Miller. ß The Author 2016. Published by Oxford University Press on behalf of The John M. Olin Center for Law, Economics and Business at Harvard Law School. This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact doi:10.1093/jla/law007 192 ~ Arlen: DPA Mandates and the Rule of Law publicly held firms with detected criminal misconduct. Most publicly held firms sanctioned for federal crimes by either the Criminal Division of the Department of Justice (DOJ) or the U.S. Attorney Offices enter into deferred and nonprosecution agreements (hereinafter D/NPAs) with federal prosecutors.1 Under D/NPAs, firms admit to criminal wrongdoing and agree to pay monetary sanctions, but avoid formal conviction (Arlen & Kahan 2017; Garrett 2007). Prosecutors not only use D/NPAs to sanction firms, they also use them to regulate their future conduct. Specifically, prosecutors use D/NPAs to impose mandates on firms that require them to change their internal governance or business practices. These D/NPA mandates thus enable prosecutors to create and impose new legal duties whose breach can subject the firm to criminal sanction (Arlen & Kahan 2017).2 Individual prosecutors’ offices3 have broad authority to impose the mandates they deem appropriate. The DOJ has placed few ex ante constraints on the scope of prosecutors’ authority to create and impose mandates. Prosecutors imposing mandates also are not subject to significant ex post oversight, for example through judicial review. The central claim of this article is that the prosecutors’ discretionary authority to use D/NPAs to create and impose mandates on firms is inconsistent with the rule of law.4 At its core, the rule of law requires that limitations on the legal rights of individuals must be determined by laws, rather than by potentially arbitrary and unconstrained decisions of individual government actors. Indeed, 1 See Arlen (2012a, Section 1, providing evidence on corporate criminal convictions of publicly held firms as compared with sanctions imposed through D/NPAs); compare with Alexander & Cohen (2015). 2 For a discussion of the nature of these mandates, the structural differences between D/NPAs and duty-based corporate criminal liability, and the limited situations where the imposition of these mandates is consistent with optimal deterrence, see Arlen & Kahan (2017). 3 Throughout this article, I use the term individual prosecutor to refer to the individual U.S. Attorney’s offices and to specialized sections in the Criminal Division of the DOJ, such as the Fraud Section. 4 This article focuses on whether the imposition of mandates through D/NPAs conformed to the rule of law. It does not address the question of whether and when D/NPAs and D/NPA mandates should be used. These issues are addressed in Arlen & Kahan (2017). In addition, many of the rule of law concerns discussed in this article would apply as well to mandates imposed on firms through other enforcement actions, including guilty pleas, formal regulatory enforcement actions, or agreements conditioned on a waiver of regulatory enforcement. This article focuses on D/NPAs because they are regularly used to impose mandates and are subject to little if any judicial review over the content of the mandates (see Section 2). For insightful analysis of the challenges presented by regulators’ use of enforcement authority to impose mandates see, e.g., Barkow & Huber (2000); Barkow (2011, discussing issues that arise when state prosecutors act as regulators); see Price (2016, concluding that authorities should only be able to use discretion to waive enforcement in return for substitute condition that impose less onerous conditions); see also Epstein (1988, p. 7–8). Spring 2016: Volume 8, Number 1 ~ Journal of Legal Analysis ~ 193 all members of society, including government actors, should be bound to act in accordance with law. Accordingly, commitment to the rule of law requires that states ensure that any government actor granted discretion to affect the liberty and property interests of others be constrained to act for the public’s good, as defined by duly-elected authorities or their delegates. Government actors shoul (...truncated)