Corporate Probation: The Con Edison Sentence
At about 6:30 P.M. on Aug. 19, 1989, a Consolidated Edison Co. steam pipe exploded in Manhattan's Gramercy Park neighborhood. Three people were killed and debris was spread throughout the neighborhood. Residents in one of the affected buildings conducted their own tests and discovered asbestos in the debris, although Con Edison itself had not reported the release of asbestos.
The U.S. Attorney's Office for the Southern District of New York obtained indictments against Con Edison and two of its officials. They were charged with felony violations of the Emergency Planning and Community Right-to-Know Act of 19861 and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended in 1986,2 both of which require the prompt reporting of releases of hazardous substances such as asbestos.
The trial began on Oct. 11, 1994. After four days of trial, Con Edison pleaded guilty. On April 21, 1995, Judge John S. Martin Jr. sentenced Con Edison to the maximum fine of $2 million and to three years probation under the supervision of a court-appointed monitor. (Con Edison had already reached private-party settlements under which it paid more than $54 million in respect of civil suits and other claims for property damage, personal injuries and other losses resulting from the explosion.) The U.S. Attorney's Office had vigorously supported the appointment of a monitor, and Con Edison's lawyers strongly opposed it.3
This column will discuss the precedent for this sentence; the legal necessity of a sentence of probation; the role corporate culture may sometimes play in creating or preventing the conditions that may necessitate probation; the importance of corporate compliance programs in preventing such crimes, or in mitigating their impacts; and the nature of the probation imposed in this case. One clear lesson that emerges is that an effective compliance program is likely the best way for a company to avoid the fate that befell Con Edison.
Precedent for Probation
This is apparently the first case in which a corporation convicted of an environmental felony has been sentenced to a term of court-supervised probation because, in part, of the judge's concerns with its "corporate culture." However, there is precedent for the imposition of a sentence of corporate probation under analogous circumstances.
One study found that supervised probation has occasionally been imposed on corporations convicted of pollution violations and that judges are increasingly using "nontraditional" sanctions in such cases.4 Even critics of the idea of corporate probation acknowledge it is appropriate where it is needed to enforce a remedial order.6
Court-appointed monitors are a well-established technique when a court determines that the transformation of an institution or the construction of a complex facility is necessary for the solution of the underlying problem.7
Necessity of Probation
The Organizational Sentencing Guidelines of the United States Sentencing Commission did not directly apply in this case, because the incident at Gramercy Park occurred before the Guidelines' 1991 effective date. (The Sentencing Commission is still formulating a special set of guidelines for fines for environmental violations,8 but the Organizational Sentencing Guidelines do otherwise apply to penalties other than fines for environmental crimes.) Where applicable, the Organizational Sentencing Guidelines require a sentence of probation in certain circumstances. Section 8D1.1(a) provides:
The court shall order a term of probation:
(3) if, at the time of sentencing, an organization having 50 or more employees does not have an effective program to prevent and detect violations of law;
(4) if the organization within five years prior to sentencing engaged in similar misconduct, as determined by a prior criminal adjudication, and any part of the misconduct underlying the instant offense occurred after that adjudication; [or]
(6) if such sentence is necessary to ensure that changes are made within the organization to reduce the likelihood of future criminal conduct.
Judge Martin apparently believed that a sentence of probation was necessary to ensure the necessary changes within Con Edison. In pronouncing sentence, he stated:
The problem with corporate liability is that there are in every corporation some very wonderful people, and there are some very wonderful people at Consolidated Edison, but there is something that happened here, and the thing that cries out most to me from this record is that [one of the individual defendants] was able to blind himself to what was so obvious to anyone who looked at the record. One of the things I found disturbing here was the sense that there were people at Con Edison, who testified at the trial, who clearly knew and who should have been jumping up and down saying, there is asbestos here, we know it. It was obvious they didn't say it because they were intimidated from saying it, because they didn't think that was the corporate culture; and that was not the corporate culture that came across to me in this trial. . . I do think there was a sense here, at certain levels within this company, that you had better not tell the bad news.9
Judge Martin's perception of the importance of corporate culture in the company's compliance with the law is supported by a considerable literature in organizational behavior. Corporate culture refers to the underlying assumptions, beliefs, values, attitudes and expectations shared by a corporation's officials and employees, which affect their behavior and the behavior of the corporation as a whole. In the words of one of the leading works on the subject:
Every business -- in fact every organization -- has a culture. Sometimes it is fragmented and difficult to read from the outside -- some people are loyal to their bosses, others are loyal to the union, still others care only about their colleagues who work in the sales territories of the Northeast. . . [S]ometimes the culture of an organization is very strong and cohesive; everyone knows the goals of the corporation, and they are working for them. Whether weak or strong, culture has a powerful influence throughout an organization; it affects practically everything -- from who gets promoted and what decisions are made, to how employees dress and what sports they play.10
Similar sentiments were expressed in a book devoted to the subject of corporate culture in electric utilities:
Virtually all types of organizations take on characteristics that are unique to themselves. They develop norms and mores that dramatically or subtly define themselves and set themselves apart from other comparable organizations. . . So an organization's culture is essentially a set of shared beliefs and values that govern how people act. This is particularly important because how people act determines the viability and survival of the company.11
Turning around a corporate culture is no simple task. Employees at every level of an organization become socialized to a pattern of beliefs and behavior; resocializing them to a different pattern requires far more than a few pronouncements from the chairman or president. Often years of concerted effort are required before the new culture is suffused throughout the organization and day-to-day operations actually change. As Professor Barry D. Baysinger has written:
There are no quick and easy techniques for building a new organizational culture and no simple strategies for changing one. Cultures develop slowly either as accidents of history or as the result of patient leadership and the influence of many systemic forces beyond management control. Furthermore, such change will not likely result if it is pushed by top management only as a reluctant response to the threat of vicarious liability and heavy fines for organizational crime.12
The above-quoted book about the electric utility industry voiced similar sentiments about the slow pace and great difficulty in forming and changing corporate cultures:
Culture comes slowly to an organization. It is an evolutionary product that is shaped by the actions of every person in the organization. Events perceived as positive get good internal press while events perceived as negative are held up as examples of what not to do -- positive and negative reinforcement. Over time, the strategy, people, organization and culture come together.13
One of the items affected by corporate culture is environmental compliance. Some organizations have deep environmental commitments and, at every level, will try very hard to make sure their actions are environmentally benign, even at considerable cost. Other organizations, while lacking an ideological commitment to the environment itself, believe very strongly that compliance with laws and regulations is extremely important, and will work hard not to violate any requirements. Still other organizations are contemptuous of environmental rules and will try to skirt them whenever they believe they will not be caught.
Where there are problems of corporate culture, it is important that a sentence imposed for an organizational crime reflect the difficulties and delays in changing organizational attitudes. Companies with long histories of noncompliance, especially compared with others in the same industry, may well have particular problems in shaping up. Judicial supervision may help to ensure that the company maintains environmental compliance while its corporate culture is changing.
As noted above, one reason a sentence of probation is required is if the company lacks "an effective program to prevent and detect violations of law." (Judge Martin did not make a finding as to whether Con Edison had such a program.) The Organizational Sentencing Guidelines provide this definition, in §8A1.2, Application Notes 3(k):
An "effective program to prevent and detect violations of law" means a program that has been reasonably designed, implemented, and enforced so that it generally will be effective in preventing and detecting criminal conduct. . . The hallmark of an effective program to prevent and detect violations of law is that the organization exercised due diligence in seeking to prevent and detect criminal conduct by its employees and other agents.
Due diligence requires at a minimum that the organization must have taken the following types of steps:
(1) The organization must have established compliance standards and procedures to be followed by its employees and other agents that are reasonably capable of reducing the prospect of criminal conduct.
(4) The organization must have taken steps to communicate effectively its standards and procedures to all employees and other agents, e.g., by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.
(5) The organization must have taken reasonable steps to achieve compliance with its standards, e.g., by utilizing monitoring and auditings systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution.
(6) The standards must have been consistently enforced through appropriate disciplinary mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense...
Thus the absence of such a program at the time of sentencing mandates the imposition of probation. The presence of such a program at the time of the crime itself can also lower the organization's culpability score under the Sentencing Guidelines, thereby lowering the fine imposed (at least for those on-environmental crimes where the fine is determined by the Sentencing Guidelines).14
The Department of Justice has independently affirmed the importance of compliance programs. Its July 1, 1991 pronouncement, "Factors in Decisions on Criminal Prosecutions for Environmental Violations in the Context of Significant Voluntary Compliance or Disclosure Efforts by the Violator," said that Justice Department attorneys "should consider the existence and scope of any regularized, intensive, and comprehensive environmental compliance program; such a program may include an environmental compliance or management audit. Particular consideration should be given to whether the compliance or audit program includes sufficient measures to identify and prevent future noncompliance, and whether the program was adopted in good faith in a timely manner."
Although the existence of a written compliance program is indisputably important in helping to shield a corporation or another entity15from liability, a written program standing alone is not enough. The Advisory Working Group to the Sentencing Commission, when recommending the Environmental Sentencing Guidelines, was skeptical that some companies would actually implement their written programs and set forth seven indicia that a program was being effectively carried out, such as regulatory expertise; auditing and monitoring systems; and disciplinary procedures.16
Compliance programs with internal monitoring and reporting procedures may also be needed by corporate directors to help them fulfill their duty of care, so that they can make informed decisions and benefit from the liability insulation afforded by the business judgment rule.17
Under the Sentencing Guidelines, all organizations that are sentenced to probation to reduce the likelihood of future crimes, or because they lack an effective compliance program, should be subject to monitoring. Specifically, Sentencing Guidelines §8D1.4(c) provides, with respect to organizations sentenced to probation under these provisions:
(1) The organization
(3) The organization shall make periodic reports to the court or probation officer, at intervals and in a form specified by the court, regarding the organization's progress in implementing the program and detect violations of law...
(4) In order to monitor whether the organization is following the program to prevent and detect violations of law, the organization shall submit to (A) reasonable number of regular or unannounced examinations of its books and records at appropriate business premises by the probation officer or experts engaged by the court; and (B) interrogation of knowledgeable individuals within the organization. Compensation to and costs of any experts engaged by the court shall be paid by the organization. (Emphasis added.)
Thus, monitoring is mandated from the outset. A monitor must be notified, which is much different from a special master. The Sentencing Guidelines are more restrictive when it comes to special masters - that is, court-appointed officials who would not only observe and report on the organization's compliance, but who would exert some operational control. Section 8D1.5 provides, "Upon a finding of a violation of a condition of probation, the court may extend the term of probation, impose more restrictive conditions of probation, or revoke probation and resentence the organization." Application Note No. 1 thereunder states, "In the event of repeated, serious violations of conditions of probation, the appointment of a master or trustee may be appropriate to ensure compliance with court orders."
A court may find monitoring to be especially valuable when a company is obligated (either by the sentence itself or by other legal mandates, such as consent decrees) to refocus its activities. Implementation of a complex decree is likely to involve the constant temptation to engage in operational compromises. There is frequently reason to want to take more time to accomplish a required task, or to cut corners. A countervailing influence is desirable to overcome this temptation. For projects whose completion will be profitable for the company, built-in corporate pressures will help assure timely completion. A court may also conclude that the outside influence of a monitor can help guard against the natural tendency toward slippage in projects not seen as profitable, but rather being undertaken as corrective or punitive measures.
The Application Notes to Sentencing Guidelines §8A1.2 confirm that when the nature of a company's business creates a substantial risk that certain types of offenses may occur, particular attention must be paid to protecting against that risk. This would apply to a company that, for example, generates large quantities of hazardous waste.
The same Application Notes state, "An organization's prior history may indicate types of offenses that it should have taken actions to prevent. Recurrence of misconduct similar to that which an organization has previously committed casts doubt on whether it took all reasonable steps to prevent such misconduct."
In sentencing Con Edison, Judge Martin made clear that foremost in his mind was a system to ensure that future violations would be promptly reported. He stated:
I want to be sure that, on an ongoing basis, people will know that this is real and that there is an avenue outside the company for them to go to. The monitor that will be appointed will, as one of the charges, receive information from Con Ed employees of any violation, and one of the conditions of any decree that is ultimately entered is going to be that Con Ed distribute to its employees a copy of the decree which makes clear that if there are problems that are not being addressed, there is a federal monitor to whom those issues should be disclosed.18
It also appeared to be important to Judge Martin that Con Edison had already taken significant steps to improve its compliance record. It had signed several detailed consent decrees with the New York State Department of Environmental Conservation (DEC), in connection with violations unrelated to the Gramercy Park incident, requiring a series of environmental audits and management reforms. It had appointed two respected environmental attorneys, Angus Macbeth and Ross Sandler, as an "Environmental Quality Review Board" to help ensure corporate compliance. Judge Martin clearly had these actions in mind when he stated:
A monitor will be appointed, on a further order of this Court, to oversee and supervise Con Edison's compliance with the environmental laws of the United States. That monitor, as a matter of first import, will report to the Court, will review Con Ed's current structure, its current programs for compliance, and make a recommendation to the Court as to whether any further specific steps are necessary. I emphasize again that the purpose of the monitor is not to reinvent the wheel, but simply to be sure that those procedures that are being adopted will be effective and will be complied with.19
Judge Martin's sentence should serve as a warning to companies of the difficulties that can befall them if they do not adopt and implement effective compliance programs. The top officers of most businesses in environmentally sensitive industries (such as manufacturing, energy production and mining) very much desire good compliance, but wishing does not make it so.
Sometimes these programs can be developed internally. At other times, outside help is necessary. Only in the most extreme cases -- as when a felony has been committed -- will judicial intervention be required. Over the next three years, the public will watch with interest as the court appointed monitor, working with Con Edison's own personnel, its outside environmental board and DEC, craft what, all hope, will be an exemplary compliance program.
(1) 42 USC §§11001 et seq.
(2) 42 USC §§9601 et seq.
(3)One of the authors of this column, Michael B. Gerrard, was retained by the U.S. Attorney's Office as an expert witness in environmental law in connection with the sentencing.
(4)Mark A. Cohen, "Environmental Crime and Punishment: Legal/Economic Theory and Empirical Evidence on Enforcement of Federal Environmental Statutes," 82 J. Crim. L. 1054, 1082 (1992).
(5)See, O'Leary v. Moyer's Landfill, Inc., 677 F. Supp. 807 (E.D. Pa. 1988); United States v. City of Detroit, 476 F. Supp. 512 (E.D. Mich. 1979); Jason Feingold, "The Case for Imposing Equitable Receiverships Upon Recalcitrant Polluters," 12 UCLA J. EnvtL L. & Pol'y 207 (1993); "Court-Created Receiverships Emerging as Remedy for Persistent: Noncompliance With Environmental Laws," 10 Environmental L. Rep. 10059 (1980).
(6)See, Christopher A. Wray, "Corporate Probation Under the New Organizational Sentencing Guidelines," 101 Yale L.J. 2017, 2040 (1992).
(7)David I. Levine, "The Authority for the Appointment of Remedial Special Masters in Federal Institutional Reform Litigation," 17U.S. Davis Law Review 753 (1984); David L. Horowitz, "Decreeing Organization Change: Judicial Supervision of Public Institutions," 1983 Duke L.J. 1265.
(8)The Sentencing Commission's Advisory Work Group released draft recommendations on environmental sentencing guidelines for business organizations on Nov. 17, 1993, and (with two dissents) presented its draft proposal to the Sentencing Commission on Feb. 24, 1994. The Sentencing Commission has not yet adopted these recommendations and is still considering the matter. See Paul E. Florelli & Cynthia J. Rooney. "The Environmental Sentencing Guidelines for Business Organizations: Are They Murky Waters in Their Future?" 22Environmental Affairs 481 (1995).
(9)Transcript of sentencing proceedings, April 21, 1995 (Sentencing Proceedings), at 27-28.
(10)Terrence E. Deal and Allan A. Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (Addison-Wesley 1982) at 4.
(11)Philip R. Theibert, ed., Lessons in Cultural Change: The Utility Industry Experience (Public Utilities Reports Inc., 1994), at 218.
(12)Barry D. Baysinger, "Organizational Theory and the Criminal Liability of Organizations," 71 Boston U. L. Rev. 341, 367 (1991).
(13)Theibert, ed., supra. p. 326.
(14)Sentencing Guidelines §8C2.5(f).
(15)The Organizational Sentencing Guidelines apply to corporations, partnerships, association, unions, governments, political subdivisions, and other entities. §8A1.1, Application No. 1.
(16)See John C. Coffee Jr., "Environmental Crime and Punishment,"NYLJ, Feb. 3, 1994, at 5.
(17)See Hanson Trust PLC v. ML SCM Acquisition Inc., 781 F2d 264 (2d Cir. 1986); Smith v. Van Gorkom, 488 A2d 858 (Del. 1985).
(18)Sentencing Proceedings, p. 28.
(19)Sentencing Proceeding, pp. 29-30.