Month: July 2006

In June, Ralph Nader and I wrote to U.S. Supreme Court Justice Antonin Scalia, to ask how a self-proclaimed constitutional “originalist” can justify applying Bill of Rights protections to corporations.

The full text of the letter follows:

Ralph Nader

Robert Weissman

P.O. Box 19312

Washington, D.C. 20036

June 30, 2006

Justice Antonin Scalia

Supreme Court of the United States

Washington, D.C. 20543

Dear Justice Scalia,

In January, we wrote you to “inquire as to how the application of Bill of Rights and related constitutional protections to the artificial creations known as corporations can be squared with a constitutional interpretation theory of ‘originalism.'”

We have not received a reply to that letter, and are writing again to invite a response. You are, after all, known for engaging jurisprudential dialogues outside of the courtroom.

This is not an academic exercise. Supreme Court doctrine holding that Bill of Rights protections apply to corporations has major import in a number of public policy arenas. To take just a few examples:

– Deregulation of vast swaths of the economy — from cable television to banking to telephone service to electricity — is leaving consumers increasingly vulnerable, without even the inadequate protections once afforded by state regulators. An obvious remedy is to permit consumers to band together into organizations that would create some countervailing power to oligopolist service providers. The most efficient way to organize such consumer groups would be to require service providers, at no cost to themselves, to include in their billing envelopes notices inviting consumers to join an independent, democratically controlled consumer group. Supreme Court-created corporate First Amendment rights make such an approach impossible, however. A 5-to-3 1986 Supreme Court decision, Pacific Gas and Electric v. Public Utility Commission,(1) held a requirement to include such a notice in a billing envelope to be unconstitutional. (Justice Rehnquist delivered a lengthy dissent.)

“The Commission’s access order also impermissibly requires appellant to associate with speech with which appellant may disagree,” the Court stated, and therefore to respond. “That kind of forced response is antithetical to the free discussion that the First Amendment seeks to foster.” The Court explicitly stated that “the identity of the speaker” — i.e, whether it is a real person or a corporation — “is not decisive in determining whether speech is protected.”

– Family farming as an economic way of life is under siege in the United States. Giant agribusiness is leveraging its power to craft international and national rules and subsidy arrangements that pose basic challenges to the feasibility of family farming. Some agricultural states and locales have sensibly decided to address the problem of agribusiness displacement of family farms directly, by prohibiting corporations from owning farms. South Dakota adopted by referendum a state constitutional amendment in 1998 to this effect.

In a decision that invalidated the South Dakota constitutional provision on dormant commerce clause grounds, an appellate court effectively interpreted interstate commerce as synonymous with the corporate right to conduct interstate commerce.(2) The appellate court reached its decision on the grounds that the South Dakota provision was discriminatory in intent against interstate commerce. The court cited language from the “pro” statement in a pro-con statement compiled for voters by South Dakota’s secretary of state. The pro statement, the court wrote, “explains that ‘Amendment E gives South Dakota the opportunity to decide whether control of our state’s agriculture should remain in the hands of family farmers and ranchers or fall into the grasp of a few, large corporations.’ We interpret the ‘pro’ statement to be ‘brimming with protectionist rhetoric’ [internal citations omitted].” The plain language cited, however, contains no discriminatory animus towards out-of-state interests whatsoever. The court could only conclude it did by equating guarantees for corporations’ right to undertake commerce with the protections mandated by the Commerce Clause.

– Smoking-related disease kills more than 400,000 Americans a year. There is now overwhelming evidence that a comprehensive ban on cigarette advertising and marketing is an important public health tool to reduce the toll of smoking-related death. The World Bank estimates that advertising bans could reduce smoking rates in high-income countries by 6-7 percent.(3) Recognizing this evidence, the world’s first public health treaty, the Framework Convention on Tobacco Control, (signed but not ratified by the United States) calls for a comprehensive ban of all tobacco advertising, promotion and sponsorship. Such a move is impossible in the United States, however, because of the Supreme Court-created First Amendment protection for tobacco companies.

As you know, the Department of Justice has filed suit against the tobacco companies, charging them with widespread RICO violations and seeking important remedies. A decision in this case is still pending. The joint defense from the tobacco companies(4) is replete with invocations of the First Amendment, as an argument why certain of their activities which might otherwise appear illegal must be permitted, and especially why many of the evidence-based remedies sought by the government are constitutionally impermissible. Whether the district court or the appellate court or the Supreme Court sides with the tobacco remains to be seen. Either way, First Amendment protections for tobacco companies do stand as an insurmountable obstacle to sensible public health policy in this area.

– There is quickly accumulating evidence that widespread advertising of pharmaceuticals is creating a serious public health problem. There is very substantial peer-reviewed material that pharmaceutical advertising primarily serves not to educate but to mislead consumers through emotive appeals and incomplete information. Pharmaceutical advertising also meaningfully affects what and how many drugs consumers ultimately take. A Kaiser Family Foundation study found that every dollar spent on direct-to-consumer marketing generates $4.20 in additional sales.(5) Nothing captures the dangers better than the Vioxx scandal, rated by Food and Drug Administration drug reviewer and whistleblower Dr. David Graham as maybe the single greatest U.S. drug-safety catastrophe. Graham estimates that people who took the drug suffered between 88,000 to 139,000 excess heart attacks or strokes as result. As many as 40 percent of these people — as many as 55,000 — died, Graham estimates. In many ways, the Vioxx disaster was fueled by advertising. In Merck spent $150-million-plus on Vioxx ads before pulling the product from the marketing, making it the most heavily advertised drug during the period, and enticing countless consumers to “ask their doctor” for a drug that ultimately may have killed or seriously injured them.

That there is a serious problem in this area is widely understood. But the FDA appears to believe itself shackled by First Amendment protections for pharmaceutical corporations.(6) Certainly the agency’s ability to serve its public health mission by banning direct-to-consumer advertising is, at best, highly uncertain while the Supreme Court continues to extend constitutional protections intended by the Framers for individuals — real, live persons — to corporations, including pharmaceutical corporations.

We raise these examples not to request your comment on any pending or potential litigation to come before the court, nor to seek your comment on the important policies blocked by the extension of constitutional protections to the artificial creations known as corporations. Our point here is only to make clear that there are very serious consequences to the Supreme Court activism that has permitted corporations to claim constitutional protections.

Noting, however, your willingness to engage in passionate, public discussion over the originalist approach to constitutional interpretation and its application to particular legal issues that remain very much unsettled, we do seek a response to the queries in our earlier letter. How does an originalist find that the Fourteenth Amendment should apply to corporations and thereby that the amendment can be used as a vehicle to extend other Bill of Rights protections to corporations?

Sincerely,

Ralph Nader Robert Weissman

FOOTNOTES

1. Pacific Gas & Electric Company v. Public Utility Commission, 475 U.S. 1 (1986)

2. S.D. Farm Bureau, Inc. v. Hazeltin, 340 F.3d 583 (8th Cir., 2003).

3. Prabhat Jha and Frank Chaloupka, Curbing the Epidemic: Governments and the Economics of Tobacco Control, Washington, D.C.: World Bank, 1999, chapter four.

4. United States of America v. Philip Morris, Corrected Post-Trial Brief of Defendants, U.S. District Court for the District of Columbia, 99-CV-02496 (GK), September 13, 2005.

5. Meredith Rosenthal, Ernst Berhnt, Julie Donohue, Arnold Epstein, Richard Frank, “Demand Effects of Recent Changes in Prescription Drug Promotion,” Menlo Park, CA: Kaiser Family Foundation, 2003.

6. See materials and transcripts in connection with Food and Drug Administration, Public Hearing on Direct-to-Consumer Promotion of Medical Products, November 1 and 2, 2005, available at http://www.fda.gov/cder/ddmac/dtc2005 and Food and Drug Administration, Request for Comment on First Amendment Issues, Federal Register: May 16, 2002 (Volume 67, Number 95), pp. 34942-34944.

In a June letter to US Attorney General Alberto Gonzales, Ralph Nader and I wrote:

The Boeing case and the rash of no-prosecute deals for large corporations represent a systematic derogation of the Justice Department’s fundamental duty to seek equal justice, and an institutionalized double standard biased in favor of large corporations.

The full text of the letter follows:

Ralph Nader

Robert Weissman

P.O. Box 19312

Washington, DC 20036

June 5, 2006

Attorney General Alberto Gonzales

U.S. Department of Justice

950 Pennsylvania Avenue, NW

Washington, DC 20530

Dear Attorney General Gonzales,

To what extent do you believe that large corporations are subject to the criminal law?

The Justice Department’s Principles of Federal Prosecution of Business Organizations (the “Thompson Memo”) crisply describes the framework under which corporate criminal liability is to be assessed.

Corporations are “legal persons,” capable of suing and being sued, and capable of committing crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation liable for these actions, the government must establish that the corporate agent’s actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. In all cases involving wrongdoing by corporate agents, prosecutors should consider the corporation, as well as the responsible individuals, as potential criminal targets. (1)

There are some who believe that there should be no corporate criminal liability.(2) Perhaps you share this view. If the Bush administration believes that there should be no corporate criminal liability, then it should seek legislation to establish this principle. In the meantime, the Justice Department has a duty to enforce the law – which does in fact encompass corporate criminal liability — guided by the reasonable exercise of prosecutorial discretion.

We are prompted to raise these issues because of a remarkable and disturbing trend, intensified in the last few years, of federal prosecutors refusing to prosecute large corporations, evidenced most recently by the shocking decision not to prosecute Boeing.

The Epidemic of Non-Prosecution and Deferred Prosecution Deals

A recent report issued by Corporate Crime Reporter found that there were at least 34 non-prosecution and deferred prosecution agreements with large corporations between 1992 and 2005 — with more than two thirds of the cases occurring since 2002.(3) The system of pre-trial diversion, which was intended as a means of preserving prosecutorial resources and simply disposing of non-serious cases, has now mutated into a tool to facilitate corporate criminals’ escape from prosecution, conviction and serious penalty for their criminal acts.

What has intensified under your watch is a pervasive system of double standards: tough criminal penalties and lifetime stigma for individual street criminals, but second (and third chances) for corporate criminals that promise to do better in the future. The double standard is all the worse because it contradicts and undermines the basic purposes of the criminal justice system — deterrence and punishment — for the very actors for whom such objectives make the most sense. Because corporations coldly calculate costs and benefits — undertaking careful and detailed risk assessments as a fundamental part of their intentional decision-making process — they are most likely to be responsive to hard-hitting penalties, not fines easily integrated and transferred into the “cost of doing business.”

The defenses of routine use of non-prosecution and deferred prosecution agreements are unpersuasive. First is the notion that, because corporations are anxious to avoid prosecution, negotiations over a deal not to prosecute give great leverage to prosecutors. They can use this leverage to gain information to prosecute executives who committed the underlying crime, and to demand ongoing monitoring of the corporation’s actions and changes in its structure. But the goals of ongoing monitoring might instead be achieved through prosecution and implementation of a probation period, as was notably done with a federal case involving Consolidated Edison in the 1990s.(4) And the focus on individuals, while important, ignores the crucial role of organizational culture in fostering criminal wrongdoing, and the responsibility of the corporation to police the activities of its officers. No-prosecute arrangements also fail to consider the effect of the deal on other potential wrongdoers.(5) The message sent is: You get at least one free opportunity to break the law without facing criminal sanctions.

A second rationale for no-prosecute arrangements is the perceived need to avoid imposing harm on innocent bystanders — a convicted company’s shareholders or employees, for example. But while concern for innocent parties is legitimate, it does not generally justify a no-prosecute approach. First, there are many innocent parties to consider, including those hurt by the criminal wrongdoing in the first place. Second, the innocent party concern is driven especially by a fear that a convicted company will be forced out of business. That rarely happens, though convictions may (and should) have bottom-line consequences. Third, not all of the presumed innocent parties have clean hands; they often benefited along the way from corporate misdeeds.

There may be specific cases of corporate criminal wrongdoing where reasonable persons can argue that no-prosecute arrangements are justified, but these should be the exception, not the norm. Now, it is only the rare case, at least outside of the antitrust and environmental law enforcement arenas, where a corporation is criminally prosecuted.

The Boeing case makes clear how serious the problem has become.

The Boeing Debacle

Last month, the Justice Department announced a tentative agreement with Boeing to resolve two entirely separate cases of apparent criminal wrongdoing — “concerning Boeing’s hiring of former Air Force acquisition official Darleen Druyun in 2002 and the investigation by the United States Attorney’s Office for the Central District of California regarding possession of a competitor’s information in connection with launch service contracts with the Air Force under the Evolved Expendable Launch Vehicle Program and with a task order with NASA for 19 missions under its launch services contract.”(6)

Both of these matters involved serious offenses against the U.S. government and U.S. taxpayers. They both involved projects of considerable importance to Boeing. And in both cases the company’s conduct was extraordinarily egregious; these were not failures to comply with arcane rules, but theft of a competitor’s proprietary data to facilitate bid-rigging and a quid pro quo arrangement with a government contracting officer to facilitate a massive government overpayment for a weapons system of very questionable benefit.

In the Evolved Expendable Launch Vehicle Program scandal, Boeing acquired 25,000 pages of bidding documents from its sole competitor, Lockheed Martin. It then used the information to set its bids just below those of Lockheed. The government and taxpayers were thus cheated of the benefits of genuine competition.

In the elaborate Darleen Druyan affair, Air Force contracting officer Druyan admitted doing a variety of “favors” for Boeing. In the Pentagon’s misguided deal to lease rather than buy tankers from Boeing, Druyan admitted that she “agreed to a higher price for the aircraft than she believed was appropriate.” Boeing reciprocated for these gifts — ripoffs of taxpayer money — by hiring her. Her hiring was managed at the highest levels of the company, involving then-Chief Financial Officer Michael Sears. It is true that Boeing would eventually disclose the improper collaboration between Sears and Druyan, but this came only after public outcry and the exertion of political pressure by Senators John McCain and John Warner, among others. A diligent corporation — including a diligent board of directors — would have scrutinized this suspect arrangement before a formal hire was made.

News reports have remarked on some of the extraordinary concessions that Boeing was able to exact from the Justice Department in reaching a non-prosecution deal:

• The government agreed to enter into a non-prosecution agreements rather than a deferred prosecution deal;

• The government agreed to describe the penalty payment from Boeing as a potentially tax deductible “monetary penalty” rather than a “criminal penalty;” and

• Boeing does not have to acknowledge that federal prosecutors have sufficient evidence to warrant felony charges.(7)

Among other advantages, these concessions will assist the company defend itself in civil litigation. They of course comes on top of the main benefits: no criminal charges, no ongoing scrutiny of the company’s performance in the context of a criminal prosecution, no criminal penalties.

Perhaps the most audacious innovation of the Boeing non-prosecution agreement is that it resolves not just one instance of potential criminal activity, but two. One of the key factors in the Thompson Memo, and in any commonsense exercise of prosecutorial discretion, is whether the wrongdoer has engaged in repeated violations of the law. Here by definition Boeing has engaged in repeat violations, for the non-prosecution agreement settles two brazen and potentially criminal abuses of the contracting process.(8)

At the very least, the Department owes the American people a public explanation of how it applied the Thompson Memo factors to reach a determination not to prosecute – a move that Win Swenson, who was a key figure in developing the U.S. Sentencing Commission corporate criminal guidelines, properly says should be done as a standard feature in connection with all such decisions.(9)

However, given the seriousness of Boeing’s misdeeds and the fact that it committed two entirely separate and serious offenses, it is very hard to see how a reasonable application of the Thompson Memo factors could have led to a no-prosecute decision.

Indeed, if a report in the Wall Street Journal is correct, career attorneys at the Justice Department reached a similar conclusion – only to be overridden by higher-ranking officials.(10)

Remedying the Damage Done

The Boeing case and the rash of no-prosecute deals for large corporations represent a systematic derogation of the Justice Department’s fundamental duty to seek equal justice, and an institutionalized double standard biased in favor of large corporations.

We urge you to withdraw from the tentative no-prosecute agreement with Boeing; formally reassess the routinized use of deferred prosecution and non-prosecution agreements for large corporations; and adopt a formal policy of explaining, in every case where deferred prosecution and non-prosecution agreements are employed in cases involving large corporations, how application of the Thompson Memo factors, or other appropriate considerations, led to the decision not to criminally charge and prosecute.

We look forward to your timely reply.

Sincerely,

Ralph Nader Robert Weissman

FOOTNOTES:

1. Deputy Attorney General Larry D. Thompson, “Principles of Federal Prosecution of Business Organizations” (hereinafter the Thompson Memo), January 20, 2003.

2. See, for example, An Interview with Jeffrey Parker, Corporate Crime Reporter, November 25, 1991.

3. Corporate Crime Reporter, Crime Without Conviction: The Rise of Deferred and Non Prosecution Agreements, December 28, 2005, available at .

4. See Dean Starkman, “Con Ed Case Shows Monitors Are Gaining Prominence, Power,” December 1, 1997.

5. As the Thompson Memo notes, “[C]orporations are likely to take immediate remedial steps when one is indicted for criminal conduct that is pervasive throughout a particular industry, and thus an indictment often provides a unique opportunity for deterrence on a massive scale.”

6. Statement of Tasia Scolinos, Department of Justice Director of Public Affairs, Regarding the Proposed Settlement with the Boeing Company, May 15, 2006.

7. Andy Pasztor, “Boeing to Settle Federal Probes for $615 Million – Deal Allows Defense Giant to Avoid Criminal Charges in Contracting Scandals,” Wall Street Journal, May 15, 2006.

8. Boeing has a record replete with other cases of serious wrongdoing (most resolved civilly). See www.pogo.org/db.

9. An Interview with Win Swenson, Corporate Crime Reporter, January 9, 2006.

10. See also Kenneth Culp Davis, Discretionary Justice, Chicago: University of Illinois Press, 1971, especially pp. 103-106. Davis explains that the government decisions most prone to abuse are those that are discretionary, and argues that one modest check on government discretionary action, including decisions to prosecute or not prosecute, is to publish written explanations of the decisions.

Pasztor (“The deal marks a retreat from the more than $750 million in penalties originally sought by Justice Department lawyers, who also envisioned the company’s pleading guilty to several felony charges, according to people familiar with the matter. But as the settlement talks dragged on and higher-ranking Justice Department officials became involved, the emphasis shifted to a smaller penalty and an agreement that didn’t include criminal charges.”).