Reputational Penalties for Corporations and The Federal Sentencing Guidelines

Abstract

Corporations that commit crimes are subject to a variety of penalties. First, in many cases, a corporation is subject to civil penalties. An injured party may sue a corporation for damages, which may be in the form of either compensatory damages, intended to compensate the injured party for its loss, or punitive damages, which are intended to punish the corporation and act as a deterrent. Second, a corporation that commits an offense can generally expect to suffer reputational, or “marketplace” losses. That is, consumers may be less likely to do business with offending corporations, either because they have been harmed by the corporation in the past, causing them to be wary, or because of a general desire among consumers not to transact business with an offending corporation based on ethical reasons or a desire to avoid a stigma attached to the corporation. This reaction by consumers may result in the loss of corporate revenue and profits. Finally, a corporation, as a legal person, is subject to the criminal law. Although certain criminal penalties, such as incarceration, are not applicable to corporate defendants, corporations are subject to criminal fines, probation, and other criminal sanctions. In recent years, Congress has greatly expanded the breadth of criminal offenses of which a corporation may be convicted, as well as the penalties attaching thereto. These disparate sanctions must be coordinated to arrive at the appropriate penalty if the socially optimal level of deterrence is to occur. In the federal system, the form of criminal sanction and the precise amount of a fine, if any, that will be imposed on a corporation are determined by application of Chapter Eight of the Federal Sentencing Guidelines (“the Guidelines”). Despite the presence of substantial civil and market-based sanctions in many cases, the Guidelines do not account for these additional penalties in determining an appropriate criminal sanction, aside from a brief policy statement that suggests that sentencing judges may, in their discretion, choose a fine, within a mandated range, that reflects “any collateral consequences of conviction, including civil obligations.” Substantial empirical evidence demonstrates that civil and market-based sanctions are not only significant but, in many cases, may be greater than the criminal sanction imposed on a corporation. The upshot of this is that a system of corporate sentencing guidelines that ignores civil and market-based sanctions in determining the criminal penalty will often fail to produce the socially optimal sanction, which will result in social costs of over-deterrence and under-deterrence. This Note focuses particularly on the effects of reputational, or market-based, penalties on corporations. It provides a brief background on how the Guidelines operate to sentence corporate defendants and addresses the issue of the optimal penalty. Finally, the Article suggests possible ways in which the Guidelines may be amended to account for reputational effects.