Thank You FedEx, For Standing Up to the Feds

Originally published at Manhattan Institute By James Copland & Rafael Mangual | 6/21/16
US v. FedEx

On Friday, June 17, federal prosecutors made the unusual decision to suddenly drop a drug prosecution after a week of trial, some two years after indictment. The judge in the case, Charles R. Breyer, had expressed skepticism, calling it a “novel prosecution.” And indeed it was: the defendant in the trial was not an individual but the delivery company FedEx-though the government invoked some of the same statutes it’s used to go after the Mexican kingpin “El Chapo.”

Federal prosecutors had accused the package-delivery company of delivering packages that contained pharmaceuticals illegally ordered from Internet pharmacies. As FedEx’s lawyers argued, it is more than strange for a criminal conspiracy to operate “with its name emblazoned on a truck.” Judge Breyer observed that the government had failed to show any ill intent, and he pointedly noted that prosecutors have not gone after the U.S. Postal Service for the same conduct.

The FedEx case was unusual in another respect: it is exceptionally rare for the federal government to criminally prosecute a large corporation. Most often, companies and the Department of Justice agree to a deferred- or non-prosecution agreement that resolves criminal allegations without a trial. Indeed, that is precisely how federal prosecutors dealt with FedEx competitor UPS for the same alleged conduct: in 2013, the same U.S. Attorneys prosecuting FedEx entered into a non-prosecution agreement with UPS.

Deferred- and non-prosecution agreements are the major way in which the Department of Justice interacts with corporations. Since 2010, 17 of the Fortune 100 companies have been operating under the terms of one of these agreements. Last year, the federal government entered into 100-a record. By comparison, the government reached only 142 deferred- or non-prosecution agreements in all of American history prior to President Obama’s inauguration.

Without trial, the Department of Justice collects billions of dollars annually through these agreements-more than $6 billion in 2015. But these hefty levies are the least-unusual parts of these arrangements. Instead, under the terms of a deferred- or non-prosecution agreement, companies make concessions to the government that include dramatic changes to business practices. In its 2013 non-prosecution agreement, UPS agreed to hire a new corporate officer as well as an “independent” auditor who reported to the government. In some cases, companies have been strong-armed into firing senior officers and directors.
Regularly, they agree to new training programs, to modifying sales practices, and to adjustments in employee compensation.

While federal prosecutors regularly insist on such business restructurings for companies to avoid prosecution, none of these “remedies” are authorized by statute or would be available as sanctions upon the company’s conviction at trial. Moreover, in most cases, the federal government has failed to prosecute a single individual for any criminal offense imputed to the corporation. So without any finding of wrongdoing, or any judicial oversight, attorneys in the Justice Department are assuming vast, extralegal regulatory authority. We’ve dubbed this practice “the shadow regulatory state.”

With onerous terms and hefty fines in deferred- and non-prosecution agreements, why do companies so regularly agree to them? Why was the FedEx prosecution so anomalous? Comparing its case with UPS’s agreement is illuminating. In its 2013 non-prosecution agreement, UPS paid the government $40 million. By contrast, in its prosecution of FedEx, the government sought fines of $1.6 billion.

FedEx could afford to take that risk, and fight back, in part because the criminal charges levied against it were fairly ludicrous, but also because the case was easy to understand for its customers. More or less, the shipping company took its customers’ side. As Judge Breyer suggested, the government was essentially asking FedEx to snoop on its customers and open their packages-which has privacy-law implications, in addition to being bad for business.

FedEx was also able to take the government to court because it is not similarly positioned to many other businesses that face collateral consequences from a criminal conviction, or even indictment, which can amount to a corporate death sentence. A defense contractor that loses its rights to enter into government contract, a pharmaceutical company that loses the ability to be reimbursed under Medicare, or a bank that loses its banking license cannot afford to roll the dice and take on the government at trial. Like Don Vito Corleone in The Godfather, the Department of Justice often makes businesses an offer they can’t refuse.

With more than 4,000 crimes in federal statutes and more than 300,000 more crimes specified in various federal regulations, every complex commercial enterprise is inevitably vulnerable to federal prosecution-and thus, given federal prosecutors’ leverage, to oversight through a deferred- or non-prosecution agreement. What that means is that the Department of Justice has sweeping regulatory authority, which according to the D.C. Circuit’s April decision in United States v. Fokker Services, federal judges have next to no power to review.

There’s a place for deferring prosecution. Congress clearly has an interest in combatting crimes committed under corporate auspices. But it makes little sense to give broad powers to reshape businesses, without statutory authorization or judicial oversight, to the English majors with law degrees in the federal Department of Justice.

Congress should act to bring the shadow regulatory state out of the shadows. Until then, we’re just glad FedEx called the government’s bluff and won its case.

Manhattan Institute scholars James R. Copland and Rafael A. Mangual are the authors of a new study, Justice Out of the Shadows: Federal Deferred Prosecution Agreements and the Political Order


Manhattan Report: Justice Out of the Shadows

Originally published at Manhattan Institute by James R. Copland and Rafael A. Mangual | 6/15/16

US v. FedEx


Each year, the Department of Justice (DOJ) and other federal agencies enter into scores of deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) with businesses: DPAs involve cases in which criminal charges have been filed, and the DOJ asserts that judicial oversight is limited to ensuring their compliance with the Speedy Trial Act; NPAs are entered into without the filing of any formal criminal charges, and no judge ever reviews their contents. Faced with the threat of criminal charges, most companies agree to settle because the collateral consequences of a conviction (or often, even an indictment) are so harsh—in many cases, they amount to a corporate death sentence.

***UPDATE: Shortly after the publication of this report, which analyzes the government’s prosecution of FedEx in Case Study 3, the government suddenly dropped its case mid-trial. The government’s loss evidences the tenuousness of its theory of the case, but is unlikely to lead other companies to take their cases to trial. For more on this, see: Thank You FedEx, For Standing Up to the Feds


  • Since the beginning of 2010, 17 of America’s 100 largest companies, as ranked by Fortune magazine, have been operating under a DPA or an NPA; in 2015, the federal government entered into 100 such agreements—a record—and companies paid out more than $6 billion under their terms without any guilty plea or adjudication.
  • DPAs and NPAs that the government reaches with companies involve significant oversight and supervision—even dramatic restructurings of business practice, including changing top management personnel and compensation; wholesale modifications of sales and marketing strategies; and the hiring of “independent” monitors with vast oversight powers, paid out of corporate coffers but reporting to prosecutors.
  • DPAs and NPAs raise serious legal and policy issues, including those related to: national sovereignty; free speech; judicial oversight and transparency; and the desirability of deputizing private businesses to undertake law-enforcement activities.

Deferred Prosecution Agreements; Yates Memo

Originally published at Washington Legal Foundation by Joe D. Whitley | November 18, 2015

Over the past 15 years, Deferred-Prosecution Agreements (DPA) and Non-Prosecution Agreements (NPA) have become a vehicle of choice for resolving complex criminal investigations. This progression is chronicled in the Washington Legal Foundation’s (WLF) “The Federal Erosion of Business Civil Liberties” Timeline. It is commonly believed that DPAs and NPAs are useful tools for prosecutors in investigations of corporations where prosecutors can find no corporate executive directly culpable for any alleged misconduct. DPAs and NPAs permit the Department of Justice to enter into agreements totally outside of courts’ jurisdiction.

Additionally, the traditional use of criminal remedies or indictments to pursue corporate misconduct can result in many potential collateral consequences, including the shattering of many innocent employees’ lives. This consequence was observed in the havoc caused to the employees of Arthur Anderson after Arthur Anderson’s indictment in 2002. That case prompted the growing use of DPAs up to the present day. Some would argue that the pendulum has swung too far in the direction of DPAs and NPAs as the path of choice for prosecutors faced with mountains of documents and complex conduct.

Voices are being raised against DPAs and NPAs by judges, like Judge Richard Leon’s in U.S. v. Fokker Services B.V., with is currently on appeal before the U.S. Court of Appeals for the D.C. Circuit. The Department of Justice has taken notice of these growing concerns and on September 9, 2015, the Department issued guidance that may address the rush to corporate-criminal dispositions that do not consider individual misconduct. This new policy direction is a further iteration of the 2003 Thompson Memo (also noted in the Timeline) that has been revised several times leading up to the latest Individual Accountability for Corporate Wrongdoing version, which many are referring to as the Yates Memo.

In the Yates Memo, the Department of Justice has identified six key steps to be used by the leadership of each division within the Department of Justice and in the U.S. Attorney offices in pursing culpable individuals and executives at all levels within a corporation to include the following:

  • In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct;
  • Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
  • Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
  • Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation;
  • Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and
  • Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

Legislative fine tuning of the DPA and NPA process is afoot in Congress, even as some in the Judiciary, such as Judge Leon, want to reign in the power of prosecutors. These efforts by the Legislative and Judicial branches are laudable; however, I would argue for the advancement of the current internal policy reassessment of the DPA and NPA process within the Department of Justice and in the 93 U.S. Attorneys Offices that is both explicit and implicit in the Yates Memo.

As noted, criminal investigations of corporations are both costly and lengthy, leading to many unforeseen consequences. DPAs and NPAs have been one way to reduce the burden on prosecutors and investigators and at the same time permitting corporations to survive in the aftermath of employee misconduct. I submit the Yates Memo may be a movement in the right direction. At this moment however, we do not need micromanagement of the Department of Justice in the final months of the current Administration. Instead, beginning in 2017, the new Administration should undertake a review of the entire DPA and NPA process within the Department of Justice. By this time, the new Department of Justice policy advocated by the Yates Memo will have been tested in numerous investigations and prosecutions over the course of a full year. Real data will arise from these applications of the Yates Memo, which commentators, the Judiciary, and Congress can use to measure the need for further oversight of prosecutorial discretion in these matters.

*Mr. Whitley chairs Baker Donelson’s Government Enforcement and Investigations Group. He previously served as Acting Associate Attorney General of the United States and as United States Attorney in the Middle (Macon) and Northern (Atlanta) Federal Districts of Georgia.  Mr. Whitley is a member of WLF’s Legal Policy Advisory Board.


Heritage Report: The Perils of Overcriminalization

Originally published at The Heritage Foundation by Paul Larkin Jr. and Michael Mukasey | February 12, 2015

What has happened to federal criminal law in recent decades? Several former senior Department of Justice officials have expressed their concern with the path we have taken,[1] along with the American Bar Association,[2] numerous members of the academy,[3] journalists,[4] and other organizations like The Heritage Foundation.[5] We agree with their considered opinion that overcriminalization is a serious problem and needs to be remedied before it further worsens the plight of the people tripped up by it and further injures the public interest.

To begin with, the sheer number of federal laws that impose criminal penalties has grown to an unmanageable point. The Department of Justice and American Bar Association have been unable to tally the correct number.[6]

Proliferation of Federal Crimes

The Congressional Research Service reportedly has been unable to come up with a definitive total of federal criminal laws; the nearest they could come was to say they number in the thousands.[7] They are by no means confined to the federal criminal code—Title 18, itself a weighty volume—but are scattered among the laws contained in the 51 titles or subject-matter volumes of the federal code and the hundreds of thousands of regulations that are supposed to implement those laws.[8] The result is that there are more criminal laws than anyone could know.

Indeed, federal crimes are not confined to offenses against the domestic laws of the United States. Under the Lacey Act, it is a crime to import into the United States animals or plants gathered in violation of the laws of the countries from whence they came.[9]

In a sense, you can understand such a law from the standpoint of a conservationist who wishes to guard against the extinction of species of animals or destruction of the world’s forests. But one result of that seemingly well-meaning legislative effort was a raid by federal agents on the premises of the Gibson Guitar Company for importing wood for guitar frets that was allegedly exported in violation of the laws of India and Madagascar (the latter, by the way, are not even written in English).[10] It is utterly unreasonable to require anyone to know the laws of every other nation in order to avoid criminal liability.

There have also been questionable prosecutions under domestic federal criminal laws. Consider the case of Lawrence Lewis. Mr. Lewis grew up in difficult circumstances but escaped the fate of two brothers, who died in prison. A blue-collar employee who worked his way up to the position of head engineer at a military retirement home, Lewis was charged with felonious pollution of a navigable waterway, a charge that summons the image of dumping toxic chemicals into a river.[11]

That image, however, has nothing to do with the facts. Mr. Lewis was simply using a facially reasonable procedure—one that he had been instructed to use and had used uneventfully for years—to clean up occasional toilet overflows in the hospice area of the home (caused by adult diapers clogging the pipes) by spraying water from a hose to direct the waste into a sewer that led to a small creek that he believed went to the District of Columbia’s publicly owned treatment works but that, unbeknownst to him, emptied into Rock Creek and ultimately into the Potomac River. The federal government charged him with a felony for making a reasonable mistake.

Even setting aside the fact that what goes on alongside the Potomac in Washington makes the occasional runoff from a toilet at a military retirement home seem hygienic by comparison, how could this happen? The Lewis case is an example of the result of a process that started out with good intentions but has taken us far down the road that the old proverb tells us is paved with good intentions.

Before the 20th century, to the extent that there were federal criminal laws, they concerned acts that everyone knew and understood were morally wrong.[12] Accordingly, the old saw that ignorance of the law is no excuse was one that could be uttered seriously and without evoking a sarcastic snicker.

At the beginning of the 20th century, laws were adopted that had the effect of protecting the purity of food, the safety of workers, and other goals included in the rubric of health and safety.[13] Violations of some of those laws were made criminal, and some permitted conviction without a finding of criminal intent: That is, all that had to be proved was that the defendant had done the act. Courts allowed that but said it was permissible only in the kinds of cases that involved protecting the health and safety of the community. The courts’ rationale for permitting this departure from usual standards was that the stakes—public health and safety—were so high that protecting public welfare was paramount.[14]

Many may well have reasoned that people whose conduct affected health and safety should be bound to pay particular attention and that if they let their intention flag, it was not unreasonable to hold them to a strict standard of something less than criminal intent. In the process, however, the whole notion of consciousness of wrongdoing in the criminal law was obscured, although the penalties of loss of freedom or property, and moral taint, remained.[15]

Achieving Institutional Reform Through Prosecution

In addition to the passage of statutes and regulations, another phenomenon that started in the setting of civil litigation but has since spilled over into the criminal law is the practice of bringing prosecutions to achieve institutional reform rather than seeking legislation that would have that end. Litigators in what are referred to loosely as civil rights or civil liberties issues have long known that they could often achieve their goals more quickly and with greater certainty through litigation than through legislation. One obvious example was a Connecticut statute that banned the sale of contraceptives. The state had not enforced the statute for years,[16] but a plaintiff eventually persuaded the Supreme Court that the law violated a constitutional right to privacy.[17]

That practice has now spread to criminal cases. Take, for example, prosecutions for promoting drugs for uses other than those for which the Food and Drug Administration has approved them, even though the targets of the promotion are not laymen but physicians who exercise independent judgment about whether to prescribe a drug or not. The prescribing of a drug for a purpose other than the one for which it was approved is not an offense at all; indeed, physicians may help to make medical progress while curing their patients if they are able to see new uses for pharmaceuticals. Yet promoting drugs for what is called off-label use is a felony.

Peter Gleason, a Maryland psychiatrist who regularly served poor and underserved constituencies, delivered a series of paid lectures at medical conventions describing success he had had with off-label use of certain drugs, and he was prosecuted for doing so. He did not have the resources to fight, so he pleaded guilty to a misdemeanor and paid a small fine. Nonetheless, the guilty plea ruined his medical practice. The Department of Health and Human Services told Dr. Gleason that his conviction excluded him from all medical programs, and virtually all of his patients were on Medicare or Medicaid.[18]

Another defendant in the same case went to trial and prevailed when the U.S. Court of Appeals for the Second Circuit held that the First Amendment protects the right to communicate truthful information about the benefits of pharmaceuticals, even off-label benefits.[19] Dr. Gleason, however, did not benefit from that ruling because his desperation over loss of his practice led to his suicide before the Second Circuit decided the case. The Gleason case is proof that good intentions can go haywire.

Nonprosecution and Deferred Prosecution Agreements

Another factor contributing to the proliferation of criminal regulations has been the advent of nonprosecution and deferred prosecution agreements with corporate defendants. The Department of Justice often uses settlements known as nonprosecution or deferred prosecution agreements to resolve criminal cases. It may seem paradoxical that agreements whereby corporations escape actual prosecution themselves contribute to the efflorescence of criminal laws and proceedings, but the process itself has pernicious results.

Consider the corporation investigated for a possible violation of criminal law. For most corporations, particularly those that are publicly traded, otherwise have a public profile, or do business in a highly regulated industry, a conviction can be crippling,[20] but an indictment alone can also have catastrophic results.[21] As a result, many large corporations negotiate deferred prosecution or nonprosecution agreements that permit them to escape the filing of a criminal charge in return for payment of a sizable penalty as a settlement.

The size of these settlements has made both state and federal governments begin to look upon prosecutors’ offices, where the interests of justice are supposed to govern, as profit centers. In some jurisdictions, proceeds of those penalties are used in whole or in part by law enforcement agencies to conduct activities or purchase equipment. In virtually all jurisdictions, including the federal government, the dollar value of penalties extracted from corporations is featured by law enforcement agencies and departments as a principal measure of their effectiveness and worth.

Moreover, as pointed out by Matthew Fishbein in the New York Law Journal, the very size of many of these settlements has raised the expectation of lay observers that individual defendants will be prosecuted as well; those expectations are then disappointed when no such prosecutions follow.[22] The reason is that corporate settlements do not challenge the government’s legal theories or its evidence, but the government is wary of bringing charges against individual defendants because people who stand to lose their freedom often go to trial and prevail when the government’s case is tested in court.

The Department of Justice often goes beyond even the extraction of large settlements and has insisted on changes in corporate governance through the imposition of standards or monitors and even changes in corporate personnel as the price of avoiding criminal charges.[23] The Department of Justice makes that demand even though those remedies would not be available as part of a sentence after conviction.[24] To that extent, the running of corporations is taken out of the hands of shareholders and directors and placed instead in the hands of prosecutors.

Proposals for Reform

If these unhappy results of the proliferation of criminal laws and prosecutions are to change, the changes will not come from courts, which have upheld criminal penalties even without a showing of intent against claims of denial of due process.[25] Obviously, prosecutors have no incentive to make changes in a system that rewards their excesses. The changes will have to come from Congress, which itself has been the source of much of the problem, both in the laws it passes and in the standards it uses to measure prosecutorial success.[26]

There have been many proposals for reform, some with merit.

  • One is for a statute requiring proof of guilty knowledge in any criminal prosecution unless Congress has legislated specifically to the contrary.
  • Another is that administrative agencies be required to list and make generally available in full text all regulations that carry potential criminal penalties, and perhaps that Congress then be required to ratify any such regulation before it can provide the basis for a criminal prosecution.
  • Finally, Congress should adopt a general, across-the-board defense of mistake of law, requiring that a defendant be acquitted if he can prove by a preponderance of evidence that he believed reasonably that what he did was not a crime.[27]

If we are to take pride in the claim that we are a nation governed by law, the criminal law must be sensible and accessible, not simply a trap for the unwary.—Michael B. Mukasey, Partner, Debevoise & Plimpton, served as 81st Attorney General of the United States from 2007–2009 and as a judge on the U.S. District Court for the Southern District of New York from 1988–2006. Paul J. Larkin, Jr., is Senior Legal Research Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.


Eleventh Circuit Has Opportunity in Clay to Reshape Criminal Intent Prosecutions

Originally published at Washington Legal Foundation by Matthew G. Kaiser | 10/1/15

Wellcare/US v. Clay, US v. Whiteside

On Friday, October 2, the U.S. Court of Appeals for the Eleventh Circuit will hear oral arguments in a closely followed criminal health-care fraud case, U.S. v. Clay. Earlier this year, Washington Legal Foundation published a Legal Backgrounder on the case and its broader ramifications, Clay v. United States: When Executives Receive Jail Time for Ordinary Business Decisions.

In Clay, federal prosecutors converted a contract dispute between a medical services provider, WellCare Health Plans, and the State of Florida Agency for Healthcare Administration (AHCA) into a criminal action. The company had interpreted a complex state law regarding the repayment of Medicaid premiums to the state in a manner that was contrary to AHCA’s interpretation. AHCA’s interpretation was not memorialized in a state regulation or guidance document. Despite this lack of guidance, federal prosecutors indicted WellCare and its executives for health care fraud. The company entered into a deferred-prosecution agreement, leaving the executives to fend for themselves.

The key issue at trial was whether the WellCare executives’ interpretation of Florida law was reasonable. This question goes to the existence of an actus reus—i.e., were the executives’ actions unlawful? In a criminal trial, this issue should be addressed by the presiding judge, not the jury. The judge in Clay, however, instructed the jury to decide whether the defendants’ interpretation was reasonable. He also failed to follow an Eleventh Circuit precedent, U.S. v. Whiteside, which dictates the government must prove beyond a reasonable doubt that a defendant’s statement or submission “is not true under a reasonable interpretation of the law.”

Rules requiring the judge, not the jury, to determine legal questions, and precedents such as Whiteside, are critical in today’s regulatory environment. As attorney Matthew G. Kaiser wrote in the WLF Legal Backgrounder on U.S. v. Clay:

Businesses must regularly interpret complex laws and regulations impacting their communications with federal and state governments. Tax forms, license applications, claims for payment from the government, and a myriad of other forms demand answers to questions that have more than one reasonable answer. Without the protection of judicial precedents like Whiteside, interacting with the federal government becomes a high-stakes game of “Gotcha!”

Those protections are especially important for executives who, under a September 9, 2015 “Principles of Federal Prosecution” memo from Deputy Attorney General Sally Quillian Yates, will increasingly be subject to criminal investigation and prosecution in addition to, or apart from, their companies.

All who share WLF’s concerns with overcriminalization and the federal erosion of business civil liberties should keep a close eye on what the Eleventh Circuit does in Clay.


Manhattan Report: The Shadow Lengthens

Originally published at Manhattan Institute by Isaac Gorodetski James R. Copland | 2/25/14

The last ten years have seen the emergence of a new approach to business regulation and prosecution of wrongdoing in the United States. The U.S. Department of Justice now regularly enters into “deferred prosecution” or “non-prosecution” agreements (DPAs or NPAs) with large corporations, in which companies are paying billions of dollars in fines annually without trial. These agreements are presented as steps short of prosecution of corporations, a step that might drive firms into bankruptcy and disrupt their economic sectors. At the same time, a good case can be made that these agreements suffer from a lack of transparency. Questions naturally arise as to whether attorneys working for the federal government, with minimal to no judicial oversight, are best positioned to change significantly the business practices of individual companies and, indeed, entire industries.

Businesses prefer to enter into DPAs or NPAs rather than face trial, even when the costs of such arrangements are severe, because of the significant capital-market pressures stemming from criminal inquiries (including depressed stock prices and impaired credit) as well as the statutory and regulatory consequences flowing from indictment or conviction—for example, exclusion from government reimbursement or contracts, or the retraction of government licenses vital to a company’s operation. Prosecutors, in turn, prefer to avoid the risk and cost of trial as well as the potentially severe collateral consequences that indictment or conviction can impose on corporate stakeholders, including employees and creditors, as witnessed in the collapse of the large accounting firm Arthur Andersen following its 2002 federal indictment—which was ultimately set aside by the U.S. Supreme Court.

Thus, such arrangements have become commonplace, so much so that they might be characterized as a “shadow regulatory state” over business. The federal government has reached 278 DPAs and NPAs with businesses since 2004, with ten of the Fortune 100 companies operating under such agreements just since 2010. Although the federal government entered into only 17 DPAs and NPAs from 1993 through 2003, it entered into 66 in just the last two years, in which almost $12 billion in total fines and penalties were imposed. Companies in the finance and health-care sectors have been particularly likely to wind up under such agreements, with the finance sector accounting for 13 DPAs and NPAs and the health-care sector accounting for 8 of them in 2012–13. The reach of federal prosecutorial agreements has not stopped at America’s shores: the Department of Justice has asserted authority over hosts of foreign businesses—in some cases, for alleged conduct occurring completely outside the United States.

DPAs and NPAs are notable in that they impose terms on companies that go beyond the fines or incarceration normally associated with criminal punishment and because they go beyond requiring that the companies correct the specific practices alleged to be violations of the law. Instead, these agreements often call for major changes in firms’ internal processes of many types—from training to human resources—based on the apparent assumption that absent such changes, wrongdoing will be more likely to recur. Under DPAs and NPAs, companies have agreed to modify preexisting business practices significantly, by:

  • Implementing training and reporting programs;
  • Changing compensation schemes;
  • Modifying sales and marketing plans;
  • Hiring new, senior “compliance officers” as well as independent “monitors” reporting to the prosecutor; and
  • Firing key personnel, including directors or chief executives.

In many cases, the alleged predicate offenses underlying DPAs or NPAs involve ambiguous facts or strained or novel interpretations of law—interpretations that have remained untested in court, given companies’ pronounced pressure to settle. In addition, DPAs and NPAs regularly cede to prosecutors the sole discretion to determine whether companies are in breach of the agreement’s terms, without judicial oversight or the possibility of appeal.

This report focuses on DPAs and NPAs reached in 2012 and 2013 between prosecutors and four companies: Ralph Lauren, GlaxoSmithKline, Royal Bank of Scotland, and HSBC. These arrangements highlight companies’ difficulty in avoiding potential prosecution, even when they self-report potential violations discovered through robust internal compliance programs. They also highlight the broad social consequences of federal prosecutors’ quasi-regulatory decisions, which include:

  • Limiting companies’ ability to communicate truthful information to the public about pharmaceuticals, with potential life-or-death consequences;
  • Directly influencing trading practices and corporate speech relating to key interest rates and other global financial variables; and
  • Prompting companies to withdraw from developing countries, thus reducing capital formation and opportunity for the world’s poorest populations.

The U.S. practice of entering into DPAs and NPAs with corporations remains anomalous: corporate prosecutions are disfavored or impermissible in other developed nations. In 2013, however, the United Kingdom passed new legislation—the Crime and Courts Act, which introduced DPAs to the British criminal justice system beginning in February 2014. In contrast to U.S. practice, the U.K. rules limit the scope of corporate conduct subject to such arrangements and clearly delineate a transparent process that prosecutors must follow in pursuing DPAs, with significant judicial oversight. The new British rules bear watching as they are implemented, and they offer a potential blueprint for reforming American practice.