Corporate officers in the cross-hairs: California Court of Appeal adopts responsible corporate officer doctrine
January, 2009
A century ago, Ambrose Bierce satirized the corporation as "an ingenious device for obtaining individual profit without individual responsibility." Times have changed. Because prosecutors and regulators are increasingly unsatisfied by liability that is confined to the fictional corporate entity, corporate officers and directors have come under a growing threat of civil and criminal liability in connection with their official positions.
In December 2008, the California Court of Appeal adopted the "responsible corporate officer doctrine" and imposed personal liability of nearly $2.5 million on two officers of a family corporation that owned and operated a leaking underground gasoline tank. The decision is an important shift in state law that could have far-reaching consequences for corporations that do business in California and the officers who manage them.
One of the foremost benefits of incorporating a business is that it can protect the shareholders and corporate officers and directors from personal liability for the company's actions. While not absolute, this corporate "veil" is an important safeguard for individuals and facilitates innovation and risk-taking. Courts typically disregard the corporate entity only when the individual ignores corporate formalities, uses the corporation to perpetrate a fraud, personally commits a tort or crime or creates such a unity of interest between the individual and the corporation that the corporation is a mere formality: an alter ego of the individual. When the public welfare is at risk, however, courts have been more creative in finding ways to hold individuals responsible.
The responsible corporate officer doctrine is a common-law rule created more than sixty-five years ago by the U.S. Supreme Court, but not previously invoked in California state courts. Over the past several decades, courts in other jurisdictions have resorted to the doctrine out of frustration that individuals were using corporations to escape liability for violation of public-welfare laws, such as those dealing with food-and-drug safety and environmental protection. Use of the doctrine has generally been limited to violations of criminal laws.
In People v. Roscoe, No. C055801 (Cal. Ct. App. Dec. 26, 2008), John and Ned Roscoe were directors, officers and shareholders of a small, family-owned corporation. After an employee reported a leak in one of the company's underground gasoline tanks, the company engaged a remediation consultant, but the ensuing cleanup was delayed and ultimately ineffective. When John Roscoe later received administrative notices of the continuing environmental violations caused by the leaking tanks, he forwarded the notices to a subordinate but took no further action. Eventually, the Sacramento District Attorney brought suit against the corporation and its officers to enforce California's underground storage tank law. At trial, the court treated the officers, as well as the corporation, as "operators" of the faulty underground gasoline tank and held the officers liable, together with the corporation, for the full $2.5 million fine.
The Court of Appeal affirmed the personal liability of the officers, based on the responsible corporate officer doctrine. The court identified three elements necessary to hold officers (or other individuals) personally liable:
1. the individual must be in a position of responsibility which allows the person to influence corporate policies or activities;
2. there must be a nexus between the individual's position and the violation in question such that the individual could have influenced the corporate actions which constituted the violations; and
3. the individual's actions or inactions facilitated the violations.
The Roscoe court found that these elements were met, relying on the trial court's finding that John and Ned Roscoe did not "exercise their responsibilities and power to use all objectively possible means to discover, prevent, and remedy any and all violations."
Application of the responsible corporate officer doctrine is likely to be a useful tool for regulators to enforce California's strict environmental laws and will no doubt motivate corporate officers to be more diligent. However, the doctrine may also become a widely used tactic to pin vicarious liability on unwitting officers for a variety of corporate transgressions beyond those that deal with public welfare. Although the Roscoe court strongly implied that the doctrine pertains only to strict-liability statutes involving the public welfare, the broad language of the decision may invite a more freewheeling application of the doctrine to other civil and criminal arenas, which could expose officers and directors to far greater liability for the acts of their corporations.
All eyes will be on the California appellate courts as they flesh-out the contours of the responsible corporate officer doctrine. Meanwhile, in the wake of the
Roscoe decision corporate officers may want to conduct a fresh environmental compliance audit and establish more robust procedures to identify and remediate environmental problems. Corporate officers may also need to review their indemnity agreements, if any, as well as the terms of their D&O policies to curb the additional exposure created by
Roscoe.