Eighth Circuit to decide whether company executives can be jailed under a “responsible corporate officer” theory

By: Rox Laird on March 14th, 2016

National business groups are keeping a nervous eye on two Iowa egg company executives’ appeal to be heard Thursday by the U.S. Court of Appeals for the Eighth Circuit in St Paul.

A federal trial judge in Sioux City last April sentenced the top two executives of an egg-production company to three-month prison terms following a massive salmonella outbreak that sickened thousands of consumers.

The central question in the appeal is whether top executives of a corporation can be sentenced to prison for a crime that the company committed but that the executives did not “personally participate” in.  Five national business associations, including the National Association of Manufacturers and the U.S. Chamber of Commerce, submitted briefs to the federal appeals court saying that sending executives to prison under the so-called “responsible corporate officer” theory would have a “chilling effect” on businesses because  it “dramatically increases the risks of being a business executive in a regulated industry.”

Austin (“Jack”) DeCoster, the owner of Quality Egg that operates several egg-producing facilities in Iowa, and his son Peter, the company’s chief operating officer, pleaded guilty last year to criminal charges related to a salmonella outbreak across the country in 2010. That outbreak caused nearly 2,000 reported illnesses and the recall of 500 million eggs.

In addition to levying fines of $100,000 each and other financial penalties, U.S. District Judge Mark Bennett in Sioux City sentenced each DeCoster to three months in federal prison, and both men have now appealed.

Both sides called in big legal guns: The DeCosters retained Washington, D.C. attorney Peter Keisler from Sidley Austin LLP; the U.S. Justice Department’s civil appellate division and consumer protection branch are assisting the U.S. Attorney for the Northern District of Iowa.

The DeCosters acknowledge the company’s criminal violations for wrongdoing by employees that included falsifying inspection records, mislabeling expiration dates, and bribing a USDA inspector, but they argue that prison sentences are unconstitutional without evidence that they (the two executives) personally participated in the criminal violations or intended to violate the law.

“For more than a century, crimes like these have been punished by fines, occasionally probation, and above all the serious stigma and collateral consequences of criminal conviction,” their lawyers argue in a brief submitted to the appeals court. “Considered against that backdrop,”  it would violate due process and be “cruel and unusual” to send the DeCosters to prison, they argue.

Lawyers for the government contend that the constitution does not prohibit courts from sending an executive to jail, even if he did not “personally participate in the company’s violation.” But they also argue that there’s no reason to address that issue here, because, they say, the DeCosters were directly responsible for wrongdoing by their employees in Iowa: They had knowledge of what was going on at the egg production facilities and what was necessary to prevent the spread of salmonella.

The evidence, the government argues, showed that the DeCosters not only did nothing to prevent the contamination but sought to prevent the government from knowing of the extent of the problem in Iowa: “As the DeCosters themselves emphasize, they were aware for many years that their facilities—and the laying hens themselves—had tested positive for Salmonella, thus putting them on notice of the risk of egg contamination.  Yet defendants, who were indisputably responsible for managing the business, did not take the steps necessary to ensure that Salmonella-contaminated eggs were not shipped in interstate commerce.”

So the case could simply come down to the facts–what did the DeCosters know and when, and what actions did they take, if any.  But if three three-judge panel (Judges Murphy, Beam, and Gruender) decides in the DeCosters’ favor on the factual issue, then they will go on to address the broader legal question: whether district court can send executives to prison under a “buck stops here” theory, or whether punishment for these kinds of strict-liability crimes are limited to fines.

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On Brief is devoted to appellate litigation, with a focus on the Iowa Supreme Court, the Iowa Court of Appeals, and the United States Court of Appeals for the Eighth Circuit.
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