Vicarious Liability

In our nation, we have many laws to protect fair trade. One of those laws is known as the Sherman Anti-Trust law, codified at Title 15 of the United States Code, Section 1.

To gain an understanding of this rule, we can learn from a case against the Hilton Hotel Corporation. We’ll include a link to the actual case in the accompanying PDF, but for those who do not want to go through a dense reading of legal jargon, this summary may suffice.

Basically, the Sherman Anti-Trust law requires all businesses to operate fairly, and not to collude with others. The law prohibits people that operate powerful businesses from using their power in ways to crush competition.

We’ve seen many examples of the government bringing criminal charges against big corporations for violating anti-trust laws. Over the past several decades, the government has brought antitrust cases against Standard Oil, IBM, and Microsoft, for example.

When government agencies launch an investigation, the potential for criminal charges escalates. For these reasons, business leaders should broaden their understanding of white-collar crime, and we’ll provide that overview in the next section of our course.

In the 1970s, the government brought an antitrust case against the Hilton Corporation. As a business that operates large hotels in many of the world’s biggest cities, Hilton has enormous buying power. If Hilton blacklisted a specific vendor, the vendor could argue that Hilton would be interfering with competition—or breaking fair-trade laws, which is a crime under the Sherman Anti-Trust Law. Those complaints could lead to a government investigation. The investigation could lead to criminal charges against the corporation.

The Association Boycott:

In the 1970s, leaders from several hotel and restaurant companies in Portland, Oregon wanted to attract more business conventions to their market. Those leaders would need financial resources to show why Portland would be a great venue for conventions. They formed an “association” and charged membership dues to generate resources for marketing. The association would include leaders that worked in hotels, restaurants, and the vendors that sold to hotels and restaurants. All members agreed to contribute to the Association. Vendors that sold to hotels and restaurants would pay 1 percent of annual revenues. In exchange, the hotels and restaurants would give preferential treatment to vendors in good standing of the association. Hotels and restaurants agreed to boycott vendors that did not contribute to the association.

Such an arrangement violated fair-trade laws. Hilton, the corporation had a strict policy that prohibited employees from participating in any type of agreements that violated anti-trust laws. In other words, corporate policy would not allow a Hilton manager to base purchasing decisions on whether a vendor participated in an association.

Yet a purchasing agent at Hilton disregarded the policy. He specifically told a supplier that if he did not contribute to the association, the supplier wouldn’t be able to sell to Hilton.

The United States brought a criminal charge against Hilton. Knowing that it had done everything within its power to comply with the fair-trade rules, Hilton argued that it did not violate any fair-trade laws.

During the trial, several people testified on Hilton’s behalf. Under oath, corporate executives, including the president, the hotel manager, and the manager’s assistant testified that Hilton had a policy of purchasing supplies on the basis of price, quality, and service. They also testified that on two occasions, they told the hotel’s purchasing agent that he could not refuse to purchase from a supplier simply because a supplier did not contribute the 1 percent membership fee to the Association.

The purchasing agent also testified during the trial. He confirmed that he received the admonishment. He knew of Hilton’s corporate policies to comply with all laws and regulations. Despite explicit instructions from his supervisors, the purchasing agent, of his own accord, threatened a supplier with loss of Hilton’s business unless the supplier paid the association assessment. The purchasing agent testified that he violated his instructions because of his anger toward the person representing the supplier.

Under the doctrine of vicarious liability, the Hilton Corporation faced criminal liability for violating the Sherman Anti-Trust laws. According to judicial precedence:

“A corporation is responsible for acts and statements of its agents, done or made within the scope of their employment, even though their conduct may be contrary to their actual instructions or contrary to the corporation’s stated policies.”

In other words, the government could bring criminal charges against Hilton even though the corporation:

  • Had a policy in place to abide by fair-trade laws,
  • Had a policy in place to instruct purchasing agents to buy based on price, quality, and service,
  • Instructed the purchasing agent that he should not participate in any boycott by the association

In later sections, we will discuss the difference between criminal and civil liability. All business leaders should understand the implications of a criminal charge. Although the government may not be able to put businesses in jail, prosecutors routinely bring charges that result in people that run businesses in prison.

Our nation confines many people serve time in prison for business-related crimes. When I served my sentence, for example, I served time alongside an executive from the Samsung corporation, who accepted a plea agreement for violating antitrust laws. In 2019, we worked with Chris Lieschewski, the former CEO of Bumble Bee Tuna; the government brought criminal charges against Chris and Bumble for violating antitrust laws. Sadly, a judge sentenced Chris to serve several years in federal prison.

Lessons from Prison:

Many people with whom I served time told me that they did not have any intent on breaking the law. Some people did not know of laws that would prohibit their behavior.

Everyone on our team senses a responsibility to share lessons we learned from people that serve time in prison. By sharing those lessons, we hope to lessen the troubling trend of mass incarceration. We may not be able to change laws that criminalize business decisions, but we can certainly do our part to help business leaders learn how to minimize vulnerability to government investigations, or to qualify for leniency and non-prosecution agreements.

James, a friend I met while serving my sentence, offers an example of how vicarious liability can lead to a criminal charge.

James built a successful website design company. In other times, we’d consider James a great entrepreneurial success story. He grew up playing video games. Although he didn’t attend college, through self-study James developed web-design skills. He began earning an income by building websites for local businesses. James didn’t know anything about esoteric concepts that govern business law. He wanted to create jobs, pay his taxes, and contribute to his community.

Over time, because of his exceptional design skills, James grew his business by word of mouth. He hired more people. His company employed graphic designers, marketing teams, and programmers. Business leaders that lacked technical expertise would hire James’ company to build websites and to coordinate marketing campaigns. People that James’ company employed had discretion to work directly with clients to build websites and e-commerce functions as the clients’ directed.

One client hired James’ company to launch a website and engineer marketing campaigns for a nutritional supplement company. The designers at James’ company collaborated with the client to build websites that carried out functions for the client. Effective advertising campaigns brought consumers to the website. The consumers would leave contact information or place orders. The website would follow up with marketing materials.

Both the website and marketing materials published copy provided by the client. An investigation by the Food and Drug Administration led to charges that the nutrition company had been making false and misleading claims.

Although James told me that his company designed the website and the marketing materials in accordance with the client’s wishes, the government brought charges against the web design company, alleging willful blindness. The investigation advanced to a criminal proceeding. Prosecutors alleged that James knew or should have known that the nutrition company violated the law. James knew or should have known that in creating materials that misled consumers, his team had been complicitous in fraudulently deceiving consumers.

James lost his company, and he lost his liberty. He did not understand the concept of vicarious liability, respondeat superior, wire fraud, conspiracy, or obstruction of justice.

We’ve worked with many people that, like James, didn’t understand how their business decisions could lead to legal problems. For this reason, before we get into a prolonged discussion on Non-prosecution Agreements, Deferred-Prosecution Agreements, or Leniency, we should have a preliminary conversation on White-Collar Crime, which we’ll cover in the next section.