Southern Union Applies Apprendi to Criminal Fines and Strengthens the Corporate Defendant’s Hand in Plea Negotiations

Southern Union Applies Apprendi to Criminal Fines and Strengthens the Corporate Defendant’s Hand in Plea Negotiations


Co-authored with Ronald A. Sarachan and originally published in the program materials for The 27th National Institute on White Collar Crime, 2013. © 2013 by the American Bar Association.

With apologies to Matt Groening, we know that every company has at least one Homer Simpson-like employee in its midst.  And when that employee accidentally turns the wrong valve at the power plant and causes a release of pollutants, in all likelihood it is the company that will become a target if there is a federal criminal investigation.  In environmental cases, the government’s leverage to extract criminal fines from  corporate defendants is especially high, in part because of the low standard of intent required to be proved.  Some charges under the Clean Water Act and Clean Air Act require proof only of negligence, and accidents by their very nature are usually accompanied by some act that, with the benefit of hindsight, appears ill-advised.  What’s more, some environmental criminal provisions lack any mens rea requirement at all, such as the Migratory Bird Treaty Act.  The existence of the event alone is sufficient for the government to threaten indictment.  Add to that the uncertainty and business risks inherent in litigation, and it is not surprising that the government has been able to extract increasingly massive fines from corporate defendants as a condition to entering plea agreements.  However, the Supreme Court’s ruling in Southern Union Co. v. United States, issued on June 21, 2012, may help to slow this trend.  It seems fitting that the decision came in an environmental crimes case.

In response to the threat of an indictment, executive management and the board of directors are often faced with the Hobson’s choice between the financial certainty of the government’s seemingly draconian plea demand versus the risks of litigation, including the uncertainty of a court-determined fine.  To make an informed decision, the board will want to know the maximum possible fine that can be imposed if the company rejects the government’s plea demand.  Pursuant to 18 U.S.C. § 3571(c), the answer is quite straightforward:  the maximum fine for an organization is $200,000 for a misdemeanor, and $500,000 for a felony.  That seems simple enough.  However, what if the government asks the court to apply the Alternative Fines Act (“AFA”) under 18 U.S.C. § 3571(d)?

The AFA sets the maximum possible fine as:

Twice the pecuniary gain from the offense, or if the offense results in a pecuniary loss to a person other than the defendant, twice the gross loss, unless the determination of the loss or gain would unduly complicate or prolong the sentencing process.

In plea negotiations that occurred before the decision in Southern Union, the uncertainty associated with allowing the court to determine the fine was grounded, in part, in the government’s threat that the court would impose an enhanced fine under the AFA under a mere preponderance standard.  After Apprendi v. New Jersey, 530 U.S. 466 (2000), established the rule that factual determinations necessary for sentencing enhancements must be made by the jury based on a standard of beyond a reasonable doubt, the constitutional issue became whether or not Apprendi applies to the imposition of criminal fines, in particular the fines available under the AFA.

From 2005 to 2010, the Department of Justice openly acknowledged that to establish a fine under the AFA, the government would have to meet the Supreme Court’s requirements under Apprendi.  Under Apprendi, to establish the pecuniary “gain” or “loss” for purposes of the AFA the government must:

(1)     allege in the indictment the amount of gain or loss attributable to the defendant; and

(2)     prove that particular amount of loss to a jury

(3)     beyond a reasonable doubt.

In 2006, for example, the Solicitor General conceded in its brief to the Seventh Circuit in United States v. LaGrou Distribution Systems, Inc., 466 F.3d 585 (7th Cir. 2006), that the Apprendi requirements applied to the AFA, and the court of appeals held that it was error for the district court to find the loss amount under the AFA using a preponderance of the evidence standard rather than the jury finding the loss amount beyond a reasonable doubt.  The DOJ made the same affirmation to the American Bar Association.

However, in the Cosco Busan ship accident case, the Solicitor General reversed itself and argued that Apprendi does not apply to criminal fines and, therefore, does not apply to the AFA. The DOJ asserted that its new constitutional interpretation was justified by the Supreme Court’s decision in Oregon v. Ice, 555 U.S. 160 (2009), a case involving state’s rights and state sentencing laws.  While the Supreme Court made no mention of the AFA in Oregon v. Ice, the DOJ saw the case as an opportunity to lighten its constitutional burdens at sentencing.

The DOJ’s rejection of Apprendi was in some way understandable given that proving the amount of loss attributable to a particular defendant beyond a reasonable doubt can be a daunting task in white collar cases.  In an environmental case based on negligence under the Clean Water Act or Clean Air Act, where there are oftentimes multiple, concurrent acts of negligence by multiple parties that resulted in the accident, some of which are charged and some not, it can be nearly impossible.

On June 21, 2012, the U.S. Supreme Court resolved the government’s burden of proof in establishing a basis for criminal fines.  In Southern Union Co. v. United States, the Court ruled that “Apprendi applies to the imposition of criminal fines.”  (Slip op. at 16.)  The defendant, Southern Union, had been convicted after a jury trial for storing liquid mercury without a permit at a subsidiary’s facility from “on or about September 19, 2002 to October 19, 2004.”  Rather than the AFA, the case involved the Resource Conservation and Recovery Act, and the applicable code provision provided for a maximum fine of $50,000 per day of violation. (42 U.S.C. § 6928(d).)  The government argued for the maximum fine, asserting that it was $38.1 million based on 762 days of violations.  Southern Union argued that imposition of a fine in excess of one day of violation ($50,000) would be unconstitutional under Apprendi because the jury had not made specific findings as to the number of days of violation.

The trial court ruled that Apprendi applied to the sentence but that the jury had impliedly found 762 days of violation, justifying a fine of $38.1 million.  However, because the jury’s verdict form permitted conviction on the basis of a single day of violation, the sentence was appealed.  The First Circuit disagreed that the jury had implicitly found 762 days of violation, but sided with the government that it did not matter because Apprendi does not apply to criminal fines.  The ruling created a split between the circuits, the Second and Seventh Circuits both having ruled that Apprendi applies to fines. Because of the split between the circuits, the Supreme Court accepted the Southern Union case for review.

Before the Supreme Court, the government argued that, because fines are less onerous than incarceration or a death sentence, fines are exempt from Apprendi.  The Court quickly dispelled this argument, finding that where the government seeks a fine that is sufficiently substantial to trigger the Sixth Amendment’s jury trial guarantee, Apprendi applies.  Therefore, the government must allege the maximum fine in the indictment and must establish the facts necessary for the fine calculation, to the jury, beyond a reasonable doubt.  As the Court noted from its ruling in Blakely v. Washington, 542 U.S. 296, 301-02 (2004):

an accusation which lacks any particular fact which the law makes essential to the punishment is . . . no accusation within the requirements of the common law, and is no accusation in reason.  (Slip op. at 12.)

The government also argued that applying Apprendi to criminal fines will prevent states and the federal government from enacting statutes that calibrate the amount of a fine to a defendant’s culpability.  The government presumed that the number of days that Southern Union’s subsidiary stored mercury on its property without a permit equated to the company’s degree of culpability.  Given that the mercury was safely stored, without issue, until September 2004 when a couple of teenagers broke into the facility and spread the mercury around the property, the degree of culpability for the actual harm is not so easily determined.  In fact, in many environmental cases culpability is not required or at issue whatsoever because the basis for the criminal charge is strict liability.  The Court was quite dismissive of the government’s attempt to overcome a constitutional right by asserting that enforcing the law could hinder the government’s policy of extracting large fines from companies for the misconduct of individual employees.  The Court stated that while legislatures are free to enact statutes that constrain judges’ discretion in sentencing, the statutes must still be administered in conformance with the Sixth Amendment.  (Id. at 15.)

The Southern Union ruling undoubtedly has a significant impact on cases where the charged offense includes a graduated penalty for the number of days of violation. However, it potentially has even more far-reaching impact in cases where the fine is determined on the basis of the government’s argument that the court should apply the AFA.  The government’s threat under the AFA to double what it claims are astronomical loss amounts creates a risk-benefit analysis that has usually weighed in favor of taking the DOJ’s plea demand over trusting the uncertainties attendant in a factual determination by the court based on a mere preponderance standard.  By requiring this determination to be made by the jury under a beyond reasonable doubt standard, Southern Union alters the critical risk-benefit analysis.

In addition, Southern Union carries special significance in the context of environmental crime cases where the determination of the fine amount under the AFA is made more difficult because of the vagaries in determining the “loss” that will be doubled to calculate the maximum possible fine, as well as the daunting challenge of apportioning fault.  “It is a bedrock rule of both tort and criminal law that a defendant is only liable for the harms he proximately caused.”  U.S. v. Monzel, 641 F.3d 528, 535 (D.C. Cir. 2011).  In the sort of large-scale accidents that give rise to criminal prosecutions, the harm can usually be traced, not to a single cause, but to a series of failures and mistakes.  For example, in the Cosco Busan case the National Transportation Safety Board found that there were multiple reasons why the ship collided with the San Francisco Bay Bridge, any one of which could have prevented the accident had it not been part of the story. The U.S. Coast Guard licensed a U.S. Pilot who suffered from sleep apnea and had a history of prescription drug use.  Several of the drugs came with cautions about operating heavy machinery.  The Pilot, who ultimately pleaded guilty to a negligence-based Clean Water Act violation, made various navigational errors that were beyond what anyone could expect from an experienced San Francisco pilot.  The Chinese crew was alleged to have placed too much trust in the local pilot and consequently failed to recognize that he was navigating the ship directly towards the bridge tower.  The Coast Guard’s Vessel Traffic Service (“VTS”) allowed the pilot to sail in dense fog in direction contradiction to local harbor safety rules.  When the VTS observed that the ship was heading for the bridge tower, the VTS operators decided not to inform or direct the Pilot.  Had any one of these links been removed from the chain, the accident would not likely have happened.

This scenario is sometimes referred to as the Swiss Cheese Model of accident causation. All of the holes in the various pieces of Swiss cheese must line up for the accident to occur.  Any one piece of cheese can change a near miss into an accident.  The AFA requires allocation of the respective degree of fault for each piece of cheese so that one defendant is not fined for the acts of another defendant, or the acts of an uncharged entity, such as the Coast Guard in the Cosco Busan matter. Consequently, the allocation of responsibility and commensurate allocation of “loss” can be incredibly complicated.

The reality is that no court has yet attempted to have a jury apportion the loss between the multiple causes of an environmental accident under the AFA.  For example, the court in the BP Texas City Case, United States v. BP Products of North America, was asked to try to allocate such losses.  The group of victims of the Texas City refinery explosion formally objected to a plea agreement which contained a stipulated fine of $50 million, claiming that the fine should be closer to $1 billion based on the AFA and the losses to all the victims.  Both BP and the government argued that the allocation of fault among the various actors that together caused the accident would be too complicated and therefore should be avoided.  In a lengthy opinion, the district court ruled that a jury determination of the actual loss attributable to BP, as opposed to the other causes of the accident, would unduly complicate the sentencing and the court declined to attempt it.  The court accepted the parties’ negotiated fine of $50 million over the prospect of trying to determine the pecuniary loss attributable to conduct that formed the basis of BP’s plea.

The Southern Union ruling has already impacted pending matters.  For example, in United States v. Sanford,(Crim. 11-cr-00352-1 D.C. 2012), the government filed a Notice of Election Not To Pursue An Alternative Fine less than a month after the Supreme Court’s Southern Union ruling.  The offense at issue was a record keeping violation relating to the disposal of waste from a fishing vessel.  The government had asserted that the $24,862,954 Sanford made from selling the fish represented the “gain” derived from the recording keeping violation.  The government’s notice that it was abandoning its Alternative Fines Act claim was filed only after the Supreme Court’s rejection of the government’s arguments in Southern Union and after the trial court had questioned whether the government would be able to establish that the “gain” alleged in the indictment was actually derived from the record keeping offense. (Order at Doc. 171, Notice at Doc. 179.)  As a result, the maximum penalty, if a conviction is obtained, appears to be $500,000 rather than the fifty million initially sought by the government.

While environmental cases forged the path for applying Apprendi to corporate fines, the most profound impact will likely be in a far broader range of white collar crime cases.  In major corporate criminal cases, the government routinely has sought fines beyond the maximum $500,000 per offense found in 18 U.S.C. § 3571(c).  Now, in each such case, the government will have to abide by the constitutional protections afforded under Apprendi.  The astronomical fines threatened under the APA created risk that made cases untriable as a practical matter, regardless of the actual guilt or innocence of the company.  Southern Union makes the question of guilt or innocence relevant again – as it should and must be, and as was intended by the Apprendi ruling.

Hanousek v. United States, 528 US 1102 (2000).

Recently some courts have struggled with allowing convictions for strict liability offenses resulting from lawful commercial activities.  Several judges have refused to accept pleas to Migratory Bird Treaty Act violations because the defendant had no intention or desire to kill a migratory bird.  Seattle Audubon Soc’y v. Evans, 952 F.2d 297 (9th Cir. 1991); Newton County Wildlife Ass’n v. U.S. Forest Serv., 113 F.3d 110 (8th Cir. 1997); U.S. v. Chevron USA Inc., No. 09-CR-0132, 2009 WL 3645170 (W.D. La. Oct. 30, 2009) (rejecting plea agreement under the MBTA).  See also ABA Criminal Justice, Spring 2010: Captain Charles “Sully” Sullenberger, Charles Dickens, and the Migratory Bird Treaty Act; “Windmills Are Killing Our Birds, One standard for oil companies, another for green energy sources,” Wall Street Journal, Sept. 8, 2009.  Cf. U.S. v. FMC Corp., 572 F.2d 902 (2d Cir. 1978); U.S. v. Apollo Energies, Inc., 611 F.3d 679 (10th Cir. 2010).

“Although this Court has yet to determine whether the rule announced in Apprendi applies not only to imprisonment but also to monetary fines, the government concedes that the rule does apply to criminal fines because they are penalties for criminal offenses.”  (Gov’t Brief in United States v. La Grou, p. 27.)

See: Scott D. Hammond, Deputy Attorney General for Criminal Enforcement, US Department of Justice, Antitrust Division, remarks before the American Bar Association Section of Antitrust Law (Mar. 30, 2005).

“The United States does not now concede that Apprendi applies to fines in general or alternative fine calculations for the corporate defendant.  Our position in this pleading has been taken in consultation with the Office of Solicitor General.”  (Gov’t Response in United States v. Fleet Management, No. 08-0160 SI, p. 23.)

See U.S. v. Pfaff, 619 F.3d 172 (2d Cir. 2010); U.S. v. La Grou Distribution Sys., Inc., 466 F.3d 585 (7th Cir. 2006).

In addition to the Resource Conservation and Recovery Act, other environmental statutes with criminal fine provisions based on the number of days of violation include the Clean Water Act, 33 U.S.C. § 1319(c), the Toxic Substances Control Act, 15 U.S.C. § 2615(b), and the Safe Drinking Water Act, 42 U.S.C. § 300h?3(c).

The model was originally proposed by British psychologist James T. Reason of the University of Manchester in 1990.

A defendant may only be held liable for the damages caused by the “offense of conviction” to the exclusion of other “losses stemming from all conduct attributable to the defendant, including conduct unrelated to the offense of conviction.”  Hughey v. U.S., 495 U.S. at 418, cited in U.S. v. BP Products of  N. Am. Inc., 2009 WL 677653, at *28 (S.D. Tex. 2009).