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Excessive Fines Clause and corporations

Amicus brief says that 8th Amendment's ban on "excessive fines" does not have a corporate loophole.

In a Colorado Supreme Court brief I filed earlier this week, the Cato Institute and the Independence Institute argue for strict application of the Excessive Fines Clause of the Eighth Amendment. According to the brief, there is no loophole that would allow the imposition of excessive fines on corporations.

Factual background

Dami Hospitality is a corporation with one owner, an immigrant widow who has limited English proficiency. The corporation operates a motel in the Denver area. By the widow's version of events, she relied on her insurance agent to ensure that she had all necessary business coverage, including workmen's compensation insurance. After her former insurance agent retired, a new agent allowed the insurance to lapse in 2005. The Colorado Department of Labor notified her of the lapse, and she paid a fine of $1,200. The coverage lapsed again in 2006, and was restored in 2007. Another lapse arose in 2010 and persisted until 2014. Upon notification by the Department of Labor that year, the owner promptly obtained coverage. According to the owner, she at all times had told the insurance agent to obtain all necessary business insurance coverages. The agent wrote a letter to the Department of Labor in 2014, stating "I think I feel part of the responsibility for this matter that I did not tell about Worker's Compensation…"

Procedural history

Following a series of administrative hearings and reviews, the Department of Labor fined Dami Hospitality $841,200. According to the owner, the fine is so large that it will destroy her business. The motel's annual payroll is less than $50,000. In the four decades that the widow operated small businesses (including another motel at an earlier time), no workmen's compensation claim has ever been filed by any employees.

Dami Hospitality appealed the administrative decision to the Colorado Court of Appeals. The three-judge panel held that the fine violated the Excessive Fines Clause of the Eighth Amendment because it was grossly disproporationate to the offense. The Colorado Attorney General petioned for certiorari, which was granted by the Colorado Supreme Court.

Legal background

The Eighth Amendment mandates: "Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." The Excessive Bail Clause and the Cruel and Unusual Punishment Clause have been incorporated agaisnt the States, via the Fourteenth Amendment. This June, the U.S. Supreme Court granted cert. in an Indiana case to decide whether or not the Excessive Fines Clause is incorporated; the federal Circuit Courts of Appeal have split on the issue. Eugene Volokh wrote an amicus brief in support of the cert. petition, and he details the issues here.

In a footnote in a 1989 case, the U.S. Supreme Court expressly left open the question of whether the Excessive Fines Clause protects corporations. Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 276 n.22 (1989). In 1998, the Supreme Court issued its most important modern decision on the Excessive Fines Clause, United States v. Bajakajian, 524 U.S. 321 (1998). There, an individual and his family boarded an international flight carrying $357,144, which is entirely lawful. However, the individual did not fill out the necessary federal form informing the federal government that he was carrying more than $10,000 in cash outside the United States. The U.S. government ordered the forfeiture of all the cash. The U.S. Supreme Court reversed, holding that the forfeiture was far excessive to the offense.

In a separate line of cases, starting in 1996, the Supreme Court has held that the Due Process Clause forbids punitive damage awards that are grossly disproportionate to the defendant's misconduct. As the name of the foundational case demonstrates, this doctrine certainly applies to corporate defendants. BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996).

Argument

Our brief is a collabortion between me (Research Director, Independence Institute; Associate Policy Analyst, Cato Institute) and three full-time Cato lawyers: Ilya Shapiro, Trevor Burrus, and Mathew Larosiere. Trevor was my intern in 2010, and a very good one. We address only the issue of corporations in the Excessive Fines Clause. Waht follows is a description of the arguments in the brief, sometimes verbatim and sometimes with additional explanation.

Text. Various provisions of the Constitution impose strict rules against government misbehavior, no matter who is the victim. For example, the First Amendment states: "Congress shall make no law . . . abridging the freedom of speech." By the Fourteenth Amendment and judicial interpretation, the "no law" rule applies to all the branches of the federal and state governments. In 1978, the First National Bank wished to expend corporate resources in support of speech opposing a ballot initiative to create a graduated income tax in Massachusetts. The expenditures violated a Massachusetts statute that forbade corporate spending on ballot measures, except for measures that directly affected the corporation's business. In the U.S. Supreme Court, lawyers for Massachusetts argued the corporations have no First Amendment rights.

The Court responded that the issue was not "whether corporations 'have' First Amendment rights," but whether the law at issue "abridges expression that the First Amendment was meant to protect." First National Bank v. Bellotti, 435 U.S. 765, 776 (1978).

Likewise, the Fourth Amendment requires warrants for searches (with some exceptions established by case law). In 1978, the Court held that "the Warrant Clause of the Fourth Amendment protects commercial buildings as well as private homes." Marshall v. Barlow's Inc., 436 U.S. 307 (1978). There was no distinction in the Fourth Amendment text between searches of the property of a natural person versus searches of the property of a corporate person.

Under Article I, sec. 10, "No State shall. . .pass any. . .Law impairing the Obligation of Contracts." The Contracts Clause applies equally to contracts involving natural persons and those involving corporate persons. Dartmouth College v. Woodward, 7 U.S. (4 Wheat.) 518, 646 (1819) ("The framers of the constitution did not deem them unworthy of its care and protection."). The Court's decision in Dartmouth College and other cases not to create corporate exceptions to generally applicable constitutional law was a catalyst for the rise of the American business corporation. See R. Kent Newmyer, John Marshall and the Heroic Age of the Supreme Court (2007). If the Court had invented constitutional loopholes depriving people of constitutional rights just because they chose to associate via the corporate form, the loopholes would have gravely discouraged the most efficient form for much business activity.

Over the years, the Court has straightforwardly applied the text of the Fifth Amendment grand jury guarantee, the Sixth Amendment criminal jury trial guarantee, the Seventh Amendment civil jury guarantee, the Fifth and Fourteenth Amendment guarantees against taking property without due process and law, and Fourteenth Amendment equal protection to natural persons and corporate persons alike. The Court has declined to read these texts as if they had an loophole stating "except that when the target is a corporate person, the government is unconstrained."

The general rule is that the text of the Constitution applies to corporations when "appropriate to such body." Hale v. Henkel, 201 U.S. 43, 76 (1906). Necessarily, some constitutional provisions cannot be applied to a corporations. For example, the Excessive Bail Clause could not be applied to a corporation, because it is impossible to hold a corporation in jail pending trial. The Cruel and Unusual Punishment Clause prohibits physical torture and also certain conditions in prisons and jail. It would be impossible to apply the rules against physical torture or prison/jail conditions to a corporation, because corporations do not have physical bodies.

Likewise, the Fifth and Fourteenth Amendments prohibit deprivation of "life, liberty, or property, without due process of law." The word "life" cannot apply to a corporation, since it is not alive. Corporations can own property, so the prohibition on taking property without due process does apply to corporations.

The Fifth Amendment Grand Jury Clause controls prosecutions for "capital or otherwise infamous crimes." Capital punishment by definition involves a natural body on which to inflict mortal punishment, and thus is inapplicable to corporations. Because corporations can be criminally prosecuted for infamous crimes, the Grand Jury Clause of the Fifth Amendment applies to such prosecutions. Corporations cannot serve in the militia, so the grand jury exception for "the Militia, when in actual service in time of War or public danger," does not affect corporations.

What about the Self-Incrimination Clause of the Fifth Amendment? According to Hale, the Self-Incrimination Clause "operates only where a witness is asked to incriminate himself—in other words, to give testimony which may possibly expose him to a criminal charge." 201 U.S. at 67. Because the Clause "is limited to a person who shall be compelled in any criminal case to be a witness against himself; and if he cannot set up the privilege of a third person, he certainly cannot set up the privilege of a corporation." Id. at 70. Given the text, the Court concluded that the Self-Incrimination Clause, "was never intended to permit [a corporate officer] to plead the fact that some third person might be incriminated by his testimony, even though he were the agent of such person." 201 U.S. at 66. The Fifth Amendment text leads to the same result for labor unions. See United States v. White, 322 U.S. 694 (1944).

In sum, the Court's jurisprudence over the last two centuries has not been based on free-ranging philosophical speculation about whether corporate persons should "have" a certain right. Rather, the decisions follow the text. If a limit on government action applies cannot logically apply to a corporation (e.g., capital punishment), then the limit is irrelevant in a corporate context. If the forbidden government action could be undertaken against a corporation, the government action is equally forbidden against corporate persons and natural persons.

Policy considerations. The Colorado Attorney General's opening brief worried that application of the Excessive Fines Clause could impede effective business regulations. We suggest that the Excessive Fines Clause poses no threat at all to effective regulation of businesses. The clause allows the government to impose fines, which punish and deter misconduct. The clause merely prohibits excessive fines. By definition, such fines are grossly disproportionate to the conduct at issue. Accordingly, they are never necessary or appropriate to any system of regulation.

The Attorney General was also concerned about the difficulty of judicial review of proportionality in future cases involving large corporations: "Would a larger corporation be evaluated based on the officer or employee that committed the violation? Must the culpability take into account the culpability of other officers? Should the proportionality of the sentence take into account the harm of the fine on each of the individual shareholders?" However, such questions already arise in cases where a defendant argues that punitive damages violate the Fifth or Fourteenth Amendment Due Process Clauses. The courts have demonstrated themselves capable of addressing such questions when necessary.

History. An excellent article by Nicholas McLean surveys the history of the Excessive Fines Clause. Livelihood, Ability to Pay, and the Original Meaning of the Excessive Fines Clause, 40 Hastings Const. L.Q. 833 (2013). The clause comes from a provision in the 1776 Virginia Declaration of Rights. Several of the American colonies has similar guarantees. Their ancestor was the 1689 English Bill of Rights. Its most important ancestor was Magna Carta in 1215: "A freeman shall not be amerced for a slight offense, except in accordance with the degree of the offense; and for a grave offense he shall be amerced in accordance with the gravity of the offense, yet saving always his 'contentment'; and a merchant in the same way, saving his 'merchandise'; and a villein shall be amerced in the same way, saving his 'wainage' if they have fallen into our mercy: and none of the aforesaid amercements shall be imposed except by the oath of honest men of the neighborhood." The Magna Carta provision in turn was based on prohibitions against excessive fines in older English law. As McLean shows, the common understanding for about a millenium in England and America has been was that the ban on excessive fines forbids, among other things, a fine that would destroy a person's livelihood, such as by taking a workman's tools or all of a merchant's lawful merchandise. Or a widow's motel.

The immediate reason for the 1689 English Bill of Rights prohibition on excessive fines was the misconduct of the despotic Stuart kings in the previous century, culminating in the abuses of King James II, who was overthrown in the Glorious Revolution of 1688. As the Stuarts demonstrated, government that can impose excessive fines can enrich itself unjustly and can terrorize its subjects into submission.

According to the Eighth Amendment, there can never be a legitimate government interest in imposing an excessive fine. Government regulations, including those that apply to business, are to uphold ordered liberty. A government that could impose excessive fines would not be defending law and order, but instead would be a danger to the rule of law--able to ruin persons who do not deserve to be ruined. The danger of such excessive power does not vanish simply because the person(s) to be ruined have chosen to associate in a corporation. Any fine that is "excessive" necessarily exceeds the powers the people granted to a government bound by the rule of law. No legitimate government could have a power to impose excessive fines.

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  • QuantumBoxCat||

    "The Court has declined to read these texts as if they had an loophole stating "except that when the target is a corporate person, the government is unconstrained.""

    So, is a "loophole" just a rhetorical means of saying you disagree with a laws interpretation? You write, "Likewise, the Fourth Amendment requires warrants for searches (with some exceptions established by case law)." Why don't you use the term "loophole" in that sentence instead of "with some exceptions established by caselaw."? What exactly is the difference between a loophole and an exception established by caselaw? Lastly, did you actually use the term "loophole" in your amicus brief?

  • Bill Poser||

    How did the State come up with such a large fine in the first place?

  • ||

    A schedule adopted by the legislature for daily fines, with some limited discretion available to the administrative agency. The fine was within the permissible range.

  • Sanctimonica||

    Winning an argument that fines are unreasonable when they exist as a matter of statutory law -- to which the corporation willingly exposed itself by engaging in commerce falling under the law -- seems much more difficult than rather than as a discretionary fine imposed by the judiciary.

  • FreeSqueak||

    BP oil spill.... how high it too high?

  • ||

    It's my understanding that there willful and wanton violation of safety rules as directed by very high levels of management. And the resulting harm was immense. So there is about zero chance any court would find that a very large fine on BP was excessive.

  • BillyG||

    In relation to actual damages, it may have been low. Not sure what it really is, but I'm seeing$17.2 billion as damage after a quick search. The fine was less.

  • BillyG||

    In relation to actual damages, it may have been low. Not sure what it really is, but I'm seeing$17.2 billion as damage after a quick search. The fine was less.

  • susancol||

    I think you are confusing reparations with punishment. Fines are *punishment*. Punishment via fines actually often fails to reach the persons damaged by the actions being punished.

  • PublicName5||

    Thanks for the explanation. Looking into the case a little more, it looked like BP escaped the jurisdiction of the Louisiana courts, who themselves where wanting to take a bite, not sure how big, with state fines.

  • Longtobefree||

    Do those insurance agents still have their licenses?

  • FreeSqueak||

    Thanks for the reply. Yes, that makes sense.

  • BillyG||

    The fact that liberals try to act like corporations aren't an extension of the owners and actual people is the most concerning issue. It's like they think whenever two or more people decide to work together they lose all rights.

  • PublicName5||

    Overall it sounds like a wonderful idea. However I was browsing Wikipedia about statutory interpretation a while ago and ran into the interesting rule of internal/external consistency

    Can the definition of 'person' change within a single sentence and still be considered internally consistent? Otherwise, if the best fit definition is used per clause, it would seem right and proper to include animals under the protection of the cruel and unusual punishments clause.

    A8: Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

  • PublicName5||

    An aside, it would seem the type of family separations happening at the border are cruel and unusual punishment.

  • Smooth Like a Rhapsody||

    Seem?
    To whom?
    Children are detained from parents, citizens or not, as the parents are arrested, every day, in every state.
    How is that cruel and unusual?

  • PublicName5||

    The type of separation is when
    * the family may have refugee status
    * the family is not established in a physical location
    * the family has a reasonable expectation staying together for the security of the family

  • PaulW||

    My understanding is that when the state imprisons both of a child's parents, they also ensure that the child is placed in the custody of a relative or in foster care. I'm almost positive no state cages the children of imprisoned parents.

  • ReaderY||

    Professor Kopel,

    There is a much more straightforward reason why corporations aren't subject to 5th Amendment self-incrimination than you gave. Corporations can't testify at all. Not having bodies, they don't have mouths. They never say anything. They can't.

    In a case involving a corporation, the corporation is never a witness. Witnesses may be officers or agents or owners of the corporation, never the corporation itself. The whole corporate theory is that a corporation is legally separate from any of them. Witnesses are only privileged against testifying against ghemselves, not some legally separate others.

    So the reason for self-incrimination is purely physical, due to lack of having a body, just like excessive bail and capital punishment. I don't think your brief actually said that in so many words.

    And of course, corporations CAN own property - not having a body doesn't prevent that.

    If you changed "not applicable to corporations" to "requires a body, and corporations don't have one," I think you'd reach the same results in a way that's much clearer and understandable.

    Of course, because corporations don't have mouths and can't themselves speak, it could also be argued free speech doesn't apply to them directly only through their agents.

  • Eddy||

    "requires a body, and corporations don't have one"

    I ain't got no body

  • Rossami||

    Except that corporations are called to testify every day. They respond to subpoenas, produce documents, answer questions and do all the things that natural persons are required to do. They also regularly make announcements to the press, communicate with customers, have attorney-client-privileged conversations and talk to employees - all without having a body.

    While you are correct that this is conducted through the officers, agents or owners of the corporation, so is the execution of any contract necessary to own property. Your attempt to distinguish corporations for the lack of a physical body fails to define current legal practice.

  • smilerz||

    "Of course, because corporations don't have mouths and can't themselves speak, it could also be argued free speech doesn't apply to them directly only through their agents."

    So no speech actually comes from corporations, only individuals? Therefore, any speech on behalf of a corporation was exercised by an individual and government can't impose any restrictions upon it.

    Is that where you were going with that?

  • PaulW||

    I have dealt with a similar issue representing corporations who have been heavily fined due to lapses in their state-mandated workers' compensation insurance coverage. Florida courts have rejected the excessive fines argument under Florida's constitution.

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