American law allows corruption victims to recover damages under a variety of legal theories, and its class action procedures are well suited for recovery in certain cases. This post discusses who the law deems a victim and what damages they are entitled to recover. A second post will suggest where countries developing their own corruption victim law might follow American practice, and where American practice should be avoided at all costs.
In the United States, the party that most often recovers damages for corruption is a company whose employee accepted a bribe. The bribe will have been paid in return for awarding the bribe-payer a contract or for approving poor performance or overpayment on a contract the payer already holds with the employer. Most cases have arisen from one firm bribing an employee of another, but the same law applies when the victim is a government agency whose employee was bribed. U.S. agencies (here), cities (here and here) and counties (here), local police forces (here) and the United Nations (here) have all collected damages in these circumstances. So have foreign governments when the bribe was paid in violation of the Foreign Corrupt Practices Act (chapter 10 here).
The basis of the employer’s damages is in taking a bribe the employee breached the duty of loyalty owed the employer. The duty of loyalty is also grounds for recovery in conflict of interest cases. The most well-known public conflict of interest case is from the early 20th century. In United States v. Carter, Army Captain Oberlin Carter had awarded dredging contracts to a company in which he had a secret interest. The court ruled that not only was the Army entitled to Carter’s share of the company’s profits but to any money he had earned from investing those profits.
Bribing procurement officials can injure firms as well as the government buyer. A firm that loses a contract because a competitor bribed a procurement officer can collect damages if it can show injury to itself or to the competitive process. If the bribery is part of a bid rigging scheme, not only is any firm excluded from the bidding entitled to damages, but if the prices paid were higher than what they would have been absent the scheme, the purchaser can recover the difference.
In these cases, the causal link between the corruption and the harm has been obvious. Where the link has been blurrier, the courts have been reluctant to award damages, taking refuge in such conclusions as the relationship between the putative victim’s damages and the corruption was “too remote” or “too attenuated.”
To be sure, compensation has been awarded in a handful of cases that fall outside the patterns described above. The South African government recovered damages from a company that corruptly harvested and imported lobsters from its territorial waters, and in 2018 owners of a Canadian firm were awarded damages from a company whose bribery of officials of the Democratic of the Congo reduced the Canadian firm’s value. There have been some cases where shareholders of a firm that admitted bribing foreign officials recovered damages on the theory the disclosure of the bribes reduced the firm’s stock price, but problems of showing the disclosure affected the company’s share price have resulted in most being dismissed.
There appears to be only a single case where a large group of citizens have sought damages for public corruption. It was filed this past July. Illinois’ largest supplier of electric power had earlier admitted to a long running scheme in which it paid state representatives to approve favorable legislation. The four million plus individuals and businesses the utility supplies have sued, alleging the laws the company bought enabled it to charge unreasonably high prices.
Like any crime victim, those injured by public corruption can obtain compensation in two ways: through a private civil suit or as a party to the prosecution of those responsible for the corruption. A federal law, the Mandatory Victims Restitution Act, governs who is considered a victim in federal criminal cases; the common law of torts, modified in competitor cases by federal and state competition laws, governs civil actions. Although the same general principles of causation are followed in determining who is a victim, as explained below, the rules governing damages differ.
The Mandatory Victims Restitution Act was enacted in 1996, and most public corruption victims have since sought recovery under it. Private damage actions are usually expensive whereas in a criminal case the government bears the cost of investigating and prosecuting defendants. All a victim need do is present evidence showing the damage the corruption caused.
Compensation is awarded at the time the court imposes sentence, and payment takes priority over the payment of a fine or penalty. Compensation is mandatory save in two situations. Where the number of victims makes compensation “impracticable” or where a lengthy inquiry would be required to establish the harm or amount of compensation. The exceptions were made to ensure that devising a compensation order did not unduly delay sentencing. In these cases victims only option is a civil action for damages.
American law does have a procedure that facilitates suit in cases where the victims are numerous. One or more victims can bring suit on behalf of the entire group or class harmed. Class actions ease the recovery of damages two ways. In cases where each class member’s injury is too small to justify suit, likely the case with the Illinois electric power consumers, and second in cases where the class cannot afford a lawyer. Class action rules allow lawyers to take a case on a contingency basis, paid only if the suit succeeds and with payment coming from the proceeds of the recovery. Surprisingly, given the amenability of some corruption damage actions to recovery via a class action, the Illinois case appears to be the only one brought to date.
Even where victims can recover as a party to the criminal trial, they may choose to pursue a civil case instead. For one reason, they have no control over a criminal case. Whether they recover damages depends entirely on decisions the government takes. It decides whether to investigate a case, whether to bring charges against anyone, and whether to pursue the case once charges are filed. Under American law, crime victims cannot demand a case be investigated or prosecuted and have no remedy if at any stage and for whatever reason the prosecution is discontinued.
A second reason why victims might choose to file a civil action is the damage award can be larger. The restitution act provides that victims be compensated for any damage or loss to property “directly and proximately” caused the defendant’s crime. The courts read this language to exclude what the common law terms “consequential” or “special” damages, damages that “flow from” the initial wrong (example here). The difference is illustrated by cases where a firm loses a contract because a competitor paid a bribe. Recovery under the restitution law would be limited to the profits the firm would have earned from the contract. If the failure to secure the contract precipitated the firm’s bankruptcy, damages would also include the loss of future profits. But these are considered consequential or special damages, recoverable in a civil suit but not under the restitution act.
U.S. law does not, however, limit victims to choosing between a civil suit and recovery as a crime victim. A company forced into bankruptcy because a competitor’s bribe cost it a major contract could seek compensation under the restitution act and damages through a civil action. It could not recover twice for the same harm, but it could be awarded lost profits on the contract in the criminal action and consequential damages as plaintiff in a civil suit.
Indeed, it could withhold suit until after the criminal trial and use the evidence adduced there to prove its case in a civil action. Moreover, an acquittal in the criminal case would not bar suit. The standard for convicting a defendant of a crime is proof beyond a reasonable doubt. The standard for finding the same defendant liable for damages arising from the same facts in a civil case is far lower, the balance of probabilities. That is that on balance it is more likely than not the defendant did what plaintiff alleges.
Many damage actions can be brought in either federal or state court. Agencies of the state of New York, however, have a strong incentive file their cases in New York state court. The general rule at common law is that when an employee is bribed in return for issuing a contract, the bribe, any profits from its investment, and any damage the bribe caused is recoverable. In New York, by contrast, its highest court has ruled that a public agency is also entitled to the return of all monies paid on a contract secured through a bribery no matter how much work has been done and what its quality.
Corruption victims will almost always choose to recover through a civil suit when the case can be styled a violation of a competition law. The Sherman Act, the federal statute which protects competition, and most state laws meant to prevent unfair competition provide that any damages awarded for a violation are to be trebled. In addition, contrary to the usual rule that each side pays its own attorney fees, in competition law cases the claimant’s attorney fees form part of the damage award.
The most notable public corruption case pursued as a competition law violation is Newmarket v. Innospec. Newmarket and Innospec both manufacture gasoline additives. After Innospec was charged with bribing Indonesian officials in return for the exclusive right to sell its product in Indonesia, Newmarket brought suit alleging Innospec had monopolized or attempted to monopolize the Indonesian market for gasoline additives in violation of section two of the Sherman Act. Innospec paid $45 million to settle the case.
Whether a victim seeks to recover damages under the restitution act or by a civil suit, American courts recognize the difficulties of showing damages with precision. Employers often seek to claw back the salary and benefits it paid to an employee who took bribes. The theory is that the employer thought it was paying for an employee’s honest services but got something less. Exactly how much less though is impossible to determine precisely. Recognizing, as one court has, that the determination of damages in such cases “is by nature an inexact science,” the courts have held a reasonable estimate suffices.
Two examples. In United States v. Bahel, Sanjaya Bahel, a staff member of the United Nations, was convicted of a series of corrupt acts between 1999 and 2006, a period in which he had been paid $876,000. The court accepted as a reasonable estimate of the UN’s losses the $86,000 Bahel earned while suspended pending the case’s resolution. A federal appellate court ruled that one-fourth of the salary of a bribe-taking sheriff was a reasonable estimate of the damages the city that employed him incurred. “Although an arbitrary fraction,” the court wrote, “it rather generously credits [the sheriff] with being worth to the employer three-fourths of his salary.”
In these and cases brought to recover damages for numerous types of wrongdoing, the courts have stressed that so long as the damage estimate is reasonable, as opposed to purely speculative, it will support an award of compensation. As the Supreme Court explained in a landmark decision –
“Where the tort itself is of such a nature as to preclude the ascertainment of the amount of damages with certainty, it is enough if the evidence show the extent of the damages as a matter of just and reasonable inference. . . . The wrongdoer is not entitled to complain that they cannot be measured with the exactness and precision that would be possible if the case, which he alone is responsible for making, were otherwise.”