Corporate Criminal Liability in Japan: The Supreme Court on Dual Liability and Presumed Negligence

Date of Judgment: March 26, 1965
Court: Supreme Court of Japan, Second Petty Bench
Case Name: Foreign Exchange and Foreign Trade Control Law Violation Case
Case Number: 1963 (A) No. 1801

I. Introduction: Corporate Wrongdoing and the Question of Culpability

On March 26, 1965, the Second Petty Bench of the Supreme Court of Japan issued a significant ruling in a case involving several trading companies charged under the Foreign Exchange and Foreign Trade Control Law. This judgment delved into the complex area of corporate criminal liability, particularly how Japanese law holds corporations accountable for the illegal acts of their employees through mechanisms known as "dual criminal liability provisions" (ryōbatsu kitei). The case squarely addressed whether a corporation could be held liable based on a presumption of its own negligence in supervising its employees, and whether such a presumption was compatible with constitutional principles of due process and culpability. This decision remains a cornerstone in understanding the framework for corporate criminal responsibility in Japan.

II. The Case of the Trading Companies

The defendants in this case included several prominent Japanese trading corporations, such as Company E, Company NB, Company NJ, Company I, and Company K. These companies were engaged in international trade. The prosecution arose from actions taken by certain directors and employees of these corporations in connection with their companies' business operations. These actions constituted violations of the then-operative Foreign Exchange and Foreign Trade Control Law (FEFTCL).

Specifically, employees of these corporations were found to have, for instance, received payments from residents on behalf of non-residents without the necessary statutory exemptions, or to have become parties to transactions that created financial claims between residents and non-residents, contrary to the stipulations of FEFTCL Articles 27(1)(3) (latter part) and 30(3)[cite: 1].

The corporations themselves were not accused of directly committing these acts but were prosecuted under Article 73 of the FEFTCL[cite: 1]. This article was a "dual criminal liability provision" (ryōbatsu kitei), a type of statutory clause common in Japanese regulatory law. It stipulated that if a representative, agent, employee, or other worker of a juridical person (or an individual employer) committed a violation of certain FEFTCL articles in connection with the business or property of that juridical person or individual, not only would the actual offender be punished, but the juridical person or individual employer would also be subject to the fines prescribed for those offenses[cite: 1].

The lower courts, including the Tokyo District Court (first instance) and the Tokyo High Court (second instance), found the defendant corporations guilty[cite: 1]. Consequently, the companies, including Company K, lodged appeals with the Supreme Court[cite: 1].

III. Arguments on Appeal: Challenging Corporate Culpability

The primary constitutional challenge relevant to the core of this judgment was advanced by Company K. Their argument centered on the interpretation and constitutionality of the dual liability provision, Article 73 of the FEFTCL[cite: 3].
The prevailing interpretation of such provisions, as acknowledged by the appellants, was that they presumed negligence on the part of the employer concerning the employee's unlawful actions[cite: 3]. According to this view, an employer could escape liability only if they could affirmatively prove that they had exercised due care in the selection and supervision of their employees and had taken all necessary measures to prevent such violations[cite: 3].

Company K contended that:

1. This presumption of negligence inherently conflicted with the fundamental principle of culpability (sekinin shugi) in criminal law, which generally requires that punishment be based on the proven fault of the accused[cite: 3].
2. The burden of proving the absence of negligence was, in practice, an almost insurmountable hurdle for corporations[cite: 3]. This meant that the presumption effectively led to a regime of strict liability (liability without fault) for employers[cite: 3].
3. Therefore, Article 73, by imposing what amounted to strict liability under the guise of presumed negligence, and lacking explicit statutory language detailing this presumption, violated Article 31 of the Constitution of Japan, which guarantees due process of law[cite: 3].

Other appellants, like Company I, raised different constitutional issues, such as the FEFTCL being an impermissibly vague "blank space penal statute" (kūhaku keibatsu hōki) and its continued application being contrary to constitutional guarantees of economic freedom and property rights due to changed economic circumstances. The Supreme Court also dismissed these arguments.

IV. The Supreme Court's Ruling: Upholding and Extending Presumed Negligence

The Supreme Court dismissed all appeals, including Company K's[cite: 3]. In its reasoning concerning the dual liability provision, the Court leaned heavily on its established jurisprudence.

The Court first reiterated its stance on dual liability provisions as applied to individual employers. It cited several precedents, including a pivotal Grand Bench decision from November 27, 1957, which established that such provisions are to be understood as presuming the existence of negligence on the part of the employer[cite: 3]. This presumed negligence relates to the employer's failure to exercise necessary care in the selection and supervision of their agents, employees, or other workers, or in taking other necessary measures to prevent the violation[cite: 3]. Consequently, the Court had consistently held that unless the employer could prove that they had indeed fulfilled these duties of care, they could not escape criminal liability under the dual liability provision[cite: 3].

The crucial step taken in the 1965 judgment was the explicit extension of this "presumption of negligence" doctrine to cases where the employer is a juridical person (a corporation, such as a Kabushiki Kaisha) and the actual offender is an employee who is not a representative of the corporation[cite: 3]. The Court found that the legal principle established for individual employers should "naturally be extended" to such corporate employers[cite: 3].

Given this interpretation, the Supreme Court concluded that Company K's constitutional challenge to Article 73—that it violated Article 31 by imposing presumed negligence—was based on a flawed premise and was therefore unfounded[cite: 3]. The Court effectively ruled that the presumption of negligence, allowing for a defense of due care, was a constitutionally permissible way to structure corporate liability under such provisions.

V. Understanding Dual Criminal Liability Provisions (Ryōbatsu Kitei)

To appreciate the significance of this ruling, it's essential to understand "dual criminal liability provisions" (ryōbatsu kitei). These are statutory clauses that, in addition to penalizing the individual who directly commits an illegal act (e.g., an employee), also impose punishment (typically a fine) on the employing entity (an individual employer or a corporation) in connection with whose business the offense occurred[cite: 1].

These provisions have a long history in Japanese law, particularly in the realm of administrative and economic regulations, dating back to laws like the 1932 Capital Flight Prevention Act[cite: 1]. Their primary aim is to ensure compliance with regulatory schemes by holding business entities accountable for violations occurring within their sphere of operations. While initially prevalent in administrative offenses, their use has expanded to cover certain conventional crimes as well, such as environmental offenses causing harm to human health[cite: 1].

Ryōbatsu kitei serve several functions[cite: 1]:

1. Enabling Corporate Punishment: Under traditional Japanese criminal law principles, a corporation, being an artificial entity, cannot typically be punished under a general penal provision that refers to "a person" (大判昭和10.11.25刑集14巻1217頁)[cite: 1]. Dual liability provisions provide a specific statutory basis for imposing penalties on corporations[cite: 1].
2. Imposing Supervisory Duties: They implicitly or explicitly place a duty on employers to prevent their employees from committing offenses in the course of business. The employer is then punished for a breach of this supervisory duty (i.e., for their own negligence)[cite: 1].
3. Addressing Status Crimes: In some instances, if the main offense requires the perpetrator to have a specific status (a mibunhan), a dual liability provision can enable the punishment of an employee who committed the act but lacks that specific status[cite: 1].

VI. The Evolution of Employer Liability Doctrines

The Supreme Court's 1965 decision was a key point in the evolution of how Japanese law conceptualizes the liability of employers under ryōbatsu kitei.

Early interpretations often leaned towards vicarious liability, where the employer was held responsible simply because their employee committed an offense, regardless of any fault on the employer's part (大判昭和16.12.18刑集20巻709頁)[cite: 1]. This sometimes shaded into strict liability (no-fault liability) (大判昭和17.9.16刑集21巻417頁), where the employer was liable once the employee's offense was proven, without any need to demonstrate the employer's own culpability[cite: 1]. While strict liability can be effective in achieving administrative objectives by placing strong pressure on businesses, it sits uncomfortably with the fundamental principle of culpability (sekinin shugi) in criminal law, which holds that punishment should be tied to blameworthiness[cite: 1]. Conversely, requiring prosecutors to rigorously prove an employer's specific negligence in each case could significantly weaken the deterrent effect of these provisions[cite: 1].

Seeking a middle ground, the "presumption of negligence" theory (過失推定説 - kashitsu suitei setsu) gained prominence[cite: 1]. This theory, advocated by scholars like Tatsukichi Minobe, posits that the employer, as the controller of the business, is presumed to have been negligent in their supervisory duties if an employee commits a violation[cite: 1, 2]. The employer can only escape liability if they can prove that the employee's violation was due to force majeure or, as later refined by the courts, that they had exercised all due care[cite: 1, 2].

The Supreme Court's 1957 Grand Bench decision, cited in the 1965 ruling, was pivotal. It established that even without an explicit statutory provision allowing for a non-negligence defense, a natural person employer could be exonerated from liability under a dual liability provision if they could prove they had exercised due care in selection, supervision, and prevention of violations[cite: 2]. This was a direct consequence of adopting the presumption of negligence theory[cite: 2]. The 1965 judgment then formally extended this framework to corporate employers, at least concerning the actions of their non-representative employees[cite: 2].

VII. Theories of Corporate Criminal Liability: Beyond the Employee's Act

The 1965 judgment, by focusing on the corporation's presumed negligence in supervising non-representative employees, touches upon the broader, complex question of how criminal culpability can be attributed to a corporation, which is an artificial legal entity lacking a mind in the human sense. This is where theories of corporate criminal liability come into play, particularly in relation to the first function of ryōbatsu kitei – enabling corporate punishment.

Two main models are often discussed[cite: 2]:

1. Identification/Attribution Theory (Individual Model): This theory, influential in Anglo-American law and resonating in some Japanese interpretations, identifies the corporation with certain key individuals who are considered its "directing mind and will" – typically high-ranking officers or representatives[cite: 2]. The acts and mental states (intent or negligence) of these individuals are then attributed to the corporation as its own[cite: 2].
   • In the context of ryōbatsu kitei, if a corporate representative is negligent in supervising an employee who commits an offense, this negligence can be deemed the corporation's negligence, but the corporation might still have a chance to prove overall due care[cite: 2].
   • However, if a representative themselves commits the illegal act with the requisite culpability, this might be viewed as the corporation's own direct act and culpability, potentially leaving no room for a non-negligence defense for the corporation concerning that specific act (this is alluded to as "Proposition 2" in some academic analyses of the 1965 judgment's implications)[cite: 1, 2]. The 1965 judgment specifically concerned acts by "employees who are not representatives," leaving this latter scenario open[cite: 3].
   • Criticisms of this theory include the difficulty in consistently defining which individuals represent the corporation's "mind," and the argument that it is often a metaphorical and indirect way of establishing corporate liability[cite: 2].
2. Organizational Model (Corporate Realist Theory): This model views the corporation as an entity in itself, capable of acting and being at fault in an organizational sense[cite: 2]. Corporate culpability is located in systemic failures, such as deficient policies, inadequate procedures, a corporate culture that tolerates or encourages misconduct, or a failure to implement effective compliance and prevention systems[cite: 2].
   • Under this model, even if a high-ranking representative was involved in an offense, the corporation as an entity might still lack culpability if it can demonstrate that its organizational structures and preventive measures were robust and diligently implemented, and that the harm was, from the corporation's systemic standpoint, unforeseeable or unavoidable[cite: 2].
   • This approach aligns well with the emphasis on corporate compliance programs as a means of preventing corporate crime and potentially demonstrating a lack of corporate culpability[cite: 2].

The 1965 Supreme Court decision, with its focus on the corporation's (presumed) negligence in supervising non-representative employees, has elements that can be seen through the lens of the identification theory (the fault of individuals in supervisory roles being relevant to the corporation's fault). However, the broader discussion in legal scholarship often pushes towards an organizational model as a more theoretically sound basis for corporate criminal liability[cite: 4].

VIII. The "Presumption of Negligence" in Practice

The Supreme Court's affirmation of the "presumption of negligence" for corporate employers means that once an employee (who is not a representative) is proven to have committed an offense in connection with the company's business, the burden of proof shifts[cite: 3]. The corporation must then affirmatively demonstrate that it exercised all necessary due care in the selection and supervision of that employee and in taking other measures to prevent such violations[cite: 3].

This raises critical practical questions:

• What constitutes "due care" for a corporation in this context? It generally involves proving adequate hiring practices, proper training, effective supervision, and the implementation of systems to prevent legal violations.
• How high is the evidentiary bar? Appellants in the 1965 case feared it was virtually impossible to meet, making the liability almost strict in effect[cite: 3]. While not strictly impossible, it is undoubtedly a significant challenge.
• The existence and diligent enforcement of robust compliance programs become crucial. Such programs can serve as tangible evidence of the corporation's efforts to exercise due care and foster a culture of legal adherence.

IX. Legislative Considerations and the Future of Corporate Liability

The 1965 ruling solidified a particular approach to corporate liability under ryōbatsu kitei in Japan. However, legal scholarship continues to debate whether this framework – largely reliant on dual liability provisions and the presumed negligence of individuals within the corporation – is the most effective or theoretically coherent method for addressing corporate crime[cite: 4].

Many legal scholars advocate for the development of general principles of corporate criminal liability within the Penal Code itself, distinct from ryōbatsu kitei which are typically found in specific regulatory statutes[cite: 4]. Such general principles would ideally be based on an organizational model of culpability[cite: 4]. This would involve assessing the corporation's own systems, policies, and operational culture to determine if a collective or systemic fault led to the commission of the offense[cite: 4].

Adopting an organizational model could also lead to a more nuanced approach to the liability of individual employees. Their culpability could be assessed more independently of the corporation's, focusing on their specific roles, responsibilities, and failures within the corporate structure[cite: 4]. It would not necessarily require that an employee be punished for the corporation to be held liable, or vice-versa, if their respective culpabilities (or lack thereof) are distinct[cite: 4].

X. Conclusion: Navigating Corporate Responsibility in a Regulatory Landscape

The Supreme Court's 1965 judgment in the Foreign Exchange and Foreign Trade Control Law Violation Case marked a pivotal moment in Japanese law, affirming a fault-based (albeit through presumption) approach to holding corporations criminally liable for the misconduct of their non-representative employees under dual liability provisions[cite: 3]. It underscored that corporations cannot simply be passive bystanders to the actions of their workforce but have an affirmative duty to ensure legal compliance.

While the "presumption of negligence" doctrine provides a framework, the practicalities of meeting the burden of proof for exoneration emphasize the critical importance for corporations to proactively implement, diligently enforce, and continuously monitor robust internal controls and compliance mechanisms. These are not merely best practices for good governance; in the context of Japanese criminal law, they can be integral to demonstrating the due care required to rebut a presumption of corporate negligence.

The legal landscape continues to evolve, with ongoing discussions about the most appropriate models for conceptualizing and legislating corporate criminal responsibility. The 1965 decision, however, remains a key reference point, highlighting the judiciary's efforts to balance the objectives of regulatory enforcement with the foundational principles of culpability in a world where corporate actions have profound societal impact.