U.S. Supreme Court’s Recent Decisions on ‘Honest Services’ Fraud Raise Questions About Fiduciary Duty, Quid Pro Quo, Mens Rea, and Other Issues

In 1987, in McNally v. United States, ¹McNally v. United States, 483 U.S. 350 (1987). the U.S. Supreme Court held that neither the mail fraud statute, 18 U.S.C. §1341, nor the wire fraud statute, 18 U.S.C. §1343, prohibited violations of the “intangible right to honest services.” Instead, the court held that these statutes applied only to schemes to defraud another of money or tangible property. In McNally‘s wake, Congress passed 18 U.S.C. §1346, which provides that mail or wire fraud can be predicated on “a scheme or artifice to deprive another of the intangible right of honest services.” The statute passed with virtually no legislative history. ²The statute was passed as part of the omnibus drug bill. Its language was not the subject of any committee report or debate. United States v. Brumley, 116 F.3d 728, 739 (5th Cir. 1997) (Jolly & DeMoss, J.J., dissenting). During floor debate, Rep. John Conyers stated that the statute “is intended merely to overturn the McNally decision,” 134 Cong. Rec. H. 111 08-01 (daily ed. Oct. 21, 1988), and following final passage, the Senate Judiciary Committee entered into the congressional record a report stating that Section 1346 “overturns the decision in McNally v. United States,” 134 Cong. Rec. S. 17360-02 (daily ed. Nov. 10, 1988) (Statement of Sen. Joe Biden). In the ensuing 22 years, courts struggled to clarify what the “intangible right of honest services” meant.

In the trilogy of Skilling v. United States,
³561 U.S. ___, 2010 WL 2518587 (2010) (5 WCR 459, 7/2/10). Black v. United States,
⁴561 U.S. ___, 2010 WL 2518593 (2010). and Weyhrauch v. United States
,
⁵561 U.S. ___, 2010 WL 2518696 (2010). the Supreme Court was squarely presented with an opportunity to declare the statute unconstitutional as hopelessly vague and ambiguous. Instead, the court chose to limit Section 1346’s “intangible right of honest services” to schemes involving “bribes” and “kickbacks.” Justice Ruth Bader Ginsburg’s majority opinion in Skilling found that extending the statute beyond these “core” violations would render the statute unconstitutionally vague. To save the statute, the majority limited it to what the majority found was Congress’s core intent.

This article examines the decisions of the court in Skilling, Black, and Weyhrauch and analyzes the scope of their holdings. We also examine questions that were left unanswered by the Supreme Court and that will likely trouble the lower federal courts for years to come.

The Supreme Court’s Trilogy

Skilling‘s Majority Opinion.

Jeffrey Skilling was charged with conspiracy to commit securities and wire fraud by seeking to deprive Enron Corp. and its shareholders of the intangible right to his “honest services.” The substantive counts of the indictment charged securities fraud, wire fraud, making false statements to Enron auditors, and insider trading. In charging the jury, the court stated that to convict Skilling, the jurors had to find a material breach of fiduciary duty that resulted in a detriment to his employer due to the withholding of material information, which Skilling had reason to believe would lead a reasonable employer to change its conduct.

In his petition for certiorari to the Supreme Court, Skilling argued that this “intangible right to honest services” was unconstitutionally vague. He asserted that the statute must define a criminal offense with sufficient definiteness so that an ordinary person can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement. Skilling argued that Section 1346 provided no definition and was without any legislative history.

In construing the statute rather than invalidating it, Ginsburg first looked to pre-McNally caselaw to ascertain the statute’s meaning and Congress’s intent. Ginsburg opined that Congress intended Section 1346 to incorporate the honest-services fraud doctrine recognized by courts of appeals before McNally, and that those pre-McNally honest-services cases were predominantly bribery and kickback schemes. While acknowledging that there was great disarray over the statute’s application to conduct outside this core, the majority concluded that the statute could be limited to bribes and kickbacks, as every reasonable attempt must be made to save a statute from unconstitutionality by adopting a limiting interpretation.

Rather than view the pre-McNally caselaw as a hopeless muddle of conflicting holdings, the majority noted that McNally itself involved a kickback scheme. Congress’s legislative reversal of McNally in Section 1346 permitted the statute to be salvaged by confining its scope to the “core” offenses of pre-McNally cases, which Congress clearly intended to reach. For the majority, reading the statute to proscribe a wider range of offenses would raise due process concerns. Accordingly, to preserve the statute without violating the constitutional vagueness doctrine, the majority limited Section 1346 to bribery and kickback schemes. Ginsburg rejected Justice Antonin Scalia’s argument that the majority was undertaking “judicial legislation” and noted that the court was not impermissibly creating a common law crime but only limiting the statute to its heartland.

Rule of Lenity.

Ginsburg went on to state that under the limiting principle adopted by the court, it was excluding from Section 1346’s ambit such amorphous categories as undisclosed self-dealing by a public official or a private employee. In a footnote, ⁶Fn. 45. the majority stated that if Congress wished to legislate in this broader arena of conflicts, it would have to employ standards of definiteness and specificity to overcome due process concerns. For the majority, resolving Section 1346’s ambiguity was in accord with the rule of lenity and provided “a uniform national standard” defining honest services with clarity. Limited to bribery and kickbacks, the statute was upheld and found not to offend the constitutional void-for-vagueness doctrine.

The majority did not provide a specific definition of “bribery” and “kickbacks” to employ in honest-services fraud prosecutions. It offered only a cryptic remark that the terms drew “content” from pre-McNally caselaw and federal statutes proscribing and defining similar crimes in 18 U.S.C. §§201(b) and 666(a)(2) and 41 U.S.C. §52(2). The court did not explain what content could be taken from these statutes. Notwithstanding the vagueness of its opinion, the court offered that “a defendant who participated in a bribery or kickback scheme cannot tenably complain about prosecution under Section 1346 on vagueness grounds.”

Because Skilling was not charged with a kickback or bribery under the honest-services fraud theory, the court considered whether Skilling’s conviction for a multi-object conspiracy required reversal under Yates v. United States
,
⁷354 U.S. 298 (1957). which held that constitutional error occurs when a jury is instructed on alternate theories of guilt and returns a general verdict that may rest on a legally invalid theory. The court did not decide that issue, but it remanded the case for a determination as to whether the error in the charge was subject to a harmless-error analysis.

Justice Scalia’s Concurrence.

In his concurring opinion, Scalia and two other justices thought Skilling’s conviction should be reversed because it deprived him of due process on grounds that Section 1346 was unconstitutionally vague. For Scalia, any attempt to limit the statute to bribery and kickbacks was “judicial legislation” that announced new federal crimes. Scalia maintained that the statute is grounded in fiduciary duty and is not limited to bribes and kickbacks. For these justices, a primary problem with the majority’s pre-McNally caselaw analysis was that none of the cases defined the nature of the fiduciary duty central to the fraud offense committed by the public official or the private employee. Indeed, there was no agreement in the caselaw concerning the source of the duty, and whether it arises from positive state or federal law, or from general common-law principles inherent in agency or employment relationships. According to Scalia, the term “fiduciary duty” is inherently indefinite, which is the reason that some courts had to try to establish limiting principles, such as variously requiring a material misrepresentation, an act of concealment, reasonably foreseeable economic hardship, or personal gain. Consequently, contrary to Ginsburg’s conclusion that the pre-McNally law pointed to a core of cases prohibiting bribery and kickbacks, for Scalia the cases provided no clear indication of what constituted a denial of the right of honest services.

Scalia further criticized the majority’s opinion for failing to solve the most fundamental problem with the statute: What is the nature of the fiduciary duty to which the bribe and the kickback restrictions apply? Prohibiting bribery and kickbacks is clearly not the intent of the statute. While bribes and kickbacks can overlap with honest-services fraud, the statute was never limited to reach just those areas. For Scalia, while Congress may have intended to reach at least bribes and kickbacks, it did not mean that Congress intended only to criminalize those acts. What Congress did was enact a vague criminal statute, and the majority’s attempt to pare it back was merely judicial legislation, he said. According to Scalia, it may be permissible for the court to save a statute where there are two possible meanings, one of which is unconstitutional and the other of which is not. That was not, however, the case in Skilling. Scalia complained that the majority reformed Section 1346 rather than choosing between a constitutional construction as opposed to an unconstitutional one. For Scalia, there was no precedent for such a rewriting of the statute.

Black v. United States.

The defendants in Black were senior executives of Hollinger International Inc., which owned a number of newspaper businesses. Hollinger was controlled by a Canadian company, Ravelston, which was 65 percent owned by Conrad Black, Hollinger’s chief executive officer. Hollinger began selling a number of the businesses it owned. When only one newspaper business was left to sell, the defendants received $5.5 million in exchange for noncompete agreements. Neither Hollinger, its audit committee, nor its board was informed of, or approved the transaction, as would be required by the conflict-of-interest principles that the transaction implicated. The defendants argued that the payment was really a management fee due them, but they characterized it as a covenant not to compete to take advantage of Canadian tax laws, which did not treat such payments as income.

The jury was charged on two theories: The defendants committed money or property fraud by (1) stealing money from Hollinger by fraudulently paying themselves bogus noncompete fees and (2) failing to disclose their receipt of those fees. In examining the honest-services fraud theory, the U.S. Court of Appeals for the Seventh Circuit found that the defendants owed a fiduciary duty of loyalty and candor to Hollinger and they misused their positions for personal gain when they appropriated $5.5 million without authorization. The Seventh Circuit held that the defendants committed fraud by depriving Hollinger of its right to their honest services by violating their duty of candor in a conflict-of-interest situation.

The district court instructed the jury over the defendants’ objection that a person commits honest-services fraud if he misuses his position for private gain for himself and/or a co-schemer, and he knowingly and intentionally breaches his duty of loyalty. Before deliberations, the government asked the district court to use a special verdict form specifying whether the money or property fraud theory or the honest-services fraud theory, or both, had been the basis for conviction. The defendants requested a general verdict form. Relying on the rule in Yates that a general verdict may be set aside if the verdict is supported on one ground that is valid and one that is invalid, the defendants urged reversal of their mail fraud convictions. The Seventh Circuit, however, held that because the defendants had resisted the special verdict form, they bore responsibility for the obscurity.

The honest-services instruction given in Black was clearly incorrect in light of the holding in Skilling, which raised the issue of whether the defendants forfeited any objection by virtue of their failure to acquiesce in the government’s request for a special verdict form. Ginsburg held that the Federal Rules of Criminal Procedure do not provide for special questions and that the defendants had properly objected to the instruction under the federal rules. By properly objecting to the honest-services fraud instruction, the defendants secured their right to challenge it on appeal. As in Skilling, however, the Supreme Court expressed no opinion on whether the error was ultimately harmless, and it remanded the case.

Weyhrauch v. United States.

In Weyhrauch, a former Alaska state legislator sought employment with an oil services company with an interest in pending tax legislation. However, according to the indictment, he failed to disclose these employment discussions to his legislative colleagues or the general public. Prior to trial, the defendant sought to exclude evidence regarding his prospective employment on the ground that an Alaska state legislator is not required to disclose ongoing negotiations for employment. The district court granted the motion to exclude the evidence, but the U.S. Court of Appeals for the Ninth Circuit reversed. The Ninth Circuit found that regardless of Alaska law, Section 1346 establishes a uniform standard of honest services that governs every public official, and the government was not required to prove an independent violation of state law to sustain an honest-services fraud conviction. In a per curiam opinion, the Supreme Court vacated the Ninth Circuit’s decision and remanded the case to the Ninth Circuit for further consideration in light of Skilling.

Unanswered Questions

Ginsburg’s opinion in Skilling limits honest-services fraud to bribes and kickbacks. While the majority did not define those terms, they stated that such terms draw “content” from pre-McNally caselaw and statutes such as 42 U.S.C. §52(2) and 18 U.S.C. §§ 201(b)
⁸By referring specifically to Section 201(b), the majority was presumably indicating that giving or receiving a gratuity (prohibited in the case of federal officials under Section 201(c)) would not suffice as a bribe, which requires a quid pro quo. The government may argue that Section 666 reaches a gratuity and that under some circumstances a Section 201(c) offense might suffice under Section 1346. and 666(a)(2). What the majority did not (and could not) say is that the statute has been dislodged from its moorings to breach of fiduciary duty. Had the Skilling majority sought to explicitly redefine honest-services fraud in terms of these federal statutes, it would have laid bare that the court was simply rewriting a criminal statute and engaging in “judicial legislation” as Scalia claimed. While those sections may provide content as Ginsburg indicates, they do not abrogate Section 1346’s requirement of breach of a fiduciary duty.

As honest-services fraud remains grounded in fiduciary duty, to whom is that fiduciary duty owed, and what is the source and formulation of that duty? The majority did not answer these questions, which will be left to be resolved by the lower federal courts in the first instance. The certiorari petition in Weyhrauch clearly raised the issue of whether the duty owed is a violation of state law, federal law, or some general moral principle. The Supreme Court’s failure to answer this question leaves us with pre-Skilling conflicting circuit court opinions on the matter.

Duty Under State Law.

In United States v. Brumley, ⁹116 F.3d 728 (5th Cir. 1997). the Fifth Circuit held that the services must be owed under state law and the government must prove that they were not provided. In United States v. Murphy, ¹⁰323 F.3d 102 (3d Cir. 2003). the Third Circuit adopted a rule similar to Brumley, requiring the government to prove that a public official violated a fiduciary duty specifically established by state or federal law. In Murphy, a former chairman of the Republican Party of Passaic County, N.J., was charged with mail fraud in connection with his involvement in a contracts-for-payments scheme. The government argued that the New Jersey Bribery Act created a fiduciary duty obligating a county public official to disclose material information to the county.

The Third Circuit held that criminal statutes simply should not be read to create a fiduciary duty between a county party official and the public, as that would mean that any criminal activity would breach a duty to the public not to break the law. While the New Jersey Bribery Act restricts the conduct of public officials, it does not create a fiduciary duty or other legal relationship to the public, and a mail fraud conviction under that theory cannot be upheld. Without the anchor of fiduciary duty, there is simply no violation. ¹¹Id. at 116-17. Whether the Third Circuit requires a fiduciary duty actionable under the state law alone is debatable. In United States v. Panarella, 277 F.3d 678, 669 n. 9 (3d Cir. 2002), the court reserved that issue. While the circuit court was urged to resolve the issue in Murphy, it found no need to do so. Id. at 117. Some circuit courts have rejected a state-law limiting principle and held that honest-services fraud is governed by a uniform federal standard. ¹²See United States v. Sorich, 523 F.3d 702, 712 (7th Cir. 2008) (3 WCR 301); United States v. Urciuoli, 513 F.3d 290, 298-99 (1st Cir. 2008) (3 WCR 74); United States v. Sawyer, 239 F.3d 31, 41-42 (1st Cir. 2001); United States v. Walker, 490 F.3d 1282, 1299 (11th Cir. 2007) (2 WCR 436); United States v. Bryan, 58 F.3d 933, 942 (4th Cir. 1995). These cases seem to be premised on the belief that a state official has an inherent fiduciary duty to the public. ¹³See, e.g.,
United States v. DeVegter, 198 F.3d 1324, 1328 (11th Cir. 1999); United States v. Waymer, 55 F.3d 564, 571 (11th Cir. 1995).

Source of Duty?

What is the source of the duty required in order to establish honest-services fraud in the private sector? In United States v. Rybicki,
¹⁴354 F.3d 124, 143 (2d Cir. 2003) (en banc). the Second Circuit held that Section 1346 was violated when personal injury lawyers made payments to insurance claims adjusters. The adjusters in turn failed to report the payments to their employer in contravention of company policy. In Rybicki, the court found there could be a violation of Section 1346 because there was a relationship that gave rise to a duty of loyalty comparable to that owed by employees to employers. It would seem that the duty could not arise under federal law, as there is no federal common law since Erie v. Tompkins
¹⁵304 U.S. 64 (1938). and certainly no federal common law of crime.

Ginsburg’s opinion leaves the courts to struggle with whether the defendant breached a fiduciary duty and, if so, what the source and formulation of that duty is. It also leaves other questions unanswered. Assuming a public official breaches a fiduciary duty owed to the public under some state, federal, or moral law by accepting a bribe, or that an employee who accepts a kickback to favor a supplier does so, does the individual who pays the bribe or kickback breach any fiduciary duty? The payer of a bribe or kickback owes no fiduciary duty to the public and owes no fiduciary duty to the employer. Consequently, he may not directly violate Section 1346.

While payers of bribes and kickbacks arguably may not be primary violators, they may be secondary violators under 18 U.S.C. §§2 and 371. However, to obtain a conviction for aiding and abetting or for conspiracy, the government must prove beyond a reasonable doubt that the payer of the bribe knew that when the payee accepted the payment, he did so in breach of the his fiduciary duty. This may not always be clear-cut.

Consider the following example. Politicians are lobbied by a major corporation seeking to have its taxes lowered through legislation pending before the state assembly. A politician who supports this legislation approaches the lobbyist and explains that his son, who is attending Harvard University and is at the top of his class, needs a summer job. The politician says he is wondering whether the lobbyist’s corporate client might hire the student. If the state legislator enters into the transaction with the intent to only vote for the legislation if his son is given a summer job, he may have committed a crime. On the other hand, in extending a job offer to the student, the corporation and lobbyist would presumably not violate the law, unless the lobbyist and his client also know of the state legislator’s secret intent to violate his fiduciary duty. Similarly, with respect to private honest-services fraud, if an employee approaches a supplier and asks for a kickback, the payment of that kickback by the supplier to the employee could constitute aiding and abetting or conspiracy only if the supplier knows that the receipt of the payment by the employee is unauthorized by the employee’s principal.

Other Questions

There are additional unanswered questions that the courts will soon have to confront. For example, it is at best unclear whether a specific quid pro quo is required to violate Section 1346. In United States v. Kemp, ¹⁶500 F.3d 257 (3d Cir. 2007). the Third Circuit held that no specific quid pro quo is required, and that a “stream of benefits” for unspecified future official acts can suffice. In Kemp, the defense presented a substantial argument that pre-McNally caselaw provided that a quid pro quo required a specific bargained-for exchange. After Skilling, it is unclear whether Kemp and the “stream of benefits” cases are good law, though the majority cited Kemp with approval in Skilling.

Yet another example is the requisite mens rea for bribery or kickbacks. In some honest-services fraud cases, courts have instructed juries that mens rea for bribery is satisfied if a defendant provided (or received) consideration with intent in any measure to influence (or in return for) official acts, ¹⁷The history of this “single purpose” test for the requisite bribery mens rea derives from the Third Circuit’s opinion in United States v. Greber, 760 F.2d 68 (3d Cir. 1985). and the jury can convict if all the other elements of the offense are otherwise proven.

In United States v. Greber, ¹⁸

Id.

the Third Circuit held that such a “single purpose” test was appropriate since a “mixed intent” was consistent with the Congress’s remedial intent in passing 1977 amendments to the federal anti-kickback statute in 42 U.S.C. § 1395nn(b)(2). The “single purpose” test next found a new home in the post-McNally decision in United States v. Biaggi, ¹⁹909 F.2d 662 (2d Cir. 1990). a federal bribery case, in which the Second Circuit approved the instruction while expressing reservations about the need for cautioning juries that a de minimis intent to influence official acts would not suffice. Thereafter, Biaggi was applied in United States v. Coyne
²⁰

4 F.3d 100 (2d Cir. 1993).

to a Section 666(b) case. Since then, other courts have engrafted the “single purpose” test into Section 1346 prosecutions. Given the genesis of the “single purpose” test in Greber in the context of interpreting amendments to the anti-kickback statute, it is at least unclear that the “single purpose” instruction should apply in Section 1346 bribery prosecutions.

These are only some of the unanswered legal issues presented by the majority’s opinion in Skilling. ²¹

See, e.g., footnote 8, supra.

The lower federal courts will have to try to fill in the gaps left by the ruling and, in some instances, also to try to harmonize different provisions and conflicting caselaw related to the cited statutes and pre-McNally decisions in order to draw “content” from them.

Conclusion

All these unanswered questions, and others, are elaborations of the debate joined in Skilling by the majority and the concurring (but dissent-like) opinion of Scalia and two other justices. In not only “blue penciling” Section 1346 to reach bribery and kickbacks, but also countenancing courts’ prospective elaboration of what these offenses constitute, it seems undeniable that, in the words of Scalia, this is not “interpretation” but “invention” of criminal law. Given the scope of the issues to be answered in defining what “bribery” and “kickbacks” constitute, it is difficult to credit the Supreme Court’s intonation in Skilling that the ruling “establish[es] a uniform national standard” in defining federal honest services fraud.

This problem did not originate with the Supreme Court. In Section 1346, Congress could have, but did not, directly confront the federalism issues that would have been presented by passing a statute like Section 201(b) (bribery of a federal official) for state and local officials. Instead, those issues were sidestepped and the hazy Section 1346 was enacted after McNally, which was employed by the government as a broad anti-corruption statute to criminalize state, local, and private-party breaches of duty. While limiting the honest-services fraud statute’s reach in Skilling, the majority ratified this congressional lack of fortitude.

In the future, we can expect the lower federal courts to continue to struggle with the definitions of bribery and kickbacks as well as the source and scope of applicable fiduciary duties. It seems likely that DOJ will issue guidance to federal prosecutors on when to bring Section 1346 cases. DOJ is also surely considering legislation to restore its reach under Section 1346 to conduct no longer prosecutable after Skilling, and perhaps as a means to resolve the issues left open by the majority’s opinion. We can only hope that it will not take another 22 years to figure out precisely what conduct is criminalized by Section 1346. Seemingly lost in the debate over the proper jurisprudence is the fact that defendants are being convicted and imprisoned during the course of the “invention” of this law, which is hardly either just or even right.