Sunday, December 05, 2010

Case o' The Week: Ninth Dodges Duty, Milovanovic and Honest Services Fraud

What do a Stradivarius, a Colt .45, a Louisville Slugger, and a Cuisinart have in common? They all describe a prosecutor's "true love" - the federal Mail Fraud statute, 18 USC Section 1341. See United States v. Milovanovic, 2010 WL 4910224, *3 & n.22 (9th Cir. Dec. 3, 2010) (decision available here).

That "true love" just deepened last week, as the Ninth broadened the already wide scope of "honest services" mail fraud by dodging a requirement of fiduciary duty. Id.

Decision by Judge Kleinfeld, erudite dissent by Judge Fernandez.

Facts: According to an indictment, Milovanovic and his co-defendants had a scheme to get out-of-state Bosnians Washington State commercial driver’s licenses, through faked tests and falsified residency requirements. Id. at *1. None of the defendants were state employees, and their contracts said they weren’t “agents.” Id. They were independent contractors, and there “was no paperwork saying that any fiduciary duty pertained.” Id. They were charged with mail fraud under an “honest services” theory, and the district court dismissed the indictment “on the ground that the mail fraud statute required a fiduciary relationship.” Id.

Issue(s): “The briefs focus on an unsettled question in the Ninth Circuit: whether ‘honest services’ fraud under the mail fraud statute can be committed only by a ‘fiduciary.’ . . . . Defendants argue that . . a fiduciary relationship is a sine qua non of ‘honest services’ mail fraud.” Id. (footnote omitted).

Held: “Honest services mail fraud does not require proof of a fiduciary relationship. Nor does it require damages to the money or property of the victim.” Id. at *5.

Of Note: “[W]e are called upon to alembicate” Judge Fernandez’s dissent. Id. at *5 (Fernandez, J., dissenting) (to distill or refine to an essence). In a nutshell Judge Fernandez is no fan of Milovanovic’s “facinorous” behavior (extremely wicked). Id. at *7. Despite that hesitation, Judge Fernandez would uphold the district court’s dismissal of the indictment. Surveying the vast majority of cases involving honest services fraud, Judge Fernandez observes “a pattern requiring a fiduciary duty before an honest services mail fraud case can go forward.” Id. at *6. Moreover, he worries that absent this limitation “relatively innocuous conduct [could be] subject to criminal sanctions.” Id. at *5 (quotation and citation omitted).

Notably, Judge Fernandez’s dissents have a way of becoming Supreme Court opinions. See, e.g., Printz v. United States, 521 U.S. 898, 928 (1997). Indeed, Printz is an interesting example – there Judge Fernandez emphasized a respect for state rights and a distrust for federal overreaching that was ultimately embraced by the high Court. Like Printz, Milovanovic expands federal authority – in this case, by allowing AUSA to prosecute mere fraudulent misbehavior (with no fiduciary relationship). Let’s hope Milovanovic has the same fate as Printz, and earns Judge Fernandez another Supreme Court shout-out.

How to Use: As Judge Kleinfeld concedes, “The Supreme Court has not spoken on whether a fiduciary duty is a sine qua non of ‘honest services’ mail fraud. Our sister circuits have given varying and conflicting answers, so no decision we make can avoid a circuit split.” Id. at *2. Unsettled law, an important federal question, and a circuit chasm: this issue seems likely to be heading to the Supreme Court. Given that uncertainty, preserve this issue in mail fraud cases alleging “honest services” despite Milovanovic: this decision is unlikely to be last word on the requirement for a fiduciary relationship.

For Further Reading: What about Skilling, Black, and Weyhrauch - that recent trilogy of Supreme Court honest services cases that were supposed to be the last word on Section 1346 (honest services) prosecutions? See article here, summarizing decisions. Judge Kleinfeld barely references the cases, but does give a nod to Justice Scalia’s mocking of the “indeterminacy” of the term “fiduciary duty” in his Skilling concurence. See Skilling v. United States, 130 S. Ct. 2896, 2937-38 (2010) (Scalia, J., concurring). Justice Scalia scoffs at the "je ne sais quoi" that has been often required beyond a mere breach of fiduciary duty, id. at 2937, and the “grandiloquence” of “lofty” definitions of fiduciary duties for honest services fraud. Id. In short, when cert. is granted on Milovanovic at least one sharp-tongued Justice may be a tough sell on the requirement for a fiduciary duty to establish honest services fraud.

Image of violin from . Image of Colt 45 from Image of baseball bat from . Image of a Cusinart from

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at

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