Case o' The Week: Ninth Fine with Fuzzy Fiduciaries -- Milovanovic and Honest Services Fraud
We in the defense bar are never happy. In a case of first impression, an en banc Court of the Ninth Circuit has added elements to the "honest services" theory of the commonly-used mail fraud statute.
The problem? Because these new elements are so broadly defined, the decision will effectively permit the continued expansion of federal criminal juridiction into what are really state-law crimes. United States v. Milovanovic, (9th Cir. Apr. 24, 2012) (en banc), decision available here.
Players: Decision by Judge Tallman, interesting concurrence by Judge Clifton.
Facts: The State of Washington has tests for non-residents to be licensed to operate trucks. Id. at *2. The defendants allegedly took bribes to help truckers pass the exam. Id. None of the defendants were government employees: one was an independent contractor. Id.
The district court dismissed the mail fraud indictment, holding that there was no “honest services” fraud because no defendant had an agency or employment relationship with the state. Id. at *3. The district court also held that “identifiable economic harm” was required as an element of mail fraud. Id. at *3.
A three-judge panel of the Ninth Circuit held that fiduciary duty is not a requirement of honest services fraud. Id. The case went en banc.
Issue(s): 1. Independent Contractors Fiduciaries? “We now consider whether the Supreme Court [in Skilling] intended to require a breach of fiduciary duty as an element of honest services fraud under 18 U.S.C. §§ 1341 and 1346, and, if so, whether the breach of a trust relationship, not arising to a formal fiduciary duty, will suffice . . . In light of the Supreme Court's decision in Skilling, the parties agree that a breach of fiduciary duty is a required element of honest services fraud under §§ 1341 and 1346. Where they disagree, however, is whether the Supreme Court intended to require a formal, or classic, fiduciary duty or whether the statute also reaches those who assume a comparable duty of loyalty, trust, or confidence. Defendants argue that because [one defendant] was an independent contractor and Milovanovic did not contract with the State directly, there was no recognized fiduciary relationship between them and the State of Washington.” Id. at *5.
2. Risk of Economic Harm Required? “We address . . . whether, as the district court rules, economic harm is required to establish a cognizable [Mail Fraud] offense.” Id. at *1.
Held: 1. Independent Contractors Fiduciaries? “We hold that a fiduciary relationship is an element of honest services fraud under 18 U.S.C. §§ 1341 and 1346, but that the fiduciary relationship need not be a formal, or classic, fiduciary relationship. Rather, §§ 1341 and 1346 similarly reach those who assume a comparable duty of loyalty, trust, and confidence, the material breach of which, with the intent to defraud, deprives the victim of the intangible right to honest services.” Id. at *11.
2. Risk of Economic Harm Required? “We further hold that foreseeable risk of economic harm is not a necessary element when evaluating whether a party breached a fiduciary duty in violation of the honest services fraud statutes, §§ 1341 and 1346. We adopt, instead, the materiality test and hold that the Mail Fraud Statute requires fraudulent intent and a showing of materiality.” Id.
Of Note: The Mail Fraud Statute, 18 USC § 1341, is a hoary old law first enacted in 1872. Despite its age, it has undergone considerable litigation and revision in the last twenty years – beginning with the Supreme Court’s 1987 decision in McNally. Judge Tallman begins his analysis in Milovanovic with a helpful explanation of the history of the Mail Fraud statute: it is a good starting point to understand this commonly-charged offense. Id. at *4-*5.
How to Use: The good news is that the en banc Court has held that the “honest services” theory of Mail Fraud requires, as an element, “a breach of a fiduciary duty.” Id. at *6. The bad news is that the definition of “fiduciary” is “broad” and includes “informal fiduciaries.” Id.
Whether the defendant charged with Mail Fraud was in fact a “fiduciary” is a jury question. Id. There’s much mischief to be made with this vague term -- make a point of challenging new jury instructions defining “fiduciary.” See id. at *11-*12 (Clifton, J., concurring) (noting ambiguity in the definition of the word, “fiduciary.”)
For Further Reading: Allow us to “alembicate what has gone before.” See three-judge panel Milovanovic decision here. You’ll recall that Judge Fernandez wrote a compelling dissent to the three-judge opinion in Milovanovic. See blog here.
As we noted in the original Milovanovic blog, Judge Ferndandez’s dissents have an interesting habit of evolving into Supreme Court decisions. See, e.g., Printz v. United States, 521 U.S. 898, 928 (1997).
With luck, the Ninth’s en banc decision in Milovanovic may not be the last word on this important new development in mail fraud law.
Image, "What is a Fiduciary?" from http://www.pfac-pro.org/ohana/website/index.cfm?p=118001
Steven Kalar, Senior Litigator ND Cal FPD. Website at www.ndcalfpd.org