June 24, 2010

Skilling v. United States: what’s “honest services fraud”?

By Skilling v. United States: what’s “honest services fraud”?

Author: Timothy Sandefur

Today, the Supreme Court decided the case of Jeffrey Skilling, the CEO of Enron, who had been convicted of the crime of “honest services fraud.” The statute, however, is so vague, that nobody knows what the term “honest services fraud” actually means. Pacific Legal Foundation (joined by our friends at the Cato Institute) filed a brief in the case arguing that statutes that are so vague violate the constitutional guarantee of due process of law—and that the constitutional protection against vague laws should apply in the business realm the same as anywhere else. Vague laws are dangerous because you cannot know what they prohibit and cannot therefore avoid breaking the law. It is unfair and unconstitutional to hold vague statutes over their head in such a way.

Unfortunately, the Court has in the past been reluctant to apply it outside the regular criminal context, on the theory that businesses are wealthier and can afford expert legal advice. But in a case like this, even the experts have no idea what the statute actually means. The federal circuit courts are in disarray as to what it means. And nobody should be convicted under a statute that is so broadly and vaguely worded, that even the prosecuting lawyer can’t tell you what that law actually means. What’s more, certain common law theories, such as “public nuisance” are so vague that no lawyer can tell you what they actually mean. Yet businesses are frequently sued for committing “public nuisances,” even for perfectly legal activities.

Today’s opinion confined the “honest services fraud” statute by interpreting it to apply only to bribery or kickback schemes. By narrowing the law in this way, the justices hold that it is not too vague to satisfy the Constitutional requirement. They observed that the “honest services fraud” statute was enacted as part of a long historical process: first, the courts had developed the notion of “honest services fraud” in a series of decisions, which the Supreme Court later overruled in a case called McNally; it was in response to that overruling that the Congress enacted the statute reinstating the existence of the crime of “honest services fraud.” So in today’s decision, the Court went back to the original cases that developed the idea:

While the honest-services cases preceding McNally dominantly and consistently applied the fraud statute to bribery and kickback schemes—schemes that were the basis of most honest-services prosecutions—there was considerable disarray over the statute’s application to conduct outside that core category…. It has long been our practice…before striking a federal statute as impermissibly vague, to consider whether the prescription is amenable to a limiting construction…. In view of this history, there is no doubt that Congress intended [the statute] to reach at least bribes and kickbacks. Reading the statute to proscribe a wider range of offensive conduct, we acknowledge, would raise the due process concerns underlying the vagueness doctrine. To preserve the statute without transgressing constitutional limitations, we now hold that [the statute] criminalizes only the bribe-and-kickback core of the pre-McNally case law.

On this point, Justices Scalia, Thomas, and Kennedy disagreed. In their view, this was not interpretation so much as “defin[ing] new federal crimes.” Worse, the cases that pre-dated McNally were themselves too vague—which is, of course, why McNally was decided the way it was:

That case repudiated the many Court of Appeals holdings that had expanded the meaning of “fraud” in the mail-fraud and wire-fraud statutes beyond deceptive schemes to obtain property. If the repudiated cases stood for a prohibition of “bribery and kickbacks,” one would have expected those words to appear in the opinion’s description of the cases. In fact, they do not. Not at all.

Thus today’s decision was

a step out of the frying pan into the fire. The pre-McNally cases provide no clear indication of what constitutes a denial of the right of honest services. The possibilities range from any action that is contrary to public policy or otherwise immoral, to only the disloyalty of a public official or employee to his principal, to only the secret use of a perpetrator’s position of trust in order to harm whomever he is beholden to.

In short, the Court today made a perhaps noble effort to sharpen the wording of the “honest services fraud” law, to make it less vague. But Justices Scalia, Thomas, and Kennedy hold that the term is just too slippery to be defined by the courts. It’s up to Congress to narrow a statute in this way, and today’s decision, in their view, keeps this dangerously vague law on the books, like a trap ready to snap on people who cannot understand what it does and does not prohibit.

We’ll have more analysis later today.

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