U.S. Supreme Court Soon to Rule on Honest Services Law

In its current session, the United States Supreme Court has heard three cases in anticipation of ruling on the controversial honest services law. The constitutionality of the statute is at issue, and the ruling could have a substantial impact on criminal cases where public officials and business executives are charged with fraud. It may also have sweeping implications on those currently serving prison sentences.

What is Honest Services Fraud

Chapter 18, section 1346 of the U.S. Code states in pertinent part, “the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” Essentially, the statute makes it a crime to use mail, wire services or other electronic means to commit acts that deprive another of honest services.

Congress passed the law in 1988 in response to the Supreme Court’s decision in U.S. v. McNally, a case where the Court struck down the mail fraud convictions of two Kentucky politicians involved in a workers’ compensation kickback scheme. It rejected the honest services theory and determined that the federal mail fraud statute only applied to schemes and artifices that deprived victims of money or property, and not to those ostensibly depriving citizens of their right to good governance.

Since then, the honest services law has been a favorite tool for federal prosecutors in pursuing public corruption cases. It has been instrumental in a number of high profile public scandals, including the prosecution of Washington lobbyist Jack Abramoff, former congressman William Jefferson, former governors Don Siegelman and Rod Blagojevich, and Enron executives. Since the statute is short and vague, an honest services fraud case may be easier to prove than bribery. It may also apply to a much wider range of conduct (some of which may only offend ethical or fiduciary rules) and may carry greater penalties for those convicted.

Differing Interpretations

In a vexing irony, reaching a consistent definition of honest services fraud, and what tests are applicable in proving such fraud, has caused considerable disagreement with federal circuit courts. In U.S. v. Black, the Seventh Circuit upheld newspaper mogul Conrad Black’s conviction under the “personal gain” test, reasoning that where an executive seeks personal gain, the harm to an employer is irrelevant. Before the Supreme Court, Black claims that his conviction is inappropriate since he did not intend to defraud his employer.

In U.S. v. Skilling, the Fifth Circuit denied Enron executive Jeffrey Skilling’s request to set aside his conviction under the “materiality” test. The court held that honest services fraud occurs when an executive’s misrepresentations have the tendency to influence, or is capable of influencing, an employer to change his or her behavior. Skilling now claims that the Fifth Circuit erred because it should have applied the personal gain test, since he did not engage in self-dealing and did not personally profit in misrepresenting Enron’s financial status.

In Weyhrauch v. United States, the former member of Alaska’s House of Representatives was convicted of honest services fraud based upon his failure to disclose his conflict of interest as part of the Ted Stevens corruption trial. He argues that Alaska law provides no affirmative duty to disclose conflicts of interest.

Another test, the “reasonably foreseeable harm” test, has been used in cases before the Fourth Circuit. While no case applying this test is before the Supreme Court, it is indicative of the confusion among appeals courts.

Legal scholars also question the bounds of the honest services law. For instance, would it criminalize a supervisor’s order to write an unlawful contract? Would sending a personal email from a work computer deprive the employer of its right to honest services? Further, would employees be criminally liable for calling in sick when not actually under the weather? The danger is that each scenario, while arguably dishonest, is not illegal. But one could still be subject to criminal sanctions under the honest services law.

The Court’s Likely Ruling

The Supreme Court may uphold the honest services law and clarify the tests or limit the law’s application. It may also strike the law down in its entirety. In either scenario, the Court will likely answer the question of whether the law is unconstitutionally vague. In doing so, it will have to further define what it actually means to “deprive another of the intangible right of honest services.” It is also conceivable that that the Court would create some type of instruction on the economic harm required in such cases.