The Supreme Court recently pared down the "honest-services" fraud statute, 18 U.S.C. § 1346, to its core applications in a decision that significantly limited the statute's reach but allowed it to survive constitutional challenge. In Skilling v. United States, No. 08-1394, 561 U.S. __ (June 24, 2010), Jeffrey Skilling, the former Enron CEO convicted in 2006 on numerous charges, had challenged his convictions on a number of grounds, including the argument that the honest-services fraud statute was unconstitutionally vague. The Court narrowly construed the statute to proscribe only bribery and kickback schemes, and thus avoided invalidating the statute on constitutional grounds. Two other opinions issued on the same day as Skilling also resulted in vacatur of convictions under the honest-services statute. Black v. United States, No. 08-876, 561 U.S. __ (June 24, 2010); Weyhrauch v. United States, No. 08-1196, 561 U.S. __ (June 24, 2010) (per curiam).

The "honest-services" fraud statute, which dictates that "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services," has been a favorite of prosecutors since its enactment in 1988. Prosecutors have regularly indicted and convicted politicians or executives under the statute where the defendants placed their personal interests above those of taxpayers or shareholders. The Court's Skilling holding calls these types of convictions into question and provides opportunities for appellate and habeas challenges; but the case also provides prosecutors with reassurance that they have a strong and dependable tool to combat bribery and kickback schemes.

Skilling Case Background

Jeffrey Skilling was Enron's Chief Executive Officer from February until August of 2001. He resigned four months before Enron filed for bankruptcy. Following Enron's collapse, the federal government established a Task Force to investigate the financial crimes behind the former energy giant's rapid descent into bankruptcy. The government's investigation generated multiple criminal indictments against Enron employees for conspiring to inflate Enron's financial condition for personal gain. The investigation culminated in 2006 with the indictments of former CEOs Kenneth Lay and Skilling and the company's chief accountant, Richard Causey, who pleaded guilty just before Lay's and Skilling's trial. Among the counts against Lay and Skilling were counts of conspiracy to commit honest-services wire fraud under 18 U.S.C. § 1346.

After a four-month trial in U.S. District Court in Houston, Texas, the jury found Skilling guilty of nineteen criminal counts, including one count of conspiracy to commit honest-services wire fraud, money-or-property wire fraud, and securities fraud; twelve substantive counts of securities fraud; five counts of making false representations to auditors; and one count of insider trading.1

Sentenced to serve twenty-four years in prison and ordered to pay $42 million in restitution, Skilling appealed his conviction, arguing, among other things, that the District Court had wrongly denied him a change in trial venue (away from Houston) due to the extensive and highly negative pre-trial media coverage of Enron's collapse, and that the honest-services fraud statute was unconstitutionally vague.

The Fifth Circuit affirmed Skilling's conviction. Skilling subsequently sought, and the Supreme Court granted, certiorari on two questions: whether the pretrial publicity and "community prejudice" in Houston deprived Skilling of a fair trial, and whether the honest-services statute was unconstitutionally vague. The Court affirmed the Fifth Circuit's holding that the pretrial publicity attending Enron's collapse and Skilling's prosecution had not deprived Skilling of a fair trial.2 But Skilling's vagueness challenge to the honest-services fraud statute was more successful. Writing for the Court, Justice Ginsburg held that "the intangible right of honest services" reaches only bribery and kickback schemes – a construction the Court held saved § 1346 from unconstitutional vagueness. The Court accordingly vacated Skilling's conviction and remanded for further proceedings.

The Court's Decision: Section 1346 is Limited to Bribes and Kickbacks. Undisclosed Self-Dealing is No Longer a Viable Prosecution Theory

The Court began by examining the history of the honest-services wire fraud statute. The original mail fraud provision, enacted in 1872, prohibited the use of the mails to advance "any scheme or artifice to defraud." In 1909, the statute was broadened to include "obtaining money or property by means of false or fraudulent pretenses, representations, or promises." In the years following these enactments, and certainly by 1982, all of the federal courts of appeals had embraced the "honest services" theory of fraud, recognizing an actionable harm in the denial of an individual's intangible right to the offender's "honest services," in addition to harms caused by the deprivation of money or property.

In 1987, however, the Court limited liability under the mail fraud statute to fraud causing property or money losses, invalidating what courts had declared to be to an implicit right to honest services located in the statute.3 The Court noted that the statute did not expressly authorize an actionable claim for deprivation of "honest services," and that "if Congress desires to go further, it must speak more clearly."4 In direct response to the Court's holding in McNally, Congress passed legislation incorporating an "intangible right of honest services" into the mail-fraud statute. It was this "intangible right" that came under the Court's scrutiny in Skilling.

Skilling argued that the statute was unconstitutionally vague because "honest services" was not sufficiently defined to provide fair notice to putative offenders or to cabin prosecutorial discretion. The Court responded to Skilling's argument by invoking the doctrine of constitutional avoidance, asking whether the statute could be saved from a void-for-vagueness determination through a "fairly possible" limiting construction. Looking first to the text, the Court noted that Congress codified "the intangible right of honest services." It interpreted the use of the definite article, in concert with the timing of the legislation, as demonstrating Congress's intent to codify the right established under the pre-McNally doctrine of the Courts of Appeals, and not an abstract right without definition. The Court characterized the "vast majority" of this pre-McNally doctrine as including bribery and kickbacks.

The Court held that, as limited to bribery and kickbacks, § 1346 is not unconstitutionally vague because it provides fair notice to prospective offenders through operation of the mens rea requirement and also cabins prosecutorial discretion through the relevant definitions in pre-McNally cases and other, similar federal statutes, such as the federal bribery statute, 18 U.S.C. § 201(b); the federal-funding related bribery statute, 18 U.S.C. § 666(a)(2); and the definition of "kickback" related to public contracts, 41 U.S.C. § 52(2). Consistent with the principle of lenity, the Court construed ambiguous references to conflict-of-interest in pre-McNally cases in favor of prospective defendants, refusing to include conflict-of-interest or self-dealing in the definition of honest services fraud as the Government had sought.

The Court noted that its analysis of § 1346 established a uniform and clear national standard for honest services that reaches only seriously culpable conduct and accomplishes Congress's goal of "overruling" McNally. With regard to other activity that could be perceived to be within the ambit of honest services, the Court reiterated the McNally Court's refrain that, "if Congress wants to go further, it must speak more clearly than it has." 483 U.S. at 360.

Although the Court provided a definitive answer on the scope of honest services fraud, it declined to decide if Skilling's conviction should be overturned. Three objects of conspiracy were alleged at Skilling's trial; but the jury had issued only a general verdict. Because there was no allegation that Skilling solicited or accepted side payments from a third party for making the alleged misrepresentations about Enron's financial health, his conviction would be invalid if it rested only on an honest services theory. Thus, the Court vacated the conviction and remanded for further proceedings to determine if the conspiracy conviction rested on an interpretation of honest services that did not survive its decision.

Justice Scalia's Concurrence

Concurring in the judgment, Justice Scalia (joined by Justice Thomas and in part by Justice Kennedy) offered the view that § 1346 is impermissibly vague and violative of the Due Process Clause of the Fifth Amendment.5 He challenged the majority's assertion that pre-McNally cases provided clear guidance of a basis for criminal sanctions. Attacking the majority's interpretation of the doctrine of constitutional avoidance, Justice Scalia asserted that the Court was not providing a "fairly possible" limiting construction, but was actually rewriting the statute as a legislature would. He criticized the majority for what he characterized as impermissibly creating a new federal common-law crime.6 Scalia would have reversed Skilling's conviction outright, on the alternative basis that § 1346 provides no ascertainable standard for conduct.

Skilling's Effect on Other Pending Cases

The Court's decision in Skilling controlled its disposition of two other opinions released that same day, Weyhrauch v. United States, 561 U.S.___ (2010)7 and Black v. United States, 561 U.S. ___ (2010).8 The Court's unsigned, per curiam decision in Weyhrauch vacated the Ninth Circuit's judgment in light of Skilling. (The Ninth Circuit had held that § 1346 provided a nationwide standard for honest services fraud that did not require the imposition of an affirmative state-law duty to sustain a conviction.) In Black, the Court vacated the Seventh Circuit's decision and remanded for future proceedings, holding that the honest-services jury instruction given in that case was incorrect after Skilling. The Court left it to the Court of Appeals to consider whether the error was harmless when honest services was defined as including "misuse [of the defendant's] position for private gain for himself and/or a co-schemer [when the defendant] knowingly and intentionally breache[d] his duty of loyalty."9

Two other high-profile defendants also had their convictions called into question in the days following Skilling's publication. Former Alabama Governor Don Siegelman and HealthSouth CEO Richard Scrushy both had been convicted of honest-services fraud based on Siegelman's appointment of Scrushy to the state healthcare board in return for a contribution to his education lottery campaign. The Supreme Court vacated the Siegelman and Scrushy judgments and remanded to the Eleventh Circuit for reconsideration in light of Skilling.10

The Future of § 1346

Future prosecutions. Looking forward, prosecutors stand on firmer ground in fraud cases involving bribes and kickbacks. The Court may have limited the scope of § 1346, but with the threat of a vagueness challenge removed, prosecutors will likely be more aggressive in charging conduct that fits within the bribery and kickback sphere. Consequently, the Supreme Court's decision may actually lead to more prosecutions under the honest-services fraud statute.

But although it is now clear that honest-services fraud applies to bribery and kickback schemes, it is not readily apparent to whom or when the statute applies. The majority indicates that § 1346 is applicable to state and local officials, private employees, and federal officials alike.11 But Justice Scalia (joined by Justices Thomas and Kennedy) in dissent points out that the nature and content of the honest-services fiduciary duty is not defined. For instance, would the duty of "honest services" attach to a lower-level employee like a manager at a large multinational corporation? The majority effectively pretermits these concerns by stating that a fiduciary relationship was "usually beyond dispute" in bribery and kickback cases.

Since the Skilling majority implicitly held that honest-services fraud is applicable to the private sector, prosecutors undoubtedly will continue to bring such charges against corporate employees. One area particularly vulnerable to honest-services fraud prosecution is government contracting. Government scrutiny of public contracts and access to contracting records increases the likelihood that prosecutors will uncover a corporation's use of kickbacks and bribes to secure government contracts.12 Under the Court's new interpretation, prosecutions will likely continue to target such contracting behavior – but the extent of the fiduciary duty required and the level of conduct required to breach that duty remain unclear.

Legislative Efforts. More generally, because the Court expressly invited Congress to reconsider its work in the honest-services area, public and private corporate officers and their counsel should keep abreast of future legislation that may reshape the contours of the intangible right to honest services. This legislation could take many forms, either by incorporating additional conflicts of interest or self-dealing activity within the ambit of honest services or by giving further content to what constitutes bribery or a kickback scheme. With some Senators and Representatives already critical of the decision,13 Congress may well expand the honest-services doctrine to include undisclosed self-dealing. In the meantime, defendants currently convicted of honest-services fraud will seek judicial relief, arguing that their convictions were not based on cognizable acts of bribery or kickbacks.