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O’Melveny & Myers LLP Secures Victory in Skilling v. United States: Supreme Court Cabins Scope of “Honest Services” Statute

January 1, 0001

 

Yesterday, in a 9-0 ruling in Skilling v. U.S., No. 08-1394, the Supreme Court limited the “honest services” theory of mail- and wire-fraud prosecutions to cases of corporate employees and public officials participating in “bribery and kickback schemes.” This landmark ruling places critical constraints on prosecutions under the statute—some of which went so far as to charge conduct as commonplace as business decisions that proved unwise in retrospect. Congress is being called on to expand the scope of the statute in light of the Court’s ruling, and executives should follow any such developments closely, given the way the statute was used to criminalize everyday business decisions.

For five years, O’Melveny litigated this issue on behalf of Jeffrey Skilling, Enron’s former CEO. Skilling was indicted in 2004 under an honest-services theory—not for accepting bribes or kickbacks, but as prosecutors put it for doing his job inappropriately, taking business risks, and breaching his fiduciary duties. O’Melveny moved to dismiss, arguing the statute, 18 U.S.C. § 1346, which does not define “honest services,” was unconstitutionally vague; or, if the statute was to be saved from a vagueness challenge, its scope must be limited to cases of bribes or kickbacks. The lower courts rejected these arguments, but the Supreme Court unanimously held that the honest-services charges against Skilling were “flawed”—six Justices reasoning the statute is limited to cases of bribes and kickbacks, and three concluding the statute is unconstitutionally vague.

Before Congress enacted § 1346 in 1988, most lower courts had come to recognize an “honest services” theory of mail- and wire-fraud in bribery and kickback cases, but that theory found no grounding in the text of the statutes, and the cases recognizing the theory were in a state of disarray. In 1987, in McNally v. U.S., 483 U.S. 350, the Supreme Court rejected the “honest services” theory, but invited Congress to “speak more clearly” and amend the statute if it wanted to endorse it. Congress soon enacted § 1346, but did so with little or no debate and no care to define what “honest services” meant.

Over the next 22 years, courts predictably struggled with how to apply the statute, and a series of circuit splits developed, with courts offering competing interpretations. In early 2009, the Supreme Court showed its first inklings of hearing an honest-services case. O’Melveny lawyers, acting as amicus counsel, helped convince Justice Scalia to write a sharp dissent from a denial of certiorari in a public-corruption honest-services case, in which he signaled that § 1346 was being overextended and might be unconstitutional.

In the months that followed, the Court granted cert in two honest-services cases—both raising circuit splits over how to read the statute, but not the constitutional question. In a cert petition in the Skilling case, and an amicus brief in another, O’Melveny argued Skilling’s case must be heard—because it squarely presented the constitutional question and the alternative rule he posited was the most appropriate. The Court granted cert in Skilling’s case, used it as the vehicle to clarify the scope of the statute, and unanimously ruled, it is “clear that … Skilling did not commit honest-services fraud.”