Since the early 1900’s, the federal mail and wire fraud statutes have been applied to schemes to defraud victims not just of money or property, but also of “intangible rights” such as the right to the “honest services” of an employee or public servant. 18 U.S.C. §§ 1341, 1343, 1346. This expansive theory of honest services fraud has been applied to public officials and private businessmen, although only rarely to physicians or others in the health care system. In 2010, the Supreme Court used the case of former Enron CEO Jeffrey Skilling to impose significant limits on the reach of the honest services fraud theory. Skilling v. United States, 561 U.S. 258 (2010).Skilling itself had nothing to do with health care, arising instead from a prosecution for conspiracy, securities fraud, wire fraud, false representations to auditors, and insider trading in connection with Enron’s massive financial meltdown. Yet in rejecting Skilling’s vagueness challenge to the honest services wire fraud theory underlying his conspiracy conviction, the Court read the statute to limit honest services prosecutions to cases involving bribery and kickbacks – activities with particular salience in the health care context. In a 2012 article, I predicted that while Skilling generally was viewed as narrowing the scope of honest services fraud, the decision might have the paradoxical effect of inviting additional prosecutions in the health care industry.
While intangible rights cases date back to the early 1900’s, modern prosecutions were derailed in 1987 when the Supreme Court ruled that the mail and wire fraud statutes applied only to the deprivation of property rights. McNally v. United States, 483 U.S. 350 (1987). In response, Congress quickly enacted 18 U.S.C. § 1346 to clarify that the statutes did indeed prohibit “a scheme or artifice to deprive another of the intangible right of honest services.” The amendment did not include a definition of honest services, nor offer any other indication as to when the prohibition might apply. In his appeal, Skilling asserted that the provision was unconstitutionally vague because it failed to adequately define the prohibited behavior and granted nearly unfettered prosecutorial and judicial discretion. The Court, however, declined to overturn the statute, finding clear Congressional intent to return to the state of the law prior to McNally: a “solid core . . . involv[ing] offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.” (Skilling at 407)
Given the prominence of kickback concerns in health care, I warned that the Court’s focus on kickbacks and bribery might well have the effect of reinvigorating the prosecution of health care intangible rights violations. And indeed on October 20, 2014, the Seventh Circuit decided one of the first major post-Skilling honest services fraud cases involving health care providers, United States v. Nayak. Continue reading