Honest Services Fraud: Construing The Contours of Section 1346 In The Corporate Realm

Michelle V. Barone

The honest services fraud statute, 18 U.S.C. § 1346, makes it a crime to engage in a scheme to “deprive another of the intangible right to honest services.” Congress enacted the statute in an effort to fight fraudulent activity, but it has received disparate treatment among the courts since its inception in 1988. For instance, it is not clear how the statute should be applied in a private context as opposed to a case involving a publically elected official. Moreover, section 1346 has been criticized of being “void for vagueness,” because it does not clearly define what behavior is prohibited.

In 2010, after several years of inconsistent application of section 1346 by lower courts, the United States Supreme Court attempted to more-clearly define the outer limits of the statute’s reach in Skilling v. United States. The decision simply limited the use of section 1346 to cases involving bribes and kickbacks.

Despite the Court’s attempt to provide guidance on the reach of section 1346, Skilling left many questions unanswered. For instance, the Court failed to define precisely what behavior constitutes a “bribe” or a “kickback.” Additionally, though the Court explained that honest services fraud cases almost always involve breaches of fiduciary duties, it neglected to indicate the source of these duties. Finally, the Court failed to illustrate how the statute should properly be enforced in the private sector—for example, in a case involving claims against corporate officers and directors—where relationships are undeniably vastly different than those in the public sector, between elected officials and the public.

The honest services fraud statute has potentially unanticipated implications for corporate relationships, particularly corporate relationships in Delaware. This Note analyzes the potential reach of the statute in a corporate context and illustrates the need to bifurcate the statute in a way that differentiates between public and private honest services fraud violations.

Presently, the contours of section 1346 are poorly defined and subject to broad interpretation. The circuit courts have come to differing conclusions on the source of the duty that invokes an honest services fraud violation. Additionally, the courts are unable to agree on a uniform definition of either bribes or kickbacks. Congress should be charged with addressing these gaps in the current legislation as well as enacting separate legislation to address purely private honest services fraud violations.