The Ninth Circuit Court of Appeals, sitting en banc, recently decided a fraud case holding that a person may commit federal fraud and face imprisonment for breaching a broadly-defined fiduciary duty to a contractual business partner. This holding arises under the “honest services” fraud statute, presuming the breaching party also has a specific intent to defraud. See United States v. Milovanovic, 2012 WL 1398647 (9th Cir., April 24, 2012). The Court explained that the honest services fraud statute is not limited to formal “fiduciary” relationships that are well-known in law, but also extends to any “trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance which it would ordinarily exercise.” Is this definition clear enough to ensure that persons will have fair notice of of what constitutes a qualifying fiduciary duty?
The Supreme Court has upheld the constitutionality of the “honest services” fraud statute, see Skilling v. United States, 130 S.Ct. 2896 (2010), against challenges that it is unconstitutionally vague, explaining that the vast majority of “honest services” cases involve offenders who, in violation of a fiduciary duty, participate in bribery or kickback schemes. But Skilling does not define the limits of fiduciary relationships.
Milovanovic was an independent contractor retained by a company that provided translation services to government agencies, and in this instance for a state agency that oversaw commercial trucking drivers’ licensure. The State had contracted with a private company to provide testing services to prospective truck drivers. Milovanovic allegedly helped prospective drivers who did not speak English well, by telling them the answers to questions on the exam while he was purportedly “translating” the questions for them, in exchange for a payment, of course. When charged with depriving the State of its right to honest services, Milovanovic (and others involved in the scheme) argued that he had no agency or employment relationship with the State, and as an independent contractor owed no fiduciary duty; therefore, he could not have deprived another of any “honest services” as required by the federal statute.
The Ninth Circuit explained that the existence of a fiduciary duty in a criminal prosecution is a fact-based determination for the jury, and offered some support for instructing a jury on what constitutes a qualifying fiduciary. Those instructions should acknowledge that the mere fact of a business relationship between two persons does not mean a fiduciary relationship exists, and that mere direction and supervision by one person over another is also insufficient. It is only when one party places, and the other accepts, a special trust and confidence – usually involving the exercise of professional expertise and discretion – that a fiduciary relationship exists. However, the fact that parties memorialized or labeled a relationship as being that of an independent contractor, is not a basis for concluding that no fiduciary relationship exists.
Other circuits have wrestled with the difficult definitional limits of fiduciary relationships. Chances are, they will continue to wrestle with it. In the meantime, parties with contractual relationships in which there is an arguable element of trust, and some reduction in vigilance in one party dependent upon the other, beware.