Monday, November 10, 2014
Guest Blogger Associate Dean and Professor of Law Joan H. Krause - United States v. Nayak: The Application of Honest Services Mail and Wire Fraud to the Health Care Industry (Part I)
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. Raghuveer Nayak, who owned several ambulatory surgical centers in Chicago, was accused of paying bribes and kickbacks to physicians in return for referrals to his surgery centers, as well as instructing the recipients not to report the payments on their tax returns. In a superseding indictment, Nayak was charged with honest services mail fraud and obstruction of the administration of the tax system. Nayak filed a motion to dismiss the mail fraud count, arguing that the government had failed to allege any actual or intended harm to patients. After the district court denied his motion, Nayak entered a conditional guilty plea to both counts but reserved the right to appeal the denial of his motion to dismiss.
On appeal, the Seventh Circuit affirmed the district court’s holding that no allegation of actual or intended harm to victims need be shown under the honest services theory. Noting that Nayak’s “bribe-and-kickback scheme to drum up business for his surgery centers . . . appears to fall squarely within the scope of §1346 as the Court construed it in Skilling” (Nayak at 6), the court refused to impose an additional requirement that victims of private honest services fraud suffer tangible harm. The court found that it would be “contradictory” to read a statute prohibiting intangible harm to require proof that the victim suffered tangible harm – an interpretation that also comported with prior circuit precedent. While acknowledging that many honest services cases also involve allegations of tangible harm to victims, the Seventh Circuit made clear that no such proof was required. The court went on to note the particular salience of the holding in the health care context: “Indeed, the intangible harm from a fraud often can be quite substantial, especially in the context of the doctor-patient relationship, where patients depend on their doctor – more or less completely – to provide them with honest medical services in their best interests.” (Nayak at 12)
The precise impact of Nayak remains unclear; the role of tangible harm remains controversial, and the issue is by no means settled in all circuits. While the court was correct that many honest-services allegations are accompanied by some form of tangible harm, it is worth noting that in several of the most prominent health care honest services cases (including Nayak itself), the government agreed that the patient-victims had received high-quality medical care despite the fraud. At the very least – and as predicted – Nayak signals an interest on the part of federal prosecutors in applying the post-Skilling honest services theory to bribes and kickback schemes in the health care industry.
In another post, I will address the Nayak court’s interpretation (or lack thereof) of the requirement that the bribery or kickback scheme involve a violation of fiduciary duty.