Third Circuit Weighs in on the Extortion Defense to Bribery

The Decision in Friedman

The Third Circuit's decision in United States v. Friedman, No. 10-2235 (3rd Cir. Sept. 28, 2011) (following the Second Circuit's decision in United States v. Barash, 365 F.2d 395, 401'02 (2d Cir. 1966)), held that extortion is not an absolute defense, but “can bear on the intent required for the commission of bribery only where: (1) the defendant is paying the official to perform an act to which he is legally entitled; and (2) the official threatens the defendant with 'serious economic loss' unless the bribe is paid.” Id., slip op. at 21. The court made clear that a defendant's subjective belief in the validity of his entitlement to the requested action is insufficient, and that even substantial costs associated with red tape and the like are not the kind of “serious economic loss” to which the extortion defense is intended to apply. Id. at 3-4.

In Friedman, the court of appeals was asked to reverse the conviction of Mr. Herman Friedman, a New Jersey businessman who was accused of having made a payment to a building inspector to avoid having to seek a variance to obtain a required Certificate of Occupancy that was needed for him to lease an illegal apartment unit in a building he owned. Friedman claimed he reasonably believed that he was entitled to rent the building as is, that all the building's apartments were operated without government interference when he bought the building in 2006, that the city tax department was well aware of the additional unit's existence, “and there was no indication the unit was a recent addition” that would require a building code variance to be granted by the city of West New York. Id. at 4-5.

The evidence showed that the building inspector had a practice of soliciting bribes (and indeed, without Friedman knowing it, had pleaded guilty to doing so in an unrelated case). The building inspector, after telling Friedman that a variance would be needed, said to him, “What are you gonna do.” Id. at 5. Against this backdrop, Friedman agreed to pay $5,000 to the building inspector, and the inspector, based on the agreement, dismissed an administrative complaint against Friedman, leaving him free to lease the property. When Friedman balked at making the payment, however, the building inspector (who throughout his interactions with Friedman was cooperating with the FBI), re-filed the administrative complaint, and Friedman then paid the $5,000, after which he was indicted on one count of federal program bribery under 18 U.S.C. ' 666(a) (2), which, like the FCPA, criminalizes the making of payments to government officials with a willful and corrupt intent to influence the officials in order to gain or retain business. (Compare 18 U.S.C. ' 666(a)(2) (2006) (prohibiting payments “to influence or reward ' any business, transaction, or series of transactions”), with 15 U.S.C. ” 78dd-2(a)(1) (2006) (prohibiting payments “in order to assist ' in obtaining or retaining business for or with, or directing business to, any person”).)

At his trial, Friedman sought a jury instruction, stating: “[T]he fact that the defendant was extorted or coerced, while it is not alone a defense to the charge, may bear upon whether the defendant ever formed the intent required to commit the crime of bribery, specifically upon whether he committed the act, 'willfully,' that is, with a purpose to disobey or disregard the law.” Friedman, slip op. at 11.

The requested instruction went on:

'Extortion' means obtaining property from another, with his consent, in either one of two ways: [] inducing or bringing about this consent through the use of actual or threatened force, violence or fear, which can include fear of economic harm or hardship, which exists if a victim experiences anxiety, concern, or worry over expected personal economic harm, and which fear must be reasonable under the circumstances existing at the time of the defendant's actions. As I also explained to you earlier, a person may be guilty of bribery whether or not the official action sought to be influenced was right or wrong. That is, a bribery defendant may be guilty even if he paid the official to perform an act to which the defendant was legally entitled. However, you may consider whether the defendant believed that he was paying the official to perform an act to which he believed he was legally entitled in evaluating whether the government has proven that the defendant had the intent required to commit the bribery at issue, that is, whether the government has proven that he had the purpose to disobey or disregard the law.

Id. at 11-12.

In rejecting Friedman's appeal of the trial court's refusal to give the requested instruction, the court of appeals held that the proposed instruction was flawed because it “did not limit the consideration of coercion to situations in which the defendant was legally entitled to the act” that was the object of the agreed payment. Id. at 21.

Extortion, Duress and the Level of Threat

The Friedman court also concluded that the mere fact that Friedman had lined up a buyer who was prepared to pay more than $1 million for the apartment building, “but only if the sixteenth apartment was properly approved by the municipality,” was not the kind of situation in which Friedman faced a sufficiently severe “economic loss.” As the Third Circuit reasoned, “Friedman could [have] proceed[ed] through the normal route of applying for a variance,” and, “[a]lthough obtaining a variance requires time and money, it is the correct legal process that should have been followed and informing someone of the correct, legal steps they should take, in itself, is not threatening serious economic loss” ' even if that meant Friedman would lose the offer made on the building. Id. at 23.

Indeed, the Third Circuit's decision in Friedman potentially understates the obstacles facing defendants seeking to make use of a government official's acts of extortion or coercion. In a number of circuits, the very strong presumption, if not a flat rule, is that “[t]he proper response to coercion by corrupt public officials should be to go to the authorities, not to make the payoff.” United States v. Kahn, 472 F.2d 272, 278 (2d Cir. 1973), quoted in United States. v. Alfisi, 308 F.3d 144, 150 n.1 (2d Cir. 2002). A determination that the requested action is in any manner “discretionary” is often fatal to extortion and coercion defenses, even in those circuits in which the law is more open to debate. (See, e.g., United States v. West, 746 F. Supp. 2d 932, 940 (N.D. Ill. 2010) (citing United States v. Lee, 846 F.2d 531, 534 n.1 (9th Cir. 1988); United States v. Colacurcio, 659 F.2d 684, 690 (5th Cir. 1981); United States v. Labovitz, 251 F.2d 393, 394 (3d Cir. 1958)). The district court in West noted that the Seventh Circuit has neither precluded nor permitted an economic duress defense to a bribery charge. West, 746 F. Supp. 2d at 939 (citing United States v. Toney, 27 F.3d 1245 (7th Cir. 1994)). The West court concluded that the Supreme Court's decision in Dixon v. United States, 548 U.S. 1 (2006), which held that “the defense of duress does not negate a defendant's criminal state of mind when the applicable offense requires a defendant to have acted knowingly or willfully,” Id. at 7, had not been interpreted to prohibit “a duress defense for a crime whose mens rea is 'corruptly' acting to 'influence an official act.'” West, 746 F. Supp. 2d at 939.)

Courts in domestic bribery cases do not take issue with the idea that, at least in some cases, “one can be a victim of extortion but not a briber, and that would surely be right in a case where the victim had paid the extortionist at the point of a gun” West, 746 F. Supp. 2d at 935 (quoting United States v. Holzer, 840 F.2d 1343, 1351'52 (7th Cir. 1988)). But the lack of certainty in the law concerning the type of economic harm that must be threatened for the defense of extortion to have bite leaves the defense as yet another of the vagaries of FCPA enforcement. Such vagaries have led many compliance policies to acknowledge, in the context of extortionate threats by government officials, the ability of company personnel to make payments to officials to protect only against illegal harm to life and limb, but little more.

In her pre-trial decisions in United States v. Kozeny (Bourke), 582 F. Supp. 2d 535 (S.D.N.Y. 2008), United States District Judge Shira A. Scheindlin sought to honor the FCPA's legislative history, noting that “while the FCPA would apply to a situation in which a 'payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract,' it would not apply to one in which payment is made to an official 'to keep an oil rig from being dynamited.'” Id. at 540. Judge Scheindlin also observed that the distinct defense of duress is viable in any FCPA prosecution if there is: “'(1) a threat of force directed at the time of the defendant's conduct; (2) a threat sufficient to induce a well-founded fear of impending death or serious bodily injury; and (3) a lack of a reasonable opportunity to escape harm other than by engaging in the illegal activity.'” Id. at 540 n.31 (quoting United States v. Gonzalez, 407 F.3d 118, 122 (2d Cir.2005)). But further guidance likely will not emanate from the Bourke case, which remains on appeal, as the defendant did not press for an extortion or duress defense at the jury instruction stage at trial, and chose to focus on other issues on appeal. See United States v. Kozeny, No. 09-4704, Brief of Appellant (2d Cir. Apr. 1, 2010) (focusing on trial court's coercion instruction and allowance of expert testimony on corruption risk).

Conclusion

Although bribe payers who succumb to threats by foreign officials ' who say they will never have a fair chance at competing unless they make payments under the table ' can take the position that their conduct is economically rational, that is not the lesson that the FCPA teaches, at least absent special circumstances. Nevertheless, it undoubtedly would ameliorate the uncertainty that pervades the law for Congress or the DOJ to clarify with further examples or criteria the circumstances in which submitting to extortion or coercion by foreign officials is either not a crime or will lead to a declination. Between the “market entry” bribe and a payment to protect a valuable investment from immediate and permanent physical destruction is a vast landscape of circumstances that legitimate businesses face in high-risk jurisdictions, in which significant investments, made in good faith and in reliance on expectations of lawful conduct by the government, are threatened by unscrupulous officials. If the United States is not prepared to enact a compliance defense to primary anti-bribery violations, greater certainty in the law over when extortion will and will not amount to a defense would be a welcome development.

Bruce E. Yannett and Sean Hecker are partners and Steven S. Michaels is a counsel in the New York office of Debevoise & Plimpton LLP. They are members of the Litigation Department and White Collar Litigation Practice Group. The authors may be reached at [email protected], [email protected], and [email protected] respectively.

Given that the legislative history of the Federal Corrupt Practices Act (FCPA) makes clear Congress's intent that the statute not apply to cases of “true extortion” (see S. Rep. No. 95-114, at 10'11 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4108), it is perhaps surprising that so few FCPA defendants invoke an extortion defense. After all, it is often common in cases of foreign public corruption that the officials involved have demanded the corrupt payment to “get things done,” and have excluded those unprepared to pay a bribe from receiving a fair hearing on an application for a contract or some other required approval.

In other words, if, as we suspect, the minority of bribes are initiated by bribe-payers, why would an extortion defense not be the cornerstone of more FCPA defenses than it is presently?

In a recent decision in a domestic bribery case, the United States Court of Appeals for the Third Circuit, after canvassing the law relating to extortion as a defense to federal bribery charges, identified the principal reasons why extortion is so rarely raised, and even more rarely effective, as a defense.

The Decision in Friedman

The Third Circuit's decision in United States v. Friedman, No. 10-2235 (3rd Cir. Sept. 28, 2011) (following the Second Circuit's decision in United States v. Barash , 365 F.2d 395, 401'02 (2d Cir. 1966)), held that extortion is not an absolute defense, but “can bear on the intent required for the commission of bribery only where: (1) the defendant is paying the official to perform an act to which he is legally entitled; and (2) the official threatens the defendant with 'serious economic loss' unless the bribe is paid.” Id ., slip op. at 21. The court made clear that a defendant's subjective belief in the validity of his entitlement to the requested action is insufficient, and that even substantial costs associated with red tape and the like are not the kind of “serious economic loss” to which the extortion defense is intended to apply. Id. at 3-4.

In Friedman, the court of appeals was asked to reverse the conviction of Mr. Herman Friedman, a New Jersey businessman who was accused of having made a payment to a building inspector to avoid having to seek a variance to obtain a required Certificate of Occupancy that was needed for him to lease an illegal apartment unit in a building he owned. Friedman claimed he reasonably believed that he was entitled to rent the building as is, that all the building's apartments were operated without government interference when he bought the building in 2006, that the city tax department was well aware of the additional unit's existence, “and there was no indication the unit was a recent addition” that would require a building code variance to be granted by the city of West New York. Id. at 4-5.

The evidence showed that the building inspector had a practice of soliciting bribes (and indeed, without Friedman knowing it, had pleaded guilty to doing so in an unrelated case). The building inspector, after telling Friedman that a variance would be needed, said to him, “What are you gonna do.” Id. at 5. Against this backdrop, Friedman agreed to pay $5,000 to the building inspector, and the inspector, based on the agreement, dismissed an administrative complaint against Friedman, leaving him free to lease the property. When Friedman balked at making the payment, however, the building inspector (who throughout his interactions with Friedman was cooperating with the FBI), re-filed the administrative complaint, and Friedman then paid the $5,000, after which he was indicted on one count of federal program bribery under 18 U.S.C. ' 666(a) (2), which, like the FCPA, criminalizes the making of payments to government officials with a willful and corrupt intent to influence the officials in order to gain or retain business. (Compare 18 U.S.C. ' 666(a)(2) (2006) (prohibiting payments “to influence or reward ' any business, transaction, or series of transactions”), with 15 U.S.C. ” 78dd-2(a)(1) (2006) (prohibiting payments “in order to assist ' in obtaining or retaining business for or with, or directing business to, any person”).)

At his trial, Friedman sought a jury instruction, stating: “[T]he fact that the defendant was extorted or coerced, while it is not alone a defense to the charge, may bear upon whether the defendant ever formed the intent required to commit the crime of bribery, specifically upon whether he committed the act, 'willfully,' that is, with a purpose to disobey or disregard the law.” Friedman, slip op. at 11.

The requested instruction went on:

'Extortion' means obtaining property from another, with his consent, in either one of two ways: [] inducing or bringing about this consent through the use of actual or threatened force, violence or fear, which can include fear of economic harm or hardship, which exists if a victim experiences anxiety, concern, or worry over expected personal economic harm, and which fear must be reasonable under the circumstances existing at the time of the defendant's actions. As I also explained to you earlier, a person may be guilty of bribery whether or not the official action sought to be influenced was right or wrong. That is, a bribery defendant may be guilty even if he paid the official to perform an act to which the defendant was legally entitled. However, you may consider whether the defendant believed that he was paying the official to perform an act to which he believed he was legally entitled in evaluating whether the government has proven that the defendant had the intent required to commit the bribery at issue, that is, whether the government has proven that he had the purpose to disobey or disregard the law.

Id. at 11-12.

In rejecting Friedman's appeal of the trial court's refusal to give the requested instruction, the court of appeals held that the proposed instruction was flawed because it “did not limit the consideration of coercion to situations in which the defendant was legally entitled to the act” that was the object of the agreed payment. Id. at 21.

Extortion, Duress and the Level of Threat

The Friedman court also concluded that the mere fact that Friedman had lined up a buyer who was prepared to pay more than $1 million for the apartment building, “but only if the sixteenth apartment was properly approved by the municipality,” was not the kind of situation in which Friedman faced a sufficiently severe “economic loss.” As the Third Circuit reasoned, “Friedman could [have] proceed[ed] through the normal route of applying for a variance,” and, “[a]lthough obtaining a variance requires time and money, it is the correct legal process that should have been followed and informing someone of the correct, legal steps they should take, in itself, is not threatening serious economic loss” ' even if that meant Friedman would lose the offer made on the building. Id. at 23.

Indeed, the Third Circuit's decision in Friedman potentially understates the obstacles facing defendants seeking to make use of a government official's acts of extortion or coercion. In a number of circuits, the very strong presumption, if not a flat rule, is that “[t]he proper response to coercion by corrupt public officials should be to go to the authorities, not to make the payoff.” United States v. Kahn , 472 F.2d 272, 278 (2d Cir. 1973), quoted in United States. v. Alfisi , 308 F.3d 144, 150 n.1 (2d Cir. 2002). A determination that the requested action is in any manner “discretionary” is often fatal to extortion and coercion defenses, even in those circuits in which the law is more open to debate. ( See, e.g., United States v. West , 746 F. Supp. 2d 932, 940 (N.D. Ill. 2010) (citing United States v. Lee , 846 F.2d 531, 534 n.1 (9th Cir. 1988); United States v. Colacurcio , 659 F.2d 684, 690 (5th Cir. 1981); United States v. Labovitz , 251 F.2d 393, 394 (3d Cir. 1958)). The district court in West noted that the Seventh Circuit has neither precluded nor permitted an economic duress defense to a bribery charge. West , 746 F. Supp. 2d at 939 (citing United States v. Toney , 27 F.3d 1245 (7th Cir. 1994)). The West court concluded that the Supreme Court's decision in Dixon v. United States , 548 U.S. 1 (2006), which held that “the defense of duress does not negate a defendant's criminal state of mind when the applicable offense requires a defendant to have acted knowingly or willfully,” Id . at 7, had not been interpreted to prohibit “a duress defense for a crime whose mens rea is 'corruptly' acting to 'influence an official act.'” West , 746 F. Supp. 2d at 939.)

Courts in domestic bribery cases do not take issue with the idea that, at least in some cases, “one can be a victim of extortion but not a briber, and that would surely be right in a case where the victim had paid the extortionist at the point of a gun” West , 746 F. Supp. 2d at 935 (quoting United States v. Holzer , 840 F.2d 1343, 1351'52 (7th Cir. 1988)). But the lack of certainty in the law concerning the type of economic harm that must be threatened for the defense of extortion to have bite leaves the defense as yet another of the vagaries of FCPA enforcement. Such vagaries have led many compliance policies to acknowledge, in the context of extortionate threats by government officials, the ability of company personnel to make payments to officials to protect only against illegal harm to life and limb, but little more.

In her pre-trial decisions in United States v. Kozeny ( Bourke ), 582 F. Supp. 2d 535 (S.D.N.Y. 2008), United States District Judge Shira A. Scheindlin sought to honor the FCPA's legislative history, noting that “while the FCPA would apply to a situation in which a 'payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract,' it would not apply to one in which payment is made to an official 'to keep an oil rig from being dynamited.'” Id . at 540. Judge Scheindlin also observed that the distinct defense of duress is viable in any FCPA prosecution if there is: “'(1) a threat of force directed at the time of the defendant's conduct; (2) a threat sufficient to induce a well-founded fear of impending death or serious bodily injury; and (3) a lack of a reasonable opportunity to escape harm other than by engaging in the illegal activity.'” Id . at 540 n.31 (quoting United States v. Gonzalez , 407 F.3d 118, 122 (2d Cir.2005)). But further guidance likely will not emanate from the Bourke case, which remains on appeal, as the defendant did not press for an extortion or duress defense at the jury instruction stage at trial, and chose to focus on other issues on appeal. See United States v. Kozeny, No. 09-4704, Brief of Appellant (2d Cir. Apr. 1, 2010) (focusing on trial court's coercion instruction and allowance of expert testimony on corruption risk).

Conclusion

Although bribe payers who succumb to threats by foreign officials ' who say they will never have a fair chance at competing unless they make payments under the table ' can take the position that their conduct is economically rational, that is not the lesson that the FCPA teaches, at least absent special circumstances. Nevertheless, it undoubtedly would ameliorate the uncertainty that pervades the law for Congress or the DOJ to clarify with further examples or criteria the circumstances in which submitting to extortion or coercion by foreign officials is either not a crime or will lead to a declination. Between the “market entry” bribe and a payment to protect a valuable investment from immediate and permanent physical destruction is a vast landscape of circumstances that legitimate businesses face in high-risk jurisdictions, in which significant investments, made in good faith and in reliance on expectations of lawful conduct by the government, are threatened by unscrupulous officials. If the United States is not prepared to enact a compliance defense to primary anti-bribery violations, greater certainty in the law over when extortion will and will not amount to a defense would be a welcome development.

Bruce E. Yannett and Sean Hecker are partners and Steven S. Michaels is a counsel in the New York office of Debevoise & Plimpton LLP. They are members of the Litigation Department and White Collar Litigation Practice Group. The authors may be reached at [email protected], [email protected], and [email protected] respectively.