In the Courts

At trial in the Northern District of Illinois, Hawkins and Racasi claimed that while they did take the cash, they never intended to lower the property tax assessments. Their plan was to deceive the agent, they asserted, not Cook County. Nevertheless, the jury found Hawkins and Racasi guilty of violating both the honest services fraud statute, 18 U.S.C. ' 1346, and 18 U.S.C. ' 666, which prohibits theft and bribery concerning state and local programs that receive federal funding.

On appeal, the defendants contended that the district judge erred in his jury instructions. The judge had instructed the jury that they could convict the defendants of violating the honest services fraud statute only if the jury found that the defendants accepted a bribe. The instructions then defined bribery to include accepting “anything of value from another person corruptly intending to be influenced or rewarded in connection with some business, transaction or series of transactions of the government or government agency.” Being “influenced” in the performance of official duties refers to prototypical, quid pro quo bribery, where the defendant accepts payment in exchange for performing an official act. But accepting a “reward” for the performance of official duties, which does not affect how the defendant performs those duties, is known as a gratuity.

The defendants argued that the district judge's instructions impermissibly allowed them to be convicted of honest services fraud based on their receipt of a gratuity. As a result of the district court's instructions, it did not matter whether Hawkins and Racasi planned to do anything in exchange for accepting the money. Even if the jury credited their defense ' that they lied to the agent and did not actually intend to lower the assessments ' the defendants nonetheless could be found to have accepted a reward, or gratuity, in connection with official business. Once the jury found that Hawkins and Racasi accepted the cash, the jury could find them guilty of violating the honest services fraud statute.

Thus, the issue the Seventh Circuit was confronted with was whether gratuities fall within the scope of the honest services fraud statute. This is an issue that has spawned conflicting rulings in the wake of the Supreme Court's redefinition of honest services fraud in Skilling. See Gary Stein & Eli J. Mark, Gratuities and Honest Services Fraud, 21, 22 Business Crimes Bulletin 12, 1 (Aug. & Sept. 2014). In an opinion written by Judge Easterbrook, the Seventh Circuit held that the honest services fraud statute does not prohibit the acceptance of a gratuity and vacated the defendants' convictions under that statute.

The Seventh Circuit arrived at this holding through an analysis of Skilling's discussion of the honest services fraud statute, 18 U.S.C. ' 1346, which proscribes a scheme to deprive another of the intangible right to “honest services.” In Skilling, the Supreme Court, responding to an argument that the honest services fraud statute's proscription is unconstitutionally vague, limited the scope of that statute to cases involving a “bribe or kickback.” Judge Easterbrook began his analysis by explaining that the terms “bribe” and “kickback” in Skilling encompass only payments that “entail a plan to change how the employee or agent does his job” ' in other words, quid pro quo bribery. The Supreme Court, he noted, reversed Skilling's conviction because he did not accept anything of value “in exchange for” making misrepresentations to Enron's investors. If merely accepting a reward were enough, Judge Easterbrook reasoned, the Supreme Court would have affirmed Skilling's conviction, “for the theory in Skilling's own mail-fraud prosecution was that he had been rewarded (by his salary) for his services during a time when Enron violated the securities laws.”

The Seventh Circuit further noted that the Supreme Court's citation of 18 U.S.C. ' 201(b) in Skilling reinforced its conclusion that “[t]he Justices thought that bribery entails a quid pro quo (planned or realized), not just a receipt of money.” Section 201(b) requires a quid pro quo, and accepting a “reward” for something the official would have done anyway does not violate that provision. By contrast, Section 201(c) of that statute, which does prohibit some kinds of rewards, was not cited by Skilling when identifying bribery. Accordingly, Judge Easterbrook held that the district judge erred in his instructions because “[t]reating a gratuity as a bribe transgresses Skilling.”

The Seventh Circuit, however, affirmed the defendants' convictions under 18 U.S.C. ' 666. Section 666 criminalizes “corruptly” accepting anything of value “intending to be influenced or rewarded” in connection with a program that receives federal funding. Judge Easterbrook held that 18 U.S.C. ' 666 differs from the honest services fraud statute in that it explicitly encompasses both bribes (“intending to be influenced”) and gratuities (“intending to be ' rewarded”). Further, he rejected the defendant's argument that the word “corruptly” in Section 666 limited the statute to quid pro quo bribery, reasoning that this would, in effect, remove the statute's prohibition of taking money as a “reward.” As a result, Judge Easterbrook concluded, the jury properly convicted the defendants under 18 U.S.C. ' 666 by finding that the payments they accepted were, if not bribes, then gratuities; regardless of whether the defendants did or did not intend to lower the assessments, “[t]hey are guilty either way.”

Notably, the Seventh Circuit's ruling in Hawkins conflicts with the First Circuit's 2013 decision in United States v. Fernandez , 722 F.3d 1, 22-26 (1st Cir. 2013). Based on a lengthy analysis of the statutory text and context, the First Circuit held in Fernandez that gratuities are not criminalized under Section 666. Hawkins is the first post- Fernandez circuit court decision to address this issue, but the Seventh Circuit was not writing on a blank slate, having previously held that Section 666 forbids taking gratuities as well as taking bribes. ' Russell S. Yavner, Schulte Roth & Zabel LLP

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Documents Kept From Whistleblower

Another federal judge in Philadelphia has extended a company's attorney-client privilege to independent consultants who communicated with its general counsel.

The U.S. Court of Appeals for the Third Circuit hasn't yet spoken on the “functional equivalent doctrine” ' which attaches attorney-client privilege to communications from contractors who are the functional equivalent of company employees ' but U.S. District Senior Judge Michael M. Baylson of the Eastern District of Pennsylvania adopted the reasoning of another Eastern District judge, Anita Brody, in applying the doctrine.

Baylson denied a motion to compel discovery filed by a former employee of Unilife Corp. after finding that the documents sought would be covered by the attorney-client privilege. Talbot Todd Smith brought a whistleblower suit in 2013 under the Sarbanes-Oxley Act against Unilife, a York-based medical device manufacturer. Smith claimed he had been fired after objecting to alleged shareholder fraud and failure to comply with U.S. Food and Drug Administration (FDA) requirements. He asked the court to compel discovery of various documents that Unilife claimed were covered by the attorney-client privilege. Baylson conducted an in-camera review of the papers and held a hearing in early February. All of the documents are privileged, the judge ruled.

Because attorney-client privilege is meant to facilitate “full and frank” communication between clients and their lawyers, which contributes to the public's interest, and because of the common practice of companies using outside contractors, Brody administered a broad test for evaluating whether a GlaxoSmithKline contractor could be considered as an equivalent to a GSK employee when she faced a similar question in In re Flonase Antitrust Litigation in 2012.

“Based on the principles espoused in Upjohn , and the widespread use of independent consultants by corporations, I adopt a broadpractical approach to determining whether [defendant] Swiftwater is the functional equivalent of a GSK employee,” Brody said in her 2012 opinion. She referred to the U.S. Supreme Court's opinion in Upjohn v. United States, 449 U.S. 383 (1981), which guided her opinion.

In that opinion, the Supreme Court “rejected the narrow control-group test and endorsed a functional approach to the attorney-client privilege within corporations, taking into account the purpose of the privilege and the realities of large-scale modern corporations,” Baylson said in his recent opinion in the Smith case. The judge explained in a footnote that the control-group test had allowed only the communications involving corporate officers who were able to make decisions in response to legal advice, the control group, to be covered by attorney-client privilege.

Smith, however, had looked to a 2003 opinion from the District of New Jersey in In re Bristol-Myers Squibb Securities Litigation, which also applied the functional equivalent doctrine, but also created a four-part test. The third part of the test considers whether the consultant had decision-making authority for the company.

“However,” Baylson said, “in Flonas , Judge Brody held that the court in Bristol-Myers set forth an overly restrictive view of the attorney-client privilege and, by requiring the consultant to possess decision-making authority, resurrected the control-group test that the Supreme Court had rejected in Upjohn.” ' Saranac Hale Spencer , The Legal Intelligencer

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Honest Services Fraud Does Not Encompass Gratuities, Says Seventh Circuit

In January, the Seventh Circuit held in United States v. Hawkins, 2015 WL 309520 (7th Cir. Jan. 26, 2015), that following the U.S. Supreme Court's decision in Skilling v. United States , 561 U.S. 358 (2010), an honest services fraud prosecution may not be predicated upon the acceptance of a gratuity.

The defendants in Hawkins , Thomas Hawkins and John Racasi, were employed as real-estate analysts for the Cook County Board of Review. Cook County updates property assessments every three years, and the Board of Review hears complaints by taxpayers who believe their updated property assessments are too high. An undercover agent offered Hawkins and Racasi cash in exchange for lowering the assessments on certain properties. Hawkins and Racasi agreed, accepted the money, and told the agent that the assessments would be lowered.

At trial in the Northern District of Illinois, Hawkins and Racasi claimed that while they did take the cash, they never intended to lower the property tax assessments. Their plan was to deceive the agent, they asserted, not Cook County. Nevertheless, the jury found Hawkins and Racasi guilty of violating both the honest services fraud statute, 18 U.S.C. ' 1346, and 18 U.S.C. ' 666, which prohibits theft and bribery concerning state and local programs that receive federal funding.

On appeal, the defendants contended that the district judge erred in his jury instructions. The judge had instructed the jury that they could convict the defendants of violating the honest services fraud statute only if the jury found that the defendants accepted a bribe. The instructions then defined bribery to include accepting “anything of value from another person corruptly intending to be influenced or rewarded in connection with some business, transaction or series of transactions of the government or government agency.” Being “influenced” in the performance of official duties refers to prototypical, quid pro quo bribery, where the defendant accepts payment in exchange for performing an official act. But accepting a “reward” for the performance of official duties, which does not affect how the defendant performs those duties, is known as a gratuity.

The defendants argued that the district judge's instructions impermissibly allowed them to be convicted of honest services fraud based on their receipt of a gratuity. As a result of the district court's instructions, it did not matter whether Hawkins and Racasi planned to do anything in exchange for accepting the money. Even if the jury credited their defense ' that they lied to the agent and did not actually intend to lower the assessments ' the defendants nonetheless could be found to have accepted a reward, or gratuity, in connection with official business. Once the jury found that Hawkins and Racasi accepted the cash, the jury could find them guilty of violating the honest services fraud statute.

Thus, the issue the Seventh Circuit was confronted with was whether gratuities fall within the scope of the honest services fraud statute. This is an issue that has spawned conflicting rulings in the wake of the Supreme Court's redefinition of honest services fraud in Skilling. See Gary Stein & Eli J. Mark, Gratuities and Honest Services Fraud, 21, 22 Business Crimes Bulletin 12, 1 (Aug. & Sept. 2014). In an opinion written by Judge Easterbrook, the Seventh Circuit held that the honest services fraud statute does not prohibit the acceptance of a gratuity and vacated the defendants' convictions under that statute.

The Seventh Circuit arrived at this holding through an analysis of Skilling's discussion of the honest services fraud statute, 18 U.S.C. ' 1346, which proscribes a scheme to deprive another of the intangible right to “honest services.” In Skilling, the Supreme Court, responding to an argument that the honest services fraud statute's proscription is unconstitutionally vague, limited the scope of that statute to cases involving a “bribe or kickback.” Judge Easterbrook began his analysis by explaining that the terms “bribe” and “kickback” in Skilling encompass only payments that “entail a plan to change how the employee or agent does his job” ' in other words, quid pro quo bribery. The Supreme Court, he noted, reversed Skilling's conviction because he did not accept anything of value “in exchange for” making misrepresentations to Enron's investors. If merely accepting a reward were enough, Judge Easterbrook reasoned, the Supreme Court would have affirmed Skilling's conviction, “for the theory in Skilling's own mail-fraud prosecution was that he had been rewarded (by his salary) for his services during a time when Enron violated the securities laws.”

The Seventh Circuit further noted that the Supreme Court's citation of 18 U.S.C. ' 201(b) in Skilling reinforced its conclusion that “[t]he Justices thought that bribery entails a quid pro quo (planned or realized), not just a receipt of money.” Section 201(b) requires a quid pro quo, and accepting a “reward” for something the official would have done anyway does not violate that provision. By contrast, Section 201(c) of that statute, which does prohibit some kinds of rewards, was not cited by Skilling when identifying bribery. Accordingly, Judge Easterbrook held that the district judge erred in his instructions because “[t]reating a gratuity as a bribe transgresses Skilling.”

The Seventh Circuit, however, affirmed the defendants' convictions under 18 U.S.C. ' 666. Section 666 criminalizes “corruptly” accepting anything of value “intending to be influenced or rewarded” in connection with a program that receives federal funding. Judge Easterbrook held that 18 U.S.C. ' 666 differs from the honest services fraud statute in that it explicitly encompasses both bribes (“intending to be influenced”) and gratuities (“intending to be ' rewarded”). Further, he rejected the defendant's argument that the word “corruptly” in Section 666 limited the statute to quid pro quo bribery, reasoning that this would, in effect, remove the statute's prohibition of taking money as a “reward.” As a result, Judge Easterbrook concluded, the jury properly convicted the defendants under 18 U.S.C. ' 666 by finding that the payments they accepted were, if not bribes, then gratuities; regardless of whether the defendants did or did not intend to lower the assessments, “[t]hey are guilty either way.”

Notably, the Seventh Circuit's ruling in Hawkins conflicts with the First Circuit's 2013 decision in United States v. Fernandez , 722 F.3d 1, 22-26 (1st Cir. 2013). Based on a lengthy analysis of the statutory text and context, the First Circuit held in Fernandez that gratuities are not criminalized under Section 666. Hawkins is the first post- Fernandez circuit court decision to address this issue, but the Seventh Circuit was not writing on a blank slate, having previously held that Section 666 forbids taking gratuities as well as taking bribes. ' Russell S. Yavner, Schulte Roth & Zabel LLP

'

Documents Kept From Whistleblower

Another federal judge in Philadelphia has extended a company's attorney-client privilege to independent consultants who communicated with its general counsel.

The U.S. Court of Appeals for the Third Circuit hasn't yet spoken on the “functional equivalent doctrine” ' which attaches attorney-client privilege to communications from contractors who are the functional equivalent of company employees ' but U.S. District Senior Judge Michael M. Baylson of the Eastern District of Pennsylvania adopted the reasoning of another Eastern District judge, Anita Brody, in applying the doctrine.

Baylson denied a motion to compel discovery filed by a former employee of Unilife Corp. after finding that the documents sought would be covered by the attorney-client privilege. Talbot Todd Smith brought a whistleblower suit in 2013 under the Sarbanes-Oxley Act against Unilife, a York-based medical device manufacturer. Smith claimed he had been fired after objecting to alleged shareholder fraud and failure to comply with U.S. Food and Drug Administration (FDA) requirements. He asked the court to compel discovery of various documents that Unilife claimed were covered by the attorney-client privilege. Baylson conducted an in-camera review of the papers and held a hearing in early February. All of the documents are privileged, the judge ruled.

Because attorney-client privilege is meant to facilitate “full and frank” communication between clients and their lawyers, which contributes to the public's interest, and because of the common practice of companies using outside contractors, Brody administered a broad test for evaluating whether a GlaxoSmithKline contractor could be considered as an equivalent to a GSK employee when she faced a similar question in In re Flonase Antitrust Litigation in 2012.

“Based on the principles espoused in Upjohn , and the widespread use of independent consultants by corporations, I adopt a broadpractical approach to determining whether [defendant] Swiftwater is the functional equivalent of a GSK employee,” Brody said in her 2012 opinion. She referred to the U.S. Supreme Court's opinion in Upjohn v. United States , 449 U.S. 383 (1981), which guided her opinion.

In that opinion, the Supreme Court “rejected the narrow control-group test and endorsed a functional approach to the attorney-client privilege within corporations, taking into account the purpose of the privilege and the realities of large-scale modern corporations,” Baylson said in his recent opinion in the Smith case. The judge explained in a footnote that the control-group test had allowed only the communications involving corporate officers who were able to make decisions in response to legal advice, the control group, to be covered by attorney-client privilege.

Smith, however, had looked to a 2003 opinion from the District of New Jersey in In re Bristol-Myers Squibb Securities Litigation, which also applied the functional equivalent doctrine, but also created a four-part test. The third part of the test considers whether the consultant had decision-making authority for the company.

“However,” Baylson said, “in Flonas , Judge Brody held that the court in Bristol-Myers set forth an overly restrictive view of the attorney-client privilege and, by requiring the consultant to possess decision-making authority, resurrected the control-group test that the Supreme Court had rejected in Upjohn.” ' Saranac Hale Spencer , The Legal Intelligencer

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