9th Circuit: Independent Contractors within Ambit of ‘Honest Services’ Law

04/25/12

On Tuesday, the San Francisco-based U.S. Court of Appeals for the 9th Circuit ruled that being a state or federal employee is not a perquisite to being prosecuted for depriving the government of ‘honest services’. Adopting a broad interpretation of the hones-services fraud statute, the court found that the federal criminal law applies to anyone in a fiduciary relationship with the victim regardless of the ‘employment’ status of the perpetrator.


In the case of USA v. Milovanovic et al, U.S. Court of Appeals for the 9th Circuit, No. 08-30381, the appeals court, after a full review of its earlier judgment, held , “A fiduciary duty for the purposes of the Mail Fraud Statute is not limited to a formal 'fiduciary' relationship well-known in the law, but also extends to a 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.”

The case arose when one Brano Milovanovic and five others were charged for devising a fraudulent scheme to mislead the Washington State Department of Licensing and cause commercial drivers’ licenses to be awarded to unqualified applicants. Milovanovic was an independent contractor providing translation services for government agencies, and he allegedly accepted bribes for helping Bosnian applicants to cheat in written tests. Milovanovic was also charged with bribing Tony Lamb, and independent tester to falsify the results of driving tests.

The indictment was tossed by the district court in 2008 on the ground that independent contractors owed no fiduciary duty to the state and could not be prosecuted under the law related to honest-services fraud.

Later, a three-judge appeals court reversed the ruling of the district court and reinstated the charges holding that for honest-services fraud to occur, a fiduciary relationship was not necessary.

The case was reviewed by a full 9th Circuit on Tuesday and the court held that breach of a fiduciary duty was necessary for prosecution under honest-services fraud. However, based upon the Supreme Court decision against the former Enron CEO, the court adopted a broader interpretation of the term ‘fiduciary’ and held that the broader interpretation covered the acts of Milovanovic and his fellows.

The court also cited United States v. Lupton (7th Circuit) where the honest-services law was applied to an independent real estate brokers hired by the state to sell public buildings.

Concurring separately, Judge Richard Clifton opined that the majority was complicating things by focusing too much on the term ‘fiduciary’ and its meanings, and should focus on the breach of a simple relationship of trust instead.