|UNITED STATES OF AMERICA||)|
|)||Case No. 98-05001-01-CR-SW-1|
|RAYMOND KEITH GAILEY||)|
The Missouri State Medical Association ("MSMA") is a not-for- profit membership organization that represents about 6000 physicians in Missouri. Organized in 1850, its mission is to serve its members through promotion of the science and art of medicine, protection of the health of the public, and the betterment of the medical profession in Missouri. It is incorporated in the State of Missouri and is tax-exempt pursuant to Section 501(c)(6) of the Internal Revenue Code.
Both AAPS and MSMA have an interest in protecting against interference with the contractual rights of physicians with respect to hospitals. This action involves an unprecedented application of the federal mail fraud statute to a private contract between a physician and a hospital. The government inferred its own interpretation of such private contract and then prosecuted Appellant Dr. Gailey for acting inconsistently with the government's interpretation. The legal issues raised by this prosecution are enormously important to many physicians, and both AAPS and MSMA have a legitimate interest in arguing for reversal of the conviction here. This amicus curiae brief is being filed pursuant to FRAP 29.
As not-for-profit organizations, neither AAPS nor MSMA have a parent company nor any subsidiaries that have issued shares to the public.
After serving in the Gulf War and finishing his medical training, defendant Dr. Gailey agreed to a contract with St. John's Regional Medical Center (the "Hospital") to establish his medical practice in Joplin, Missouri, using that Hospital's services. Tr. at 7-9; Pl. Exhs. 1.1 & 1.2.1 In order to induce Dr. Gailey to bring patients to the Hospital, it agreed to loan to Dr. Gailey during his first year of practice a monthly amount equal to the difference between $9,500 and Dr. Gailey's actual net income, such that Dr. Gailey was guaranteed an effective salary of $9,500 per month. Tr. at 6; Pl. Exh. 1.1. The contract provided an incentive for Dr. Gailey to continue bringing patients to the Hospital for four additional years: the outstanding balance on the loan "will be forgiven over 48 months because of the significant need for Primary Care in the community provided that [Dr. Gailey] continue[s] to practice in Joplin as a member in good standing of the active staff of St. John's Regional Medical Center." Pl. Exh. 1.1 (original income guarantee agreement).
The Hospital's contract thereby had a five-year duration, whereby Dr. Gailey "worked off" in the last four years of the contract any
outstanding balance on the loan that he received in the first year. The Hospital's benefit under the contract was its admission of revenue- producing patients based on Dr. Gailey's medical practice, beginning in the first year of the contract. Tr. at 36. The Hospital's costs under the contract began accruing in the second year, if and when Dr. Gailey began working off the loan obligation through the forgiveness provision. Pl. Exh. 1.1. If the Hospital terminated his privileges due to material breach, then he would have been obligated to remit the loan back to the Hospital, plus 7% interest. Id.
The contract expressly required in its first year that the Hospital loan Dr. Gailey monies covering his "business manager's salary of $25,000 per year plus benefits," as an "`approved practice expense.'" Pl. Exh. 1.1 (Letter from Gailey to Brueckner dated May 24, 1994). The only condition was that Dr. Gailey himself incur this expense in the first year of the contract. The Hospital left the decisions about selecting and supervising the business manager to Dr. Gailey, as most hospitals do. Accordingly, Dr. Gailey retained a business manager for about the first half of the year, who then left for other opportunities. Tr. at 53. Dr. Gailey next asked the Hospital to replace those services, which it did for several months, but that arrangement proved to be unsatisfactory. Id. at 12-13. Towards the end of the first year, Dr. Gailey ultimately retained a business manager named Carol Hill who was also marketing the services of a physical therapist, and who therefore had the position, experience and opportunities to attract new patients to Dr. Gailey. Tr. at 82-91.
As confirmed by all witnesses at the trial, Dr. Gailey fully informed the Hospital that he was using a business manager who was continuing to work full-time for a physical therapist. Tr. at 20 (Hospital (Obert): "And [Gailey] assured me that ? [Hill] had another full-time job while she was working for him and that she had to do the work she was doing for him in the evenings and on weekends."); Tr. at 73 (Hill: "[Sadler of the Hospital] did know that I had another job."). The Hospital loaned Dr. Gailey monies covering Hill's salary for a few months at the rate specified in the contract, and never objected to her daily commitment to work elsewhere. Nor did the Hospital ever formally question Dr. Gailey, in writing or otherwise, about this personnel decision. Tr. at 47 (Q: "You didn't ask him whether it was exactly 40 hours a week, more or less, did you?" Hospital (Obert): "No.") Even when the Hospital later claimed to be surprised about the arrangement, it did not object to Dr. Gailey and it continued to keep him on its medical staff, thereby benefiting from the additional patients he brought to the Hospital.
Dr. Gailey was convicted of one count of mail fraud based on testimony by the Hospital that it had been partly deceived about his retention of the business manager. The government claimed that the alleged deceit caused a loss to the Hospital of $6,680.11, even though that amount actually constituted a loan by the Hospital for which it could easily deny forgiveness. The impact of this unprecedented mail fraud conviction on Dr. Gailey will likely be automatic revocation of his medical license.
Specifically, the conviction was based on an alleged informal representation by Dr. Gailey that the business manager was working "during normal 8:00 to 5:00 business hours" with the physical therapist and was simultaneously working "full time" for Dr. Gailey, and that the latter portion of the representation constituted fraud.2 Tr. at 21.
Even taken in the light most favorable to the prosecution, any deceit in such reference to "full time" lacks the requisite materiality. The testimony cited above is unrebutted that the Hospital assented to Dr. Gailey's retention of a business manager who was simultaneously working, from 8 am to 5 pm, for a physical therapist. Any further issue about how many of those hours were attributable to joint marketing efforts, or how many additional hours she worked solely for Dr. Gailey, was economically immaterial to the Hospital's contractual costs and benefits, and no deprivation of property resulted. Likewise, evidence that the business manager carried over some of her hours from the first to the second year of the five-year contract was wholly immaterial to the Hospital's bargained-for contract.
The conviction was based on an unjustified rewriting of the contract for the jury. The contractual benefits negotiated by the Hospital were increased patient flow over the five-year period. The alleged postponement of certain hours worked by the business manager from the first to the second year was immaterial to those benefits. Likewise, the costs to the Hospital for the business manager under the contract were expressly fixed, without condition, and it was immaterial to those costs how many specific hours the business manager worked for Dr. Gailey once the Hospital was informed that she maintained a full-time job elsewhere.
Reversal is required here for at least two reasons. First, the government failed to prove that Dr. Gailey's representations were material to his contract with the hospital. A mail fraud conviction cannot rest on false representations that are immaterial to the contractual obligations of the parties. Second, the government is unconstitutionally expanding here the reach of the mail fraud statute without adequate notice, and reversal is necessary to avoid unlimited prosecutorial discretion with respect to private contractual disputes.
A mail fraud conviction requires more than evidence of false statements. The prosecution must prove that the false statements were material in order to support a conviction for mail fraud. See United States v. Jain, 93 F.3d 436, 441 (8th Cir. 1996), cert. Denied, 117 S.Ct. 2452 (1997) (reversing a mail fraud conviction by holding that "a fiduciary's nondisclosure must be material to constitute a criminal scheme to defraud"); see also United States v. Halbert, 712 F.2d 388 (9th Cir. 1983), cert. Denied, 465 U.S. 1005 (1984); Simons v. United States, 119 F.2d 539 (9th Cir.), cert. Denied, 314 U.S. 616 (1941) (instruction regarding necessity of materiality). False representations that lack proof of materiality cannot support a mail fraud conviction. See United States v. Regent Office Supply Co., 421 F.2d 1174 (2d Cir. 1970) (false representations by defendants' agents were not shown to be capable of affecting the alleged victim's assessment of the value of the potential bargain to him).
This Court's reversal of the mail fraud conviction in United States v. Jain is particularly illustrative. There, as here, the hospital had a contractual arrangement with a physician in order to promote patient admissions to the hospital. There, as here, the hospital administrators later alleged that the physician's efforts did not justify the payments made by the hospital to him. There the prosecution alleged that the physician violated the anti-kickback and mail fraud statutes by accepting payments from the hospital; here the prosecution alleged that Dr. Gailey violated the mail fraud statutes by accepting a loan from the Hospital. There, as here, the jury convicted the physician based on testimony by hospital administrators.
This Court reversed Dr. Jain's mail fraud conviction due to a lack of proven injury and a lack of materiality, which are likewise absent here. Neither the hospital nor the patients in Jain suffered any proven injury by virtue of the defendant's activities; nor did the Hospital or patients here suffer any proven injury. While this Court described the physician's financial arrangements in the Jain decision as "unethical", it reversed the mail fraud conviction due to the absence of materiality and proven injury. There, as here, the evidence lacked any proof that the hospital or patients were harmed in any way due to the payments to the physician, which were contractually required. The Court emphasized that:
Jain, 93 F.3d at 442 (emphasis added).
It is undisputed that the Hospital here was contractually obligated to loan Dr. Gailey monies covering his expenses for his business manager regardless of whether she was full-time or part-time, or whether she marketed Dr. Gailey's practice simultaneously with her marketing efforts on behalf of the physical therapist. The only material issue determining the amount of such loan is amount of Dr. Gailey's salary expense for his business manager, and it is uncontested that Dr. Gailey only sought loan payments for his actual salary expense. "The essence of a scheme to defraud is an intent to harm the victim." Id. Quibbling by the Hospital administrators about the precise number of hours worked by Dr. Gailey's business manager is simply immaterial to the Hospital's contractual obligation, and any misrepresentations about such hours cannot prove an intent to harm the Hospital. The application by this Court of a precedent to Dr. Jain is equally appropriate here:
Jain, 93 F.3d at 442 (quoting United States v. McNeive, 536 F.2d 1245, 1252 (8th Cir. 1976)).
At the trial of Dr. Gailey, all the witnesses testified that he had fully informed the Hospital that his business manager Carol Hill had a regular, full time job elsewhere during the relevant period. Yet the entire prosecution was based on a theory that Dr. Gailey misrepresented the number of hours that his business manager worked for him in addition to her full time job elsewhere. Such misrepresentation, even if taken in the light most favorable to the prosecution, was immaterial to the costs and benefits of the Hospital under its contract with Dr. Gailey. The Hospital contractually agreed to and did loan Dr. Gailey monies covering his expense for the business manager, with knowledge that the business manager maintained a full time job elsewhere. The amount of that loan was fixed by the contract and not subject to revision by the Hospital or the Court at a later date. Moreover, the Hospital received its complete bargained-for benefit from the efforts of the business manager, even if a portion of her time carried over into the second year of the Hospital's five- year contract with Dr. Gailey. Any inaccuracy about Dr. Gailey's reporting of the business manager's evening and weekend hours was immaterial to the Hospital's costs and benefits under the contract.
The conviction against Dr. Gailey required rewriting his contract with the Hospital to impose conditions that simply were not there. Like many federal income tax rules, the contract used a cash-basis method of accounting that set the amount of the Hospital's loan to include Dr. Gailey's cash expenses, regardless of the completeness or timeliness of the performance by his business manager. The contract did not permit any reduction in payment by the Hospital based on an alleged incompleteness or tardiness in performance by the business manager. Only misapplication of the mail fraud statute could obtain a result that was impossible under the contract between the Hospital and Dr. Gailey - a pro-rata reduction in the loan with respect the salary expense. Even if the Hospital had complained about the business manager at the time her performance was allegedly delayed, such complaint would have had no material effect on the Hospital's contractual obligation to loan Dr. Gailey funds that ensured his take-home pay.
The government erroneously withheld the requirement of materiality from the jury. Jury Instruction No. 13, to which defense counsel vehemently objected, adopts as a premise an obligation that never existed or could exist under the contract. Tr. at 114-15. The Instruction asks the jurors whether: "The defendant falsely represented that Carol Hill worked forty hours per week and received payment representing wage expense for Carol Hill as if she had in fact worked full-time rather than part-time ?." In the absence of a contractual relationship between the parties, this Instruction may have been proper. But here the terms of the contract establish the obligations, and the prosecution failed to meet its burden to prove that there was a material misrepresentation with respect to the obligations established by the contract. Indeed, the Instruction even omitted any reference to the requirement of materiality. See Simons, supra.
A mail fraud conviction under Section 1341 cannot be based on a deprivation of contractual rights if the terms of the contract are not "reasonably certain." United States v. Miller, 997 F.2d 1010, 1018 (2nd Cir. 1993). It is well-established that "[c]onduct which is wrongful in the civil context is not necessarily `wrongful' within the meaning of the larceny statutes." Id. at 1019. A breach of contract itself simply does not constitute a scheme to defraud under the mail or wire fraud statutes. McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786 (1st Cir.), cert. Denied, 498 U.S. 992 (1990).
In reversing a conviction on mail fraud on facts remarkably similar to those presented here, the Court reiterated that "[a] breach of contract does not amount to mail fraud." United States v. D'Amato, 39 F.3d 1249, 1261 n.8 (1st Cir. 1994). In D'Amato, as here, the prosecution obtained a conviction of a professional based on his alleged misrepresentation in providing services for the benefit of a corporation. There, as here, the defendant was a professional prosecuted under the mail fraud statute with respect to his dealings with another private, sophisticated party. There, as here, the allegedly defrauded party had sufficient, although allegedly incomplete, knowledge about the activities of the defendant. There, as here, the disastrous impact on the professional's career by the conviction was disproportionate to the alleged injury. There the amount at issue was even substantially more than the amount at issue here. The Court unanimously reversed the conviction, with the ACLU and many New York Bar associations filing amicus briefs in support of such reversal.
Justice Oliver Wendell Holmes observed long ago that every party to a contract is legally entitled to interpret and breach it, with contractual damages being the remedy available to the other side. Oliver Wendell Holmes, "The Path of the Law," 10 Harv. L. Rev. 457, 462 (1897). The mail fraud statute did not criminalize reliance by one party on the express terms of a private contract with another, nor did it criminalize immaterial false representations relating to such contracts. Dr. Gailey's conviction for mail fraud must be reversed.
IF THE CONCEPT OF "PROPERTY" AS USED IN THE FEDERAL MAIL FRAUD STATUTE IS BROADENED TO INCLUDE DISPUTED CONTRACTUAL ENTITLEMENTS, THEN THERE IS LACK OF ADEQUATE NOTICE AND EXCESSIVE PROSECUTORIAL DISCRETION IN VIOLATION OF THE DUE PROCESS CLAUSE OF THE FIFTH AMENDMENT
Constitutional due process requires that "no man shall be held criminally responsible for conduct which he could not reasonably understand to be proscribed." United States v. Harriss, 347 U.S. 612, 617 (1954); see also Kolender v. Lawson, 461 U.S. 352 (1983); Lanzetta v. New Jersey, 306 U.S. 451 (1939); People v. Bright, 71 N.Y.2d 376, 526 N.Y.S.2d 66 (1988). Efforts by physicians to find efficient means to market their services - here Dr. Gailey retained a business manager already employed by a physical therapist - cannot be subjected to an arbitrary broadening of the mail fraud statute. The unexpected expansion of the mail fraud statute to the private contractual relationship here, without any proof of materiality or injury, is precluded by the due process clause of the Constitution.
The Supreme Court emphasized the importance of this constitutional limitation in Kolender:
Kolender, 461 U.S. at 357-58. Imprecise laws - or imprecise implementations of laws - give rise to "arbitrary and erratic arrests and convictions." Papachristou v. City of Jacksonville, 405 U.S. 156, 162 (1972).
Both the "actual notice" and the "minimal guidelines for law enforcement" requirements were violated by this mail fraud conviction. Neither Dr. Gailey nor his attorney could have possibly imagined a mail fraud violation based on his interpretation of the contract, which authorized him to request the Hospital loan on a cash basis rather than accrual basis. Such application of the mail fraud statute, which is wholly unprecedented, constitutes lack of the requisite actual notice. Moreover, the conviction eliminates minimal guidelines for law enforcement, because it establishes a precedent for prosecution under the mail fraud statute based on virtually any private contractual dispute.
This conviction, if sustained, would open a Pandora's box of unlimited prosecutions. Outspoken critics of the government - from civil rights advocates to politicians to critics of managed care - would now be subject to arbitrary prosecution based on disagreements between private parties. Unless reversed, this precedent would enable prosecutions based on private contractual disputes. Such expansion of the mail fraud statute is not permitted by the due process clause, which precludes the use of general statutory provisions in order to criminalize minor breaches of contractual provisions. See United States v. Bass, 404 U.S. 336, 347-50 (1971). There the Court emphasized the principles that "'fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed'" and that "legislatures and not courts should define criminal activity." Id. (quoting McBoyle v. United States, 283 U.S. 25, 27 (1931) (Holmes, J.)).
As the Supreme Court has since reiterated:
McNally v. United States, 483 U.S. 350, 360 (1987) (citations omitted). See also United States v. Barta, 635 F.2d 999 (2d Cir. 1980), cert. Denied, 450 U.S. 998 (1981) United States v. Ballard, 663 F.2d 534 (11th Cir. 1981), rehear'g denied and modified, 680 F.2d 352 (11th Cir. 1982).
Congress may have constitutional authority to extend the mail fraud statute to intrastate contractual disputes between private parties, but it has not expanded the mail fraud statute that far and this Court should not so expand it here. "Because construction of a criminal statute must be guided by the need for fair warning, it is rare that legislative history or statutory policies will support a statute broader than that clearly warranted by the text." Ratzlaf v. United States, 510 U.S. 135, 148 (1994) (quoting Crandon v. United States, 495 U.S. 152, 160 (1990)). The conviction of Dr. Gailey violated the fundamental principle of due process guaranteed by the Constitution.
For the reasons given and those stated in Dr. Gailey's brief, this Court should reverse Dr. Gailey's conviction.
Dated: January 5, 1999
ANDREW L. SCHLAFLY, ESQ.