Tuesday, July 22, 2014

More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (7/22/14)

Yesterday, I wrote a blog titled Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.  In that blog, I concluded that willful blindness for purposes of the income tax and the FATCA willful penalty did not include gross negligence or its parallel recklessness.  A reader pointed out that the Fourth Circuit had concluded that recklessness could meet the definition of willfulness.  United States v. Williams, 489 Fed. Appx. 655; 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).  (For my prior blog on the Williams case, see Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  Today's blog addresses this aspect of the Williams holding.

I will focus on the FBAR side of the issue here.  The FBAR willfulness civil penalty is as follows (Section 5321(a)(5)(C), here:
(C) Willful violations.— In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
    (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
        (I) $100,000, or
        (II) 50 percent of the amount determined under subparagraph (D), 
So, the key statutory term is willfully.  As the Courts have noted on many occasions, when Congress uses the term willfully in statutory schemes, it may mean different things.  See Bryan v. United States, 524 U.S. 184, ___ (1998), here; see also former Justice Souter's opinion in  Justice Souter’s opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir.  2014), here (“willful” is a “chameleon” which changes in tone and color according to the Code section involved and the circumstances).  However, as Cheek noted, in the federal tax criminal provisions, it means intent to violate a known legal duty, the strictest formulation of scienter for the word willfully.  Cheek v. United States, 498 U.S. 192 (1991), here.  In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court held that willfully as used in Section 5322(a), here, the criminal provision for willfully violating the antistructuring provisions, should be interpreted the same as in Cheek -- intent to violate a known legal duty.  Ratzlaf had to know that structuring was illegal and intend to violate the law in order to be prosecuted.  In the course of so holding, the Court said:
A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] -- reading the word differently for each code section to which it applies -- would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").
The FBAR criminal penalty is in Section 5322(a) also. The FBAR civil willfullness penalty is part of the same regulatory scheme, incorporated in the immediately  preceding Code section, Section 5321.  Significantly, Section 5321(d) says that the civil penalty can apply "notwithstanding the fact that a criminal penalty is imposed with respect to the same violation."  So, referring to the above quote from Ratzlaf, willfulness for purposes of the civil penalty would have the same interpretation of willfully -- intent to violate a known legal duty.  Hence, the IRM  says that, for purposes of the FBAR civil penalty, "The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.  (07-01-2008) FBAR Willfulness Penalty - Willfulness, here.  We thus do not have to pick among possible meanings of willfully, we know the meaning of willfully.

In Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), here, the issue was the definition of willfully in the Fair Credit Reporting Act ("FCRA") which subjected violators to actual, statutory and even punitive damages.  The Court adopted a "standard civil usage" of the term willfully to include reckless conduct.  The essence of the holding is captured in the following excerpt (pp. 56-58):
GEICO and Safeco argue that liability under § 1681n(a) for "willfully fail[ing] to comply" with FCRA goes only to acts known to violate the Act, not to reckless disregard of statutory duty, but we think they are wrong. We have said before that  "willfully" is a "word of many meanings whose construction is often dependent on the context in which it appears," Bryan v. United States, 524 U.S. 184, 191, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998) (internal quotation marks omitted); and where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well, see McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132-133, 108 S. Ct. 1677, 100 L. Ed. 2d 115 (1988) ("willful," as used in a limitation provision for actions under the Fair Labor Standards Act, covers claims of reckless violation); Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125-126, 105 S. Ct. 613, 83 L. Ed. 2d 523 (1985) (same, as to a liquidated damages provision of the Age Discrimination in Employment Act of 1967); cf. United States v. Illinois Central R. Co., 303 U.S. 239, 242-243, 58 S. Ct. 533, 82 L. Ed. 773 (1938) ("willfully," as used in a civil penalty provision, includes "'conduct marked by careless disregard whether or not one has the right so to act'" (quoting United States v. Murdock, 290 U.S. 389, 395, 54 S. Ct. 223, 78 L. Ed. 381, 1934-1 C.B. 144, 1934-1 C.B. 145 (1933))). This construction reflects common law usage, which treated actions in "reckless disregard" of the law as "willful" violations. See W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 34, p 212 (5th ed. 1984) (hereinafter Prosser and Keeton) ("Although efforts have been made to distinguish" the terms "willful," "wanton," and "reckless," "such distinctions have consistently been ignored, and the three terms have been treated as meaning the same thing, or at least as coming out at the same legal exit"). The standard civil usage thus counsels reading the phrase "willfully fails to comply" in § 1681n(a) as reaching reckless FCRA violations, and this is so both on the interpretive assumption that Congress knows how we construe statutes and expects us to run true to form, see Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152, 159, 113 S. Ct. 2006, 124 L. Ed. 2d 71 (1993), and under the general rule that a common law term in a statute comes with a common law meaning, absent anything pointing another way, Beck v. Prupis, 529 U.S. 494, 500-501, 120 S. Ct. 1608, 146 L. Ed. 2d 561 (2000).
Focus on what the Court did not do.  It did not adopt the strict meaning of willfully to require intent to violate a known legal duty, but rather adopted a different one where recklessness would suffice.  Recklessness does not suffice to constitute willfulness as defined to mean intent to violate a know legal duty.  And, Safeco says nothing -- repeat nothing -- about willful blindness.  So, the key is that Safeco did not involve the definition of willfulness that applies in the FBAR civil and criminal penalties -- intent to violate a known legal duty.

In Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct. 2060 (2011), here, the issue was liability under the patent law for inducing infringement of a patent and what level of scienter was required for civil liability.  The Court concluded that a violator must know  “that the combination for which his component was especially designed was both patented and infringing.”  That is a pretty specific intent requirement, probably akin to the Cheek and Ratzlaf requirements for willfully.  The Court held that "the evidence in this case was plainly sufficient to support a finding of Pentalpha's knowledge under the doctrine of willful blindness."  The Court then launched into a discussion of willful blindness to supply meet a specific scienter requirement.  It is significant that the Court's discussion of the criminal law concept of willful blindness went well beyond the case.  Here are the key excerpts (pp. 2068-2071, footnotes omitted):
The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances. The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. Edwards, The Criminal Degrees of Knowledge, 17 Mod. L. Rev. 294, 302 (1954) (hereinafter Edwards) (observing on the basis of English authorities that “up to the present day, no real doubt has been cast on the proposition that [willful blindness] is as culpable as actual knowledge”). It is also said that persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts. See United States v. Jewell, 532 F.2d 697, 700 (CA9 1976) (en banc). 
This Court's opinion more than a century ago in Spurr v. United States,  174 U.S. 728, 19 S. Ct. 812, 43 L. Ed. 1150 (1899),6 while not using the term “willful blindness,” endorsed a similar concept. The case involved a criminal statute that prohibited a bank officer from “willfully” certifying a check drawn against insufficient funds. We said that a willful violation would occur “if the [bank] officer purposely keeps himself in ignorance of whether the drawer has money in the bank.” Id., at 735, 19 S. Ct. 812, 43 L. Ed. 1150. Following our decision in Spurr, several federal prosecutions in the first half of the 20th century invoked the doctrine of willful blindness. Later, a 1962 proposed draft of the Model Penal Code, which has since become official, attempted to incorporate the doctrine by defining “knowledge of the existence of a particular fact” to include a situation in which “a person is aware of a high probability of [the fact's] existence, unless he actually believes that it does not exist.” ALI, Model Penal Code § 2.02(7) (Proposed Official Draft 1962). Our Court has used the Code's definition as a guide in analyzing whether certain statutory presumptions of knowledge comported with due process. See Turner v. United States, 396 U.S. 398, 416-417, 90 S. Ct. 642, 24 L. Ed. 2d 610 (1970); Leary v. United States, 395 U.S. 6, 46-47, and n. 93, 89 S. Ct. 1532, 23 L. Ed. 2d 57 (1969). And every Court of Appeals--with the possible exception of the District of Columbia Circuit, see n. 9, infra--has fully embraced willful blindness, applying the doctrine to a wide range of criminal statutes. 
Given the long history of willful blindness and its wide acceptance in the Federal Judiciary, we can see no reason why the doctrine should not apply in civil lawsuits for induced patent infringement under 35 U.S.C. § 271(b). 
* * * *\ 
While the Courts of Appeals articulate the doctrine of willful blindness in slightly different ways, all appear to agree on two basic requirements: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact. We think these requirements give willful blindness an appropriately limited scope that surpasses recklessness and negligence. Under this formulation, a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts. See G. Williams, Criminal Law § 57, p. 159 (2d ed. 1961) (“A court can properly find wilful blindness only where it can almost be said that the defendant actually knew”). By contrast, a reckless defendant is one who merely knows of a substantial and unjustified risk of such wrongdoing, see ALI, Model Penal Code § 2.02(2)(c) (1985), and a negligent defendant is one who should have known of a similar risk but, in fact, did not, see § 2.02(2)(d).
From the above, it is clear that the Supreme Court requires willful blindness to entail willful action -- deliberate action evidencing intent to avoid knowing.  Recklessness is not sufficient.

Now, we get to United States v. Williams, 489 Fed. Appx. 655, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012), here.  I won't get into many of the details since I have done that in the prior blog:  Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  The key excerpt in Williams is:
"Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information," and it "can be inferred from a conscious effort to avoid learning about reporting requirements." United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (internal citations omitted) (noting willfulness standard in criminal conviction for failure to file an FBAR). Similarly, "willful blindness" may be inferred where "a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011) (affirming criminal conviction for willful tax fraud where tax preparer "closed his eyes to" large accounting discrepancies). Importantly, in cases "where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well." Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57, 127 S. Ct. 2201, 167 L. Ed. 2d 1045 (2007) (emphasis added).Whether a person has willfully failed to comply with a tax reporting requirement is a question of fact. Rykoff v. United States, 40 F.3d 305, 307 (9th Cir. 1994); accord United States v. Gormley, 201 F.3d 290, 294 (4th Cir. 2000) ("[T]he question of willfulness is essentially a finding of fact.").
As noted above, the Supreme Court has said on a number of occasions that willfully in a statute means different things in different contexts.  The Supreme Court in Safeco did not say precisely which meaning of willfully it was adopting, but there is not even a hint that it was adopting the strictest meaning -- intent to violate a known legal duty -- that applies in the FBAR civil and criminal penalty context.  So, it was working with a less strict definition (among many possibilities) that did not require intent to violate a known legal duty.  In that different context, it might say that recklessness would suffice.  But that was not the context in Williams.  The Fourth Circuit simply misapplied Safeco.  The more apt Supreme Court authorities, as noted above are Cheek, Ratzlaf and, to the extent willful blindness is relevant, Global Tech, which, although available, the Court did not cite.

Readers should also be wary of the Williams decision because the Fourth Circuit, for whatever reason, did not think it worthy of being precedential in the Fourth Circuit.  That is often a tip-off for caution in an unpublished opinion.  Judge Posner is famously quoted as saying unpublished -- i.e., nonprecedential -- opinions lead to sloppiness.  Indeed, Judge Diana Gribbon Motz, who sat on the Williams panel, quoted Judge Posner as follows (Diana Gribbon Motz, A Federal Judge's View of Richard A. Posner's The Federal Courts: Challenge and Reform, 73 Notre Dame L. Rev. 1029, 1037  (1998), here (footnotes omitted).
As Judge Posner recognizes, closely associated with curtailment of oral argument is "another adaptation to the caseload growth: the unpublished opinion." He gives a good exposition of the dangers of unpublished opinions - how they encourage sloppiness and ducking of important issues, how imprecise standards make it difficult to determine when an opinion merits publication, and how large numbers of unpublished opinions can distort a litigant's perception of winning and give an advantage to a recurrent litigant over a one-timer. But he finally settles on "the relevant tradeoff": freeing time for a judge and clerks to work on cases of broader interest because their precedential value is more important than providing litigants exhaustive reasons for the decision.  I agree, but I would go even further than present practice, at least as that practice exists in the Fourth Circuit.
Thus, the only thing we know for sure is that the Fourth Circuit intended to do in Williams is to hold Mr. Williams liable for the penalty.  Because it expressly made the opinion nonprecedential, it made clear that only Mr. Williams would be bound by it and its reasoning; to state that otherwise, even the Fourth Circuit or  the panel itself is not bound by the precedent in other cases.  I don't know how much reliance one would want to place in such an opinion, particularly when, as I note above, the Court totally misapplied Safeco.

In McBride v. United States, 908 F. Supp. 2d 1186 (D. UT 2012), here, the Court repeated the analysis in Williams.  (For my discussion of this aspect of McBride, see McBride #2 - Proof of Willfulness (Federal Tax Crimes 11/13/12), here.   The key excerpts are:
Because § 5321(a)(5) involves civil penalties, the applicable definition of willfulness is that which has been used in other civil contexts, including civil tax collection matters and compliance with reporting requirements. Where willfulness is a condition of civil liability, it covers “not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co., 551 U.S. at 57; cf. United States v. Illinois Central R. Co., 303 U.S. 239, 242-43 (1938) (“willfully” includes “conduct marked by careless disregard whether or not one has the right to so act”) (citation omitted). Therefore, “willfulness” may be satisfied by establishing the individual’s reckless disregard of a statutory duty, as opposed to acts that are known to violate the statutory duty at issue. See Safeco Ins. Co., 551 U.S. at 57. An improper motive or bad purpose is not necessary to establish willfulness in the civil context. Am. Arms Int’l v. Herbert, 563 F.3d 78, 83 (4th Cir. 2009); Prino v. Simon, 606 F.2d 449, 451 (4th Cir. 1979). 
The Supreme Court recently confirmed that acting with “willful blindness” to the obvious or known consequences of one’s action also satisfies a willfulness requirement in both civil and criminal contexts. See Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068-69 (2011) (“persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts”) (citing United States v. Jewell, 532 F.2d 697, 700 (9th Cir. 1976) (en banc)). Under the “willful blindness” standard, “a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” Id. at 2070-71. Where a taxpayer makes a "conscious effort to avoid learning about reporting requirements," evidence of such willful blindness is a sufficient basis to establish willfulness. United States v. Williams, Case No. 10-2230, 2012 WL 2948569, at *4 (4th Cir. Jul. 20, 2012) (internal quotations omitted).
Suffice it to say that the McBride Court also misapplied Safeco for the same reasons -- Safeco was not applying the definition of willfully for FBAR civil penalty purposes.  Moreover, note the discussion of Global-Tech which, for willful blindness, requires deliberate, conscious action to avoid knowledge.  As the Supreme Court said in Global-Tech, recklessness will not suffice.

So, that is essentially my reasoning for recklessness is neither willfulness nor willful blindness.  (It would seem strange that recklessness could not be willful blindness but could be willfulness itself, particularly where the statute requires intent to violate a known legal duty.)

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