Slated for the October 2024 Term, the U.S. Supreme Court in Kousisis v. United States, Case No. 23-909 (O.T. 2024), appears poised to further limit the reach of the federal mail and wire fraud statutes. At issue in Kousisis is whether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme. The Court's grant of certiorari in Kousisis is a strong signal that it will reject the so-called "fraudulent inducement" theory, continuing the Court's recent course of narrowing the scope of the mail and wire fraud statutes.
Background
Stamatios Kousisis and Alpha Paint and Construction Co., Inc. ("Alpha" and together with Kousisis, "Petitioners") won two federally-funded bridge repair contracts from the Pennsylvania Department of Transportation ("PennDOT"), conditioned upon a certain percentage of the contract amounts going to "Disadvantaged Business Enterprises" ("DBEs"). The Department of Justice indicted Kousisis and Alpha, alleging that they used a subcontractor that they falsely represented met the DBE criteria but, because the subcontractor functioned as a "mere pass-through" while adding a 2.25% fee, it did not meet the statute's requirement to perform a "commercially useful function." See Brief for Petitioners in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 9; 49 C.F.R. §26.55(c); Brief for Respondent in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 3-4.
The federal wire and mail fraud statutes prohibit "devis[ing] or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses" through mail or wire. 18 U.S.C. §§ 1341, 1343. Although Petitioners were the "lowest bidders by millions," "undisputedly did high-quality work," and PennDOT suffered no financial harm, the prosecution nevertheless argued that the "money" fraudulently obtained was the value of the government contracts, and that the "property" fraudulently obtained was the "DBE credit." Brief for Petitioners in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 5, 13-14. Petitioners were convicted of wire fraud, conspiracy to commit wire fraud, and false statements. Kousisis was sentenced to 70 months in prison, and Alpha was required to forfeit 100% of its profits on the project, totaling almost $11 million, in addition to a $500,000 fine. Id. at 15.
On appeal to the Third Circuit, Petitioners argued that their alleged deception did not satisfy the federal wire fraud statute because their scheme was not intended to cause economic harm and no traditional property interest was implicated because the DBE requirement is intangible. However, the Third Circuit affirmed the convictions, holding that "all interests protected by contract are 'property,'" and that PennDOT's interest in requiring DBEs to work on the project was indeed a "property" interest of which PennDOT was deprived. Id. at § (C) ("Third Circuit Proceedings").
Recent Cases on the Federal Wire and Mail Fraud Statutes
The Supreme Court granted certiorari in Kousisis to resolve a 6-5 circuit split as to whether fraudulent inducement of a contract satisfies the federal mail and wire fraud statutes. Kousisis follows a line of cases over the past decade that have limited the scope of these statutes. In Skilling v. United States, 561 U.S. 358 (2010), the Court narrowed honest services wire fraud to schemes involving kickbacks and bribes. In McDonnell v. United States, 579 U.S. 550 (2016), a case involving public corruption, the Court further limited honest services fraud to "official acts." More recently, in Kelly v. United States, 590 U.S. ___ (2020); 140 S. Ct. 1565 (2020), the Court held that the federal wire and mail fraud statutes reach only "tangible" property interests. And in Ciminelli v. United States, 598 U.S. 306 (2023), the Court held mail and wire fraud charges could not be predicated on the "right to control" theory which effectively criminalized "almost any deceptive act"—irrespective of whether there was an intent to harm economic interests or tangible property. See Ciminelli, 598 U.S. at 315.
In Kousisis, Petitioners argue that "[t]he fraudulent inducement theory makes 'obtaining by fraud' enough" and that "[d]efining property fraud to include all deceptive 'schemes to get money' (or another form of property) leaves its outer bounds ambiguous." Brief for Petitioners in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 7. Petitioners further argue that the Third Circuit's holding runs counter to Ciminelli, where the Court reasoned that "the federal fraud statutes criminalize only schemes to deprive people of traditional property interests." Id. at 20. In response, the government argues that Petitioners' scheme allowed them to obtain millions of dollars they otherwise would not have received absent their false representation and that, contrary to Petitioners' arguments, PenDOT did suffer sufficient economic harm "based on the 2.25% fee that Markias charged PenDOT for acting as a pass-through DBE." Brief for Respondent in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 7, 11. The government further contends that the mail and wire fraud statutes do not require proof of intent to cause economic harm based on the Court's rejection of "such a requirement in interpreting the similarly-worded bank-fraud statute," which creates liability for schemes "to defraud a financial institution" or "to obtain any of the moneys . . . or other property owned by . . . a financial institution, by means of false or fraudulent pretenses" id. at 8 (citing 18 U.S.C § 1344)—nearly the same language that is in the mail and wire fraud statutes.
Implications
Kousisis is a vehicle for the Court to resolve a near-even circuit split as to the reach of the federal wire and mail fraud statutes. An amicus brief submitted in support of Petitioners raises the concern that, if the Court lets stand the fraudulent inducement theory, "by redefining all contract provisions as property interests so long as they are important enough to the victim to affect its decisions," "federal prosecutors could convert a breach of virtually any contract provision into a federal fraud prosecution." Brief of Amici Curiae for the Cato Institute, et al., in Kousisis v. United States, O.T. 2024, Case No. 23-909 at 6, 17. But the grant of certiorari in this case, and the Court's multiyear trajectory of narrowing the scope of the mail and wire fraud statutes, suggests the Court is poised to reject the fraudulent inducement theory, restricting mail and wire fraud charges to fact patterns where inflicting tangible, economic harm on a victim is the object of the scheme. If so, defendants in alleged contracting fraud cases and other species of white-collar prosecutions will have a viable path to dismissing the charges against them.
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