For years, the federal courts of appeals have disagreed whether a party could be found guilty of criminal fraud if they induced another party into a contract on false pretenses, but the victim got the benefit of the bargain. In other words, if someone tells you a lie to get you to enter into a contract with them, and you wouldn’t have entered the contract absent the lie, can that person use as a defense the fact that they performed the contract and gave you everything you were entitled to?
The common law definition of fraud includes not only that the defendant lied to the plaintiff, but that the plaintiff reasonably relied on the defendant’s false statements to the plaintiff’s detriment. The last part requires that the plaintiff suffer some kind of recognizable harm (usually lost money or business opportunities) in order to prove fraud.
Recently, the Supreme Court decided the case Kousisis et al. v. United States and answered this question. The appellants in Kousisis challenged their conviction under a federal wire fraud statute (18 U. S. C. §1343). The wire fraud statute makes it a crime to perpetrate any “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce.” The appellants claimed they didn’t intend to cause the purported victim (the Pennsylvania Department of Transportation) financial harm when they made what the court determined were knowingly false statements in their bid on a construction project. The Pennsylvania DOT bidding rules required that contractors employ disadvantaged small businesses in the subcontracting of the project. Kousisis’s bid indicated they would use a disadvantaged small business to procure the paint supplies for the project, which was untrue. But Kousisis performed the contract (even though they did not use a disadvantaged small business as they contracted to do) and the Pennsylvania DOT suffered no financial loss. Since DOT didn’t lose any money, was there a crime?
The Supreme Court said yes. Because Kousisis made a knowingly false representation in order to obtain a financial benefit they otherwise would not have been entitled to, they could still be convicted under the federal wire fraud statute. This theory is known as fraudulent inducement – when one party makes materially false statements to induce another into a contract they otherwise wouldn’t have signed. In numerous jurisdictions in the United States, the accused could rely on the fact that they had fully performed the contract in order to avoid criminal liability. That will no longer be the case under federal law.
In its ruling, the Supreme Court noted that a conviction for fraud still requires the government to prove that the false statement made by the defendant was material, meaning it was important to the counter-party’s decision to enter into the contract. Not every misrepresentation will be the basis of a fraud charge. Minor details that don’t affect the parties’ decision enter into the contract are not actionable. But in Kousisis, the appellants didn’t challenge the fact that including the disadvantaged small business was a requirement for Pennsylvania DOT. If, however, including disadvantaged small business subcontracts was not important to Pennsylvania DOT, there would be no liability if the bidder stated it was going to use a disadvantaged small business subcontractor even if it had no intention of doing so.
Wire fraud charges are a staple of the Department of Justice’s White Collar criminal practice, so this decision could result in far more robust enforcement. The decision could also have a big impact on civil RICO claims brought by private plaintiffs. Those claims require showing that a business or other entity was operating in a corrupt manner, which is often done by demonstrating wire fraud.
Our team of highly experienced trial attorneys includes former federal and state prosecutors and public defenders with an outstanding track record in white collar matters as well as civil fraud claims. No matter how the legal landscape changes, we stand ready to provide the best counsel and advocacy for our clients. Bring us your toughest case. We’ll get the job done.