Federal fraud after Kousisis

This is part of SCOTUSblog’s term in review series, in which scholars analyze some of the most significant cases of the 2024-25 Supreme Court term.

In Kousisis v. United States, decided on May 22, the Supreme Court considered the breadth of federal wire and mail fraud offenses and unanimously rejected a requirement that a fraud victim suffer a net economic loss. Instead, the court focused on whether the fraudster’s misrepresentations were material – that is, whether they would have affected the victim’s decision to engage in the fraudulent transaction in the first place.

By focusing on when a misrepresentation is material to a victim instead of when a misrepresentation causes a net economic loss, the court rejected a requirement not found in the statute’s text and avoided questions about which losses would support a fraud claim. But it opened the door to questions about what, exactly, constitutes materiality, which will undoubtedly become the focus of future litigation in the wake of the ruling.

The nature of fraud

At its core, fraud involves competition between the criminal and the victim. The criminal devises a means to deceive the victim to obtain money or property, and because those deceptions must catch the victim off guard, the deceptive means often evolve – as any recipient of phishing attacks knows. The shifting and varied ways in which frauds are carried out mean that legal standards governing fraud inescapably speak at a higher level of generality than those for some other offenses. And generality in criminal law attracts judicial scrutiny.

Just as highly specific, targeted criminal statutes, such as the federal offense that prohibits pointing a laser at an aircraft, 18 U.S.C. § 39A, can elicit cries of overcriminalization as the variety of tailored criminal offenses multiply, the alternative – where Congress addresses criminal conduct through highly general, adaptable criminal statutes like federal mail fraud, 18 U.S.C. § 1341, or wire fraud, 18 U.S.C. § 1343 – can prompt worries about breadth and the offense’s outer limits.

As relevant in Kousisis, the federal wire and mail fraud statutes criminalize the use of the mail or wires to carry out “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” Courts have construed this statutory language to require the government to prove that a defendant participated in a scheme to defraud, that the defendant intended to defraud, and that an interstate wire or use of the mail occurred in furtherance of that scheme.

In refining what counts as a scheme to defraud, the Supreme Court held in Ciminelli v. United States that when engaging in deception, a defendant must have money or property as the object of the fraud. Or, as the court put it in Kelly v. United States, “property must play more than some bit part in a scheme: It must be an ‘object of the fraud,’” and “a property fraud conviction cannot stand when the loss to the victim is only an incidental byproduct of the scheme.”

Enter Kousisis

But what happens when the victim suffers no economic loss? Has the person still been defrauded in accordance with the mail and wire fraud laws?

In Kousisis, the court considered this question and unanimously answered it in the affirmative. At first glance, the decision might seem to run afoul of the rule about money or property’s role in the offense described above. Stamatios Kousisis and his company falsely represented that they were using a disadvantaged business as a supplier in securing contracts from the Pennsylvania Department of Transportation. Challenging their convictions, the defendants argued that their conduct fell outside the federal wire fraud statute because the services that they ultimately provided were not deficient and thus, on their view, did not cause the victim net pecuniary harm.

The court nevertheless upheld the convictions, finding them consistent with the requirement in Ciminelli that money or property be a principal object of the fraud. Specifically, the object of the fraud in the case was, in the court’s view, obtaining money via contracts with the state government, even though the lie to obtain that money dealt with a purported characteristic of the defendant’s supplier. And the absence of a net economic loss to the victim was not enough, the court concluded, to remove the conduct from qualifying as federal fraud.

In reaching that result, Justice Amy Coney Barrett’s opinion, joined in full by six justices and in part by one more, focused on several key points.

First, the statute requires that the defendant “obtain” money or property from the victim, and under a dictionary definition of “obtain,” a “thing is no less ‘obtained’ simply because something else is simultaneously given in return.” The wire fraud statute “does not so much as mention loss, let alone require it,” Barrett wrote.

Second, recognizing that Congress’s use of common-law terms like “defraud” or “fraudulent pretenses” will generally adopt those terms’ common-law meanings, the Supreme Court rejected the premise that economic loss is invariably required under common-law fraud.

Third, although Kousisis argued that prior Supreme Court precedent rejected the government’s fraudulent-inducement theory of liability, the court explained that, in fact, it had “twice rejected the argument that a fraud conviction depends on economic loss.” When a fraud scheme deprived a newspaper of its right to exclusive use of proprietary information, for example, that taking of property sufficed even if there was no monetary loss, as in Carpenter v. United States. And, in Shaw v. United States, the court previously affirmed a bank fraud conviction even though no bank involved in the scheme had “suffered any monetary loss.”

The question of materiality

In determining that net economic loss is not required to sustain federal fraud convictions, the court emphasized another standard to confine the scope of such prosecutions: materiality, which “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation” and “asks whether the misrepresentation ‘constituted an inducement or motive to enter into a transaction.’” This choice makes sense.  As the court stated in Kousisis, the common law has “long embraced” materiality “as the principled basis for distinguishing everyday misstatements from actionable fraud.”

But, while refocusing federal fraud on materiality and noting in general terms what materiality is, the court declined to resolve more specifically what qualifies as material. Enumerating a list of standards with slightly different shades of meaning, the court simply noted that materiality “asks whether the misrepresentation ‘constituted an inducement or motive’ to enter into a transaction,” whether “a reasonable person would attach importance to [the misrepresentation] in deciding how to proceed,” or whether “the defendant knew (or should have known) that the recipient would likely deem it important.”

The court also noted the federal government’s endorsement of “an essence-of-the-bargain test, under which a misrepresentation is material only if it goes ‘to the very essence’ of the parties’ ‘bargain’” – a phrasing of materiality that the court mentioned in a case interpreting a civil suit under the False Claims Act, Universal Health Services, Inc. v. United States ex rel. Escobar. Having conceded in Kousisis that Escobar applies, the government is unlikely to retreat from this position in future federal fraud cases. 

The question may then turn on what constitutes the “essence of the bargain” in a federal fraud case. Most federal fraud prosecutions involve incontestable misrepresentations at the heart of a deal that cause significant losses. For example, a gross misrepresentation about the level of risk an investment involves – such as in a Ponzi scheme – directly affects the expected value of that investment. Such cases will surely meet the “essence of the bargain” standard. But in cases where no loss occurs from a misrepresentation and the misrepresentations seem more peripheral, courts will need to define the nature and scope of the parties’ bargain to determine whether a fraudulent misrepresentation went to its essence – a process likely to be heavily fact dependent. 

Consider healthcare, where services and payments are bristling with regulatory standards. A civil False Claims Act case from the U.S. Court of Appeals for the 3rd Circuit, United States v. Care Alternatives, provides facts involving Medicare reimbursement that, if treated criminally, would raise both close legal and factual issues.

For Medicare to reimburse providers for palliative care of terminally ill patients, a physician must certify that the individual receiving the care is not expected to live more than six months and must provide sufficient documentation. The private plaintiffs in the case brought a False Claims Act case alleging that providers’ certifications relied on deficient supporting documentation, without necessarily disputing that the patients were terminally ill.

In requiring the case to go to a jury, the 3rd Circuit identified legal issues about how factors identified in Escobar in defining materiality work together and whether the facts could support a finding of materiality. The legal factors the court considered included whether the government expressly designated the requirement as a condition of payment, whether the alleged violation was minor or instead went to the essence of the bargain, and whether the government continued the payments despite actual knowledge of the violation. The 3rd Circuit held that the district court erred in finding materiality lacking by treating as dispositive that the government paid despite knowing exactly what documentation had been submitted. The 3rd Circuit also evaluated the “essence of the bargain” as one factor among several and did not appear to view it as a necessary condition for finding materiality.

The materiality standard in federal fraud prosecutions could prove contentious if Kousisis ushers in a wave of weaker fraud prosecutions from the government, particularly involving compliance with regulatory requirements in government programs where the misrepresentations at issue have little bearing on harm to the public fisc. For example, to borrow an example from Justice Clarence Thomas’ opinion in Escobar,would a company’s failure to use U.S.-made office supplies while adequately providing contracted-for health services, as required by its government contract, be material? What about its failure to comply with anti-discrimination laws in hiring or firing employees? How the government chooses to deploy federal fraud statutes following Kousisis will directly affect how close the calls are on materiality. And whether charging decisions stay within reasonable bounds or increasingly elevate civil disputes into criminal cases will, as always, hinge on the wisdom of executive branch exercises of discretion.

Conclusion

The court’s decision in Kousisis persuasively concluded that the federal fraud statutes do not require proof of a net economic loss. But in rejecting this putative limit, the court left open what materiality standard should govern federal fraud moving forward. Ultimately, the significance of that opening will depend not only the decisions of lower courts, but how the government uses Kousisis to inform its charging decisions in more marginal cases.