SCOTUS Holds Intent to Cause Economic Harm Is Not Required for Wire Fraud, Expanding Liability

Background
Stamatios Kousisis and Alpha Painting and Construction Co. (Alpha) together secured two contracts with the Pennsylvania Department of Transportation (PennDOT) for industrial painting projects in Philadelphia. PennDOT and federal regulations required bidders to subcontract a portion of work to a disadvantaged business enterprise (DBE). In its bid, Kousisis stated that Alpha would obtain paint supplies from a supplier who qualified as a DBE. However, this DBE supplier functioned merely as a “pass-through” entity and thus failed to meet the statutory requisite that it play a “commercially useful function.” This also violated the contract with PennDOT, which specified that failure to comply with the provisions regarding the participation of DBEs would constitute a material breach.

After trial, a jury convicted Kousisis and Alpha of three counts of wire fraud and conspiracy to commit the same. Kousisis and Alpha moved for a judgment of acquittal, contending that because PennDOT received the full economic benefit of what it bargained for and they did not intend to cause economic harm to PennDOT, there was no federal wire fraud.

The district court rejected that argument and upheld the convictions. The Third Circuit affirmed, finding that the statutory requisite regarding “money or property” was met because the defendants “set out to obtain millions of dollars that they would not have received but for their fraudulent misrepresentations.” The Third Circuit thus embraced the fraudulent-inducement theory, which imparts criminal liability for a material misstatement regardless of whether the defendant intended to cause the victim economic loss.

In rejecting an economic loss requirement for federal wire fraud, the Third Circuit joined the Seventh, Eighth and Tenth Circuits. The Second, Sixth, Ninth, Eleventh and D.C. Circuits imposed such a requirement. The Supreme Court therefore granted certiorari to resolve this Circuit split.

Supreme Court Decision
At the outset, the Court examined the plain text of the federal wire statute, emphasizing that to prove wire fraud, the government must show that a defendant used the wires to effectuate a “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” The Court underscored that wire fraud is only actionable if the defendant “engaged in deception” and if “money or property” was “an object” of that deception.

The Court held that the fraudulent-inducement theory, which has no economic loss requirement, is consistent with the text of the federal wire fraud statute. It declared the statute is “agnostic about economic loss” and “does not so much as mention loss, let alone require it.”

The Court further clarified that its holding did not conflict with recent Supreme Court precedent. It distinguished Cleveland v. United States and Kelly v. United States on the grounds that those frauds involved the government’s regulatory powers, not the requisite fraudulent scheme to obtain “money or property.” The Court also aligned its holding with Ciminelli v. United States. In Ciminelli, the Supreme Court rejected the “right-to-control” theory, which treated “mere information” as a protected property interest. In contrast, the fraudulent-inducement theory is tethered to tangible, traditional concepts of property.

Finally, addressing the defendants’ argument that its holding could turn every intentional misrepresentation in a business transaction into a criminal fraud, the Court stressed that the “demanding” materiality standard acts as a critical safeguard, which “substantially narrows the universe of actionable misrepresentations.”

Justice Thomas’s Concurring Opinion
Justice Thomas concurred, urging lower courts to rigorously enforce the demanding materiality standard. Although materiality was not contested in Kousisis, Justice Thomas posited that the misstatements were not material. He reasoned that the DBE provisions were unrelated to the contracted work and were given substantially less weight than the “quality and timeliness” requirements. He underscored that while DBE noncompliance may have led to termination, it did not, unlike for poor or delayed performance, trigger mandatory payment deductions. Justice Thomas further opined that widespread knowledge of “rampant misrepresentations in the DBE program” might indicate that the government did not consider the DBE requirement to be material. Finally, he emphasized that materiality “turns on substance rather than labels,” so a contract provision’s self-designation as material carries little to no weight.

Legal and Practical Implications
This decision arguably broadens the scope of federal wire fraud because it does not require the government to prove that the defendant intended to cause economic harm. While this may encourage more prosecutions under the fraudulent-inducement theory, the Court addressed the concern that its decision will open the floodgates by emphasizing that materiality remains a high bar, limiting actionable misrepresentation claims. While the Court was not required to examine materiality, Justice Thomas’s concurring opinion, which contends that it was not met, may offer useful support for defendants seeking to hold the government to that demanding standard.