In Kousisis v. United States, No. 23-909 (May 22, 2025), the U.S. Supreme Court held that a defendant who induced a victim to enter a transaction under materially false pretenses could be convicted of federal wire fraud under 18 U.S.C. § 1343, even if the defendant did not seek to cause the victim net economic loss.
In that case, the petitioners, an industrial-painting company and its manager, secured two federally funded government contracts with the Pennsylvania Department of Transportation (PennDOT) for painting projects in Philadelphia that required contract awardees to subcontract a portion of the work to a disadvantaged business enterprise (DBE). The petitioners misrepresented to PennDOT during the bidding process that they would obtain painting materials from a prequalified DBE. Instead, the petitioners concocted a scheme in which the DBE functioned as a “pass-through” entity and the petitioners falsely reported that they made qualifying payments to the DBE throughout the projects.
Following the successful completion of the projects and after the government learned of the petitioners’ scheme, a jury convicted the petitioners of wire fraud and conspiracy to commit wire fraud premised on a fraudulent-inducement theory under 18 U.S.C. §§ 1343 and 1349. The district court denied the petitioners’ motion for a judgment of acquittal, in which the petitioners argued that, even though the DBE did not participate in the projects, PennDOT received the full economic benefit of its bargain, and thus the government could not prove that the petitioners schemed to defraud it of “money or property,” as required for them to be found guilty under 18 U.S.C. § 1343. Like the district court, the U.S. Court of Appeals for the Third Circuit rejected this argument, explaining that “obtaining the government’s money or property was precisely the object” of the petitioners’ “fraudulent scheme.” The U.S. Supreme Court granted certiorari to resolve a split between the circuits over the validity of a federal fraud conviction when the defendant did not seek to cause the victim net pecuniary loss.
Associate Justice Amy Coney Barrett, delivering the opinion of the Court, affirmed the judgment of the Third Circuit, holding that there was no net economic-loss requirement for a conviction of federal wire fraud under 18 U.S.C. § 1343 when a defendant made a material misstatement to induce a victim into a contract that required handing over “money or property.” To distinguish everyday misstatements from actionable fraud, the Court pointed out that the common law embraced the standard of “materiality.” Citing Restatement of the Law Second, Torts § 538 and Restatement of the Law Second, Contracts § 162(2), the Court explained that “a misrepresentation is material if a reasonable person would attach importance to it in deciding how to proceed, or if the defendant knew (or should have known) that the recipient would likely deem it important.” Because, in this case, the petitioners conceded that their misrepresentations were material to the transaction, the Court did not address whether “the traditional materiality test” favored by the petitioners or the “essence of the bargain” test proposed by the government applied for purposes of the statute. The Court merely reiterated “‘that materiality of falsehood is an element of’—and thus a limit on—the federal fraud statutes.” The Court explained that defendants violated 18 U.S.C. § 1343 by making material misrepresentations to “obtain” the victims’ “money or property,” regardless of whether they sought to leave the victims economically worse off.
In a concurring opinion, Associate Justice Clarence Thomas joined in the majority’s holding, but wrote separately to address whether the petitioners’ misstatements were “material,” and thus actionable, under the statute. Skeptical that the petitioners’ misrepresentations were material, Justice Thomas relied on Restatement of the Law Second, Contracts § 162(2) in arguing that the requirement that a portion of the work be subcontracted to a DBE did not go “to the very essence of the bargain,” given that the contracts’ fundamental purpose was to repair bridges in Philadelphia, rather than “minority hiring,” which had no bearing on the petitioners’ ability to complete the projects. In further support of his position, Justice Thomas contended that it was “implausible to think that a ’reasonable person’” would be induced to manifest assent within the meaning of § 162, Comment c, and attach importance to contract provisions that mandated constitutional violations by imposing an “explicitly race-based classification system.”
Associate Justice Sonia Sotomayor, in another concurring opinion, also joined the majority’s opinion to the extent it was based on the statutory text and precedent, but noted that she parted from the majority’s broader approach. Justice Sotomayor argued that the petitioners’ misrepresentations were material whether analyzed utilizing the “traditional” common-law test for materiality defined in Restatement of the Law Second, Torts § 538—under which the petitioners argued that, according to Restatement of the Law Second, Torts § 551(2)(e), the representations need “‘not go to the essence’ of the transaction to qualify as material”—or the government’s more demanding standard that required the representations go to the very “essence of the bargain.” Justice Sotomayor reasoned that “[t]he contracts’ DBE requirement . . . went directly to the viability of the projects themselves, and by extension to the ‘very essence of the bargain,’” given that PennDOT could not have proceeded with the projects as funded if it had not mandated contractor compliance with the DBE requirement, as it would have otherwise faced the risk of serious legal consequences.
Read the full opinion here.