Key Takeaways
As we previously reported, last month, the Supreme Court of the United States in Kousisis v. United States roundly endorsed the expansive “fraudulent inducement” theory of federal wire and mail fraud.[1] Resolving a circuit split, the Court held that a defendant commits federal fraud by making a material misstatement that induces a victim to turn over money or property, regardless of whether the victim had suffered any economic loss in the transaction. The Court thereby significantly expanded the reach of the federal wire and mail fraud statutes, which are two of the bedrock tools of federal prosecutors. That said, concerns raised by three concurring justices may provide defense counsel with arguments to limit the broad scope of the fraudulent inducement theory.
The Kousisis Court—in an opinion by Justice Amy Coney Barrett,[2] with concurrences by Justices Clarence Thomas, Neil Gorsuch, and Sonia Sotomayor—unanimously upheld the wire fraud convictions of an industrial contractor and its manager (the petitioners) who had made material misrepresentations to the Pennsylvania Department of Transportation (PennDOT) to secure two lucrative bridge painting and repair contracts, under which the petitioners received substantial fees. The petitioners had obtained the contracts and fees by falsely representing to PennDOT that they had complied with a federal regulatory requirement by subcontracting a portion of the projects to a qualified “Disadvantaged Business Enterprise” (DBE).[3] Each contract provided that failure by petitioners to comply with the DBE requirement would be a material breach of the contract.
Importantly, the Court upheld the petitioners’ convictions notwithstanding the fact that PennDOT had suffered no economic loss, as it had received and was fully satisfied with the bargained-for painting and repair work. The Court squarely rejected the petitioners’ core argument—which had been adopted by the U.S. Courts of Appeals for the Second, Sixth, Ninth, Eleventh, and District of Columbia Circuits—that the federal wire and mail fraud statutes require prosecutors to prove that a defendant sought to cause the victim a net economic loss.
In rejecting the economic loss rule, the Court analyzed the common law of fraud and found that “‘fraud’ was a term with expansive reach.” It concluded that, while fraud requires a showing of injury to the victim, “it was the deception-induced deprivation of property—not economic loss—that common-law courts generally deemed injurious.” The Court concluded that the fraudulent inducement theory was consistent with both the common-law definition of fraud and the Court’s precedents.
Notably, although the Kousisis Court was unanimous in rejecting the economic loss rule and upholding the convictions, three justices wrote separately to address the potential implications of the fraudulent inducement theory. Justice Thomas—who joined the Court’s endorsement of the fraudulent inducement theory—emphasized the importance of the materiality element of fraud and suggested that petitioners’ misrepresentations regarding DBE compliance were not in fact material. Justice Gorsuch expressed concerns about the breadth of the fraudulent inducement theory as articulated in the Court’s opinion and whether that theory will allow federal prosecutors to turn all manner of “harmless lies” into criminal fraud. Justice Sotomayor echoed some of Justice Gorsuch’s concerns and rebutted Justice Thomas’s analysis of the materiality of the petitioners’ misstatements.
Is the Court’s Fraudulent Inducement Theory Excessively Broad?
Both Justice Gorsuch and Justice Sotomayor raised concerns about the Court’s articulation of the fraudulent inducement theory. In particular, they worry about the breadth of the Court’s stark conclusion that “a fraud is complete when the defendant has induced the deprivation of money or property under materially false pretenses.”
Justice Gorsuch argued that, contrary to the Court’s analysis, such a statement is not well grounded in the common law or the Court’s precedents. But more fundamentally—and as is potentially relevant to future cases—both justices worry that such a conclusion will give prosecutors and courts “a commission to prosecute and punish harmless lies” and will allow criminal charges against a defendant who “provides exactly the goods or services that they promised to deliver, but lies in other ways to induce the transaction.” Both justices offered hypothetical examples of individuals whom they believe could be unfairly charged under the Court’s fraudulent inducement theory. Consider, for example, an “exemplary” babysitter who lies in a phone interview about the absence of a past criminal record. As to whether the babysitter should face federal criminal charges because her lie induced the parents to hire and pay her for babysitting services, Justice Gorsuch responds, “[o]f course not.” But he contends that the Kousisis opinion leaves open that possibility.
As a limiting principle, both justices argued that courts considering federal fraud charges should require proof that “a defendant deprived his victim of ‘what he bargained for.’” As stated by Justice Sotomayor, “[w]hen a defendant tricks a victim out of their money by promising one thing and delivering something materially different, it is no defense to say that the delivered items are of equal economic value.” Both justices also argued that a “benefit-of-the-bargain” rule—rather than the Court’s fraudulent inducement theory—is sufficient to resolve the case. As Justice Gorsuch put it, petitioners should lose because their “lies induced [PennDOT] to part with money” and “[PennDOT] did not receive what it bargained for in return: projects completed using ‘socially and economically disadvantaged’ firms.”
Although Justices Gorsuch and Sotomayor’s reasoning plainly failed to carry the day, it remains possible that their concurrences could influence prosecutors considering charges where a victim arguably received the benefit of the bargain and the transaction-inducing misrepresentations were arguably harmless. And their reasoning could potentially influence courts to the extent it could be reframed as an issue of materiality.
Materiality Should Limit the Reach of the Fraudulent Inducement Theory
Justice Thomas, like the Court, emphasized that the materiality element of the federal fraud statutes should operate as a “principled basis for distinguishing everyday misstatements from actionable fraud.” Although the Court did not rule on the materiality of petitioners’ misstatements (as they had not contested the question), Justice Thomas laid out a detailed argument—designed largely to address materiality questions in future cases—for why he was “skeptical” that petitioners’ misrepresentations regarding compliance with federal DBE requirements could be considered material. The Court did not opine on the precise standard of materiality under the federal fraud statutes, and Justice Thomas expressed no “definitive view” on that subject. But he cited as a “useful baseline” the standard previously adopted by the Court for federal False Claims Act liability and embraced by the government in Kousisis: a misrepresentation is material only if it goes “to the very essence” of the parties’ “bargain.”[4]
He began by arguing that contractual requirements (including regulatory requirements) are not automatically material and that “[e]ven in the face of contrary contract language, materiality ‘cannot be found where noncompliance is minor or insubstantial.’” He also argued that the parties’ conduct “may reveal that a contract term is not material even if the contract’s language would suggest otherwise.” He then presented several reasons why he believed that petitioners’ misrepresentations regarding DBE compliance, despite contractual language expressly identifying that requirement as “material,” likely did not meet the “essence of the bargain” materiality standard.
Justice Thomas argued that the “fundamental purpose” of the PennDOT contracts was “bridge repairs, not minority hiring,” and that the DBE provisions were “irrelevant” to that fundamental purpose and had “no bearing on petitioners’ ability to complete their projects.” He also argued that because PennDOT continued to pay its contractors, notwithstanding evidence allegedly showing that noncompliance with DBE requirements was “notorious and widespread,” the DBE provisions were not truly “essential” to the contracts.
Notably, Justice Sotomayor’s concurrence featured a detailed rebuttal to Justice Thomas’s materiality arguments, concluding that “[t]here can be no real debate that petitioners’ misstatements were material.” She argued, among other things, that historical reports of enforcement and compliance problems with the federal DBE program “do not negate the materiality of explicit contractual terms requiring compliance” and that “[i]t is implausible that compliance with the DBE requirement was immaterial to PennDOT when knowledge of petitioners’ scheme to flout those requirements would have exposed PennDOT to risk of serious legal consequences.”
But regardless of the merits of the two justices’ arguments regarding petitioners’ misstatements, their concurrences together highlight the critical importance of materiality as a limitation on the expansive fraudulent inducement theory and provide a potential roadmap of materiality arguments for both prosecutors and defendants in future cases.
What’s Next?
The Kousisis Court acknowledged the potentially far-reaching scope of the fraudulent inducement theory. The Court, however, like Justice Thomas, emphasized that the “‘demanding’ materiality requirement substantially narrows the universe of actionable misrepresentations.” The Court also noted that it was ultimately “up to Congress,” if it so chooses, to address the “undeniably ‘broad’” language of the wire and mail fraud statutes.
In the end, it seems certain that the Court’s endorsement of the fraudulent inducement theory will, subject to Department of Justice (DOJ) policy, allow—and perhaps encourage—federal prosecutors to charge a wider array of alleged misconduct under the wire and mail fraud statutes, perhaps leading to more aggressive DOJ investigations and prosecutions, at least in certain areas. That said, the “demanding” materiality requirement may well become the next battleground in the lower courts over the appropriate boundaries of the fraudulent inducement theory. Defense counsel will likely mine Justice Thomas’s materiality arguments—and may also reframe some of Justice Gorsuch’s and Justice Sotomayor’s reasoning in terms of materiality—to advocate against criminal charges in appropriate cases. It seems likely that Kousisis will have a significant impact on federal criminal law for the foreseeable future.
Endnotes
[1] 605 U.S. ---, 2025 WL 1459593 (May 22, 2025).
[2] Justice Barrett’s opinion was joined by Chief Justice Roberts and Justices Thomas, Alito, Kagan, Kavanaugh, and Jackson.
[3] The regulation implemented the DBE program of the federal Department of Transportation (DOT). DOT defines a DBE as a for-profit small business that is majority owned and controlled by one or more individuals who are “both socially and economically disadvantaged.” DOT defines “socially and economically disadvantaged” largely by reference to an individual’s race or gender. Under the DBE program, a DOT grant recipient like PennDOT must set goals for DBE participation in contracts that the grantee awards.
[4] Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U. S. 176, 194 n. 5 (2016) (quoting Junius Constr. Corp. v. Cohen, 257 N. Y. 393, 400, 178 N. E. 672, 674 (1931)).
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