Kousisis v. United States: Oral Argument Recap
On December 9, 2024, Kousisis v. United States was argued at the Supreme Court. Jeff Fisher argued on behalf of Kousisis, while Eric Feigin argued on behalf of the Government.
Kousisis Oral Argument Overview and Predictions
As stated in prior blog posts, United States v. Kousisis, 82 F.4th 230 (3d Cir. 2023), cert. granted, 144 S.Ct. 2655 (2024), is a case where the Pennsylvania Department of Transportation (“PennDOT”) was fraudulently induced to award painting contracts (and money) to the defendant’s company. The fraud was that Kousisis intentionally skirted PennDOT’s requirement that a certain percentage of his company’s sub-contracts go to disadvantaged business enterprises (“DBE”). Otherwise, the work contracted for was completed. In short, the defendant received tens of millions of dollars in state contract money that the state would not have otherwise given had it known of Kousisis’ plan to skirt DBE requirements. However, and critically, the state got full value for its services and did not, generally, suffer economic harm.
The Third Circuit affirmed Kousisis on the theory that fraudulently inducing an agency to distribute contract money was wire fraud even where the main goals of the contract (in this case, painting work) were not frustrated. The “property” that was the object of the scheme was the contract money.
Based on the questions asked and the hypotheticals presented at oral argument, there are four main ways that this case could be decided:
The Court could affirm the case based on the fact that Pennsylvania did, in fact, suffer economic harm (and that Kousisis intended for economic harm to be inflicted). During oral argument the parties debated whether, in fact, Pennsylvania had suffered economic harm after all (i.e. was cert improvidently granted here). The government suggested that it had occurred because Pennsylvania paid more for the contracts that included provisions for DBE to receive funds. The defense countered this was not proven at trial, and in fact, the Government below had sworn off any reliance on economic harm to prove its case, specifically referring to the injury as “non-monetary” injuries. Justice Alito questioned whether the jury instructions indicated that Kousisis could have been convicted solely based on the infliction of economic harm, but the Government conceded that this was not the case. Economic harm was not needed to convict. When queried as to how the Court could then affirm based on this theory, the Government posited that it was subject to harmless error review. To this, Justice Alito asked if the Government really wanted this to be deemed an “error.” The Government did not want that (getting a good chuckle from the crowd). Although the justices did seem to want to narrowly rule in this case (see more analysis below), it appears unlikely that the case will be affirmed on this ground given the jury instructions.
The Court could affirm the case on the grounds that a person need not have intended to inflict economic harm to commit property fraud. This is the outcome that the Government wants. The Government wants a blanket affirmance of the Third Circuit’s opinion. As discussed in more detail below, it does not appear that the Court will affirm on this ground.
The Court could affirm the case on the ground that the fraud went to the essence of the bargain in the contract between Kousisis and Pennsylvania. This is perhaps the most interesting, and potentially likely outcome. The Court seemed genuinely troubled, as discussed in more detail below, by the Government’s expansionist position, whereby it would be very difficult to set limitations on the outer-rim of the Government’s fraud theory. If no economic harm was intended, then any deception that induced a transaction could constitute property fraud. One way to limit this, the Court and the Government mused, was by examining the terms of a contract, and if the deception went to a material term (more on that below), then that could constitute property fraud. If it did not go to the essence of the bargain, then no fraud.
The Court could reverse the Third Circuit on the grounds that in order to violate the mail/wire fraud statutes a defendant needed to have intended to cause economic harm to the victim. This is the outcome the defense is hoping for, but it is unclear if the defense has the votes. The Justices seemed genuinely perplexed by this issue - on the one hand Kousisis’ conduct was bad. He set up a whole scheme to avoid the DBE process. But on the other hand, he did the work properly and Pennsylvania, for all intents and purposes, got what it paid for. What the Court wanted was a way to define the outer limits of wire/mail fraud, but it is unclear if this case is the right vehicle. My gut tells me the holding will be limited, and will most likely be cabined to frauds involving performance of contracts.
Oral Argument Recap
Oral argument was effectively a series of questions and answers dominated by hypothetical after hypothetical. As stated above, the Court was pondering whether the Government’s theory of the case - that fraud did not require an intent to inflict economic harm and could be proven by deceit alone - was too broad (i.e. whether there were any limitations), and also whether Kousisis’ ask - that fraud did require an intent to cause economic harm, and everything else was either civil or another felony such as a 1001 charge - would not capture all the bad behavior that was envisioned by the property fraud statutes.
First, what was clear was that the Justices needed to work on their hypotheticals as some bore almost no relation to the case at hand, or even scenarios that could ever play out in real life. In questioning whether it would be fraud if a person did not receive what they wished for but what was received was of an equivalent monetary value, Justice Kagan proposed the hypothetical of a person ordering a $1 million worth of gold, but instead receiving a $1 million worth of coal. Safe to say that that switcheroo has never happened. Justice Jackson, on the other hand, asked whether it would be fraud if a person lied about a charity (i.e. saying that money was going to charity when it did not) to induce someone to donate $20. The clear answer was that yes, that would be fraud - the person did not receive anything of value in return for the $20 - but that was not remotely what happened here, where the Commonwealth of Pennsylvania did receive the benefit of its bargain. Justice Alito, on the other, posited a question as to whether it would be fraud if he contracted with a company to take down a willow tree, but the company schemed to take down an oak on his property instead. The Justices seemed to miss the point - the issue is whether deception alone can be fraud, not whether certain types of activities resulted in (or did not result in) economic harm.
The best hypothetical came from Justice Gorsuch, who asked, together with other Justices joining in, whether it is fraud if a babysitter lies to a prospective client about where her babysitting money will go if they hire and pay her - i.e. she tells the family that she will spend it on college tuition, but she actually blows it all on trip to Cancun (I kid you not). In this example, the babysitter provides excellent babysitting services, but she, in effect, fraudulently induces the family to hire her. The defense, obviously, took the position that this was not fraud. Justice Gorsuch pressed the Government, who could not give a clean answer, beating around the bush on several occasions. Finally, Justice Kavanaugh stepped in and got the Government to confirm that “yes” this would be property fraud (but the sentencing guidelines would be low, so sayeth the Solicitor General). This was a significant concession on the Government’s part.
This answer seemed to worry the Justices, who did not want to sanction babysitters going to prison for deception. Thereafter, the tide turned a bit, with the Justices now pushing back a bit more on the Government, attempting to get the Government to draw a line in the sand between deception and fraud. The Government, in my opinion, did not do a great job at solidifying such a line, relying on a newfound “materiality” theory, leaving me to conclude that any opinion will most likely be as narrowly drawn as possible.
Second, and perhaps most interesting, the Government seemed to want to rely on the concept of materiality for the line as to when deception crosses over the line into fraud. What did the Government mean by this? Basically, not all deception is fraud, sayeth the Government. But the line is not that of economic harm v. no economic harm. Rather, the line is whether the misstatement that induced reliance was “material” or not to the transaction. Strikingly, the Government seemed to propose a higher level of materiality than what is currently in the law. In that regard, the Government suggested that to be material, a deception would need to go to the “essence of the bargain” or the “benefit of the bargain.” This is great for the defense, as materiality under the federal fraud laws is traditionally viewed as much lower than the “essence” or “benefit” of the bargain standard (which we have advocated for in our briefs). See Dynamis’ prior write-up on that issue. So the Government, realizing that the Court would not be ok with every deception qualifying under the federal fraud laws, or even deceptions that qualified as “material” under a low legal standard (i.e. anything that is relevant to a transaction) embraced a strategy where only the most important of deceptions - those that go to the very heart of the bargain - can qualify as fraud.
Two issues with this: how does that play out in non-contract based cases? In our Atlas Trading for example, there was no bargain with anyone. At issue were public tweets that people apparently relied on to make trading decisions. In addition, as the Court queried, the Government’s “benefit of the bargain” test is not a traditional materiality test. This was not present in the “common law” or even in current jury instructions. The Government seemed not to care, they were making it up as they went along. But this is why the Court’s decision will most likely be as narrow as possible as tailored to cases exactly like Kousisis. I don’t think this will, anymore, have massive implications for the future of federal fraud laws.
Third, Jeff Fisher, Kousisis’ lawyer, had a really terrific rebuttal. He hit on one very important point that he should have emphasized in his direct argument a bit more. Surprisingly, Ciminelli did not get a tremendous amount of air time during the oral arguments (which stretched to about 90 minutes), even though it was the last major wire/mail fraud decision.
Over the course of oral arguments, there was significant debate about the “common law” and what fraud was defined as back in the day (either pre-1952 or pre-1870 depending on which side you were on). The implication being that, as Kousisis argued, at common law fraud required an intent to cause economic harm. The Government said the opposite - there was no such requirement. Fisher brought up the great point though that the Government has effectively conceded that economic harm is required, because that’s why they invented new property rights such as “right to control” theory. The “right to control” - the property at issue in Ciminelli - was really just obtaining money (after all, Ciminelli too wished for state contracts) - gussied up under another name because no one could prove economic harm. The Government abandoned that theory after the Supreme Court struck it down, and now, Fisher argued, having lost on all cognizable forms of fraud that did not require economic harm, they were relying on a last ditch effort to prove that economic harm was never required at all. This was a great point that seemed to resonate with the Court.
In sum, this is a close case. Either way it comes down, the ruling will likely be as narrow as possible given the major implications that a “wide” ruling could have.
