Supreme Court Weighs Materiality Standard In Case That Could Redefine Fraud

According to a Paul Hastings Client Alert, the Supreme Court’s upcoming ruling in Kousisis v. United States could significantly alter the materiality standard in fraud cases, potentially making it harder to prosecute white-collar crimes.

The case centers on whether fraud requires financial harm or if misleading statements alone can constitute a material misrepresentation. During oral arguments, the Justices expressed skepticism about both parties’ interpretations, suggesting that a shift in the legal standard is possible.

The decision could have broad implications for both criminal and civil fraud cases, including regulatory enforcement actions.

The defendants were convicted of wire fraud for falsely claiming to have hired disadvantaged business enterprises (DBEs) to fulfill a government contract requirement.

Instead, they paid a DBE to invoice non-DBE workers who actually performed the work. The defense argued that the DBE requirement was not material to the contract because the contract was completed without financial harm to the state. Thus, no fraud occurred.

The government countered that the wire fraud statute does not require economic harm and states can have material non-economic interests, such as ensuring the hiring of disadvantaged businesses.

During oral arguments, the Justices challenged both sides. The defense warned that an expansive fraud standard could criminalize minor misrepresentations, while the government’s position implied that nearly any deception could constitute fraud.

Hypotheticals involving babysitters and personal preferences highlighted the complexities of defining the materiality standard. The Court’s ruling will likely clarify whether fraud must result in financial harm or if deception alone is sufficient.

If the Court narrows what can be considered material to a contract, there could be broad repercussions. Paul Hastings notes that materiality is a core element of many regulatory enforcement actions, civil fraud claims, and similar lawsuits, and a higher standard would make bringing such actions more difficult.