§ 5.06 Mail and Wire Fraud
| Jurisdiction | United States |
| Publication year | 2020 |
§ 5.06 Mail and Wire Fraud
The federal government recommends that in many intellectual property cases, prosecutors should consider charging mail or wire fraud in addition to, or in lieu of, an intellectual property crime.809 In addition, the mail or wire fraud statutes is broader that the ITSP which also may make fraud an attractive change for prosecutors. Indeed, courts have upheld convictions under either one of the two statutes in situations involving the theft of trade secrets even without finding a violation of Title 18, Section 2314 of the United States Code.810
The federal wire and mail fraud statutes proscribe devising any scheme involving the use of the mails or interstate wire transmission for obtaining "property" by false pretenses or representations.811 The elements of wire fraud and mail fraud812 are (1) formation of a "scheme to defraud"813 and (2) use of mailing or interstate wire communication to further the scheme.814
[1] Scheme to Defraud
[a] Tangible Rights
The federal government has routinely charged defendants with violating Sections 1341 (mail fraud) and 1343 (wire fraud) by engaging in a scheme to defraud individuals of money or other tangible property interests. While neither statute provides guidance to the meaning of scheme to defraud,815 courts generally emphasize any false or misleading statements made by the defendant to the victim.816 It is not necessary for the government to establish that the defendant had direct contact with the victim.817 Misrepresentations or omissions must be material and818 have been "reasonably calculated to deceive persons of ordinary prudence and comprehension."819 Since this is an objective standard, the government is not required to prove that the victim was actually harmed820 or that the scheme was successful.821 Courts, instead, focus on whether a reasonable person would have acted on the misrepresentations.822 Examples of traditional fraudulent schemes under the mail and wire fraud statutes include false insurance claims,823 fraudulent investment schemes,824 misrepresentations in the sale of used automobiles,825 false application forms for loans,826 fraudulent loan marketing schemes,827 check kiting schemes,828 false advertising,829 and various bribery and kickback schemes.830
In 1987 the Supreme Court issued two separate decisions defining the scope of the wire and mail fraud statutes in cases involving the theft of intangible property. In the first decision, McNally v. United States,831 the Court ruled that the mail fraud statute did not include schemes to defraud citizens of their intangible right to honest government, but rather was limited to protection of "property" rights.832 Read broadly, the decision in McNally might be construed to preclude all prosecutions for schemes to defraud individuals of intangible property like copyrights or trade secrets.
However, in a subsequent decision, Carpenter v. United States,833 the Court made clear that a scheme to defraud the owner of another type of intangible property, confidential information, was covered by the mail and wire fraud statutes. The defendant in Carpenter authored the "Heard on the Street" column for The Wall Street Journal which offered stock tips. Although this column contained no inside information on the companies discussed, it had the potential of affecting the stock prices of those companies because of the "quality and integrity" of the information contained in the column.
The defendant passed advance information on the column to two co-conspirators who executed pre-publication trades and earned profits of approximately $690,000.
The defendant in Carpenter argued that McNally meant that intangible rights could not be the subject of a violation of the mail or wire fraud statutes. The Court disagreed, indicating that "McNally did not limit the scope of Section 1341 to tangible as distinguished from intangible property rights."834 According to the Court, misappropriation of confidential business information was distinguishable from the facts in McNally. The Court squarely held that confidential information is "property" subject to the protection of the mail and wire fraud statutes.835
The Court rejected the defendants' arguments that they neither interfered with their employer's use of the information nor disseminated it to the public.836 The Court reasoned that the fact that The Wall Street Journal had been deprived of its right to exclusive use of its columns was sufficient for finding fraud because "exclusivity is an important aspect of confidential business information."837 The confidential business information in question was the schedule and contents of the daily column. The newspaper's policy and practice was to keep those things in confidence, a fact known to the defendant. After engaging in an extensive analysis of the McNally and Carpenter decisions, the Third Circuit upheld defendant's conviction under Sections 1341 and 1343 for engaging in a scheme to defraud confidential business information.838 Defendants hired impostors to sit for the Test of English as a Second Foreign Language (TOEFL) administered by the Educational Testing Service (ETS). The purpose of the scheme was to create the false appearance that defendants, among others, had taken and achieved an acceptable score on the TOEFL exam so that they could remain eligible to live in the United States under a student visa. The court agreed with the government's contention that ETS possesses a property interest in the materials that contained its trademarks and were copyrighted and that the TOEFL exam and its questions constituted confidential business information of ETS. Accordingly, ETS was deprived of a recognized property interest: the "right to decide how to use" its confidential business information, i.e. the TOEFL exam.839 Since intellectual property has been no less recognized as property, than as confidential business information, it should be equally protected under the wire and mail fraud statutes.840
However, at least one court has held that the government may not charge a defendant with wire fraud where the underlying activities involved copyright infringement in the absence of any misrepresentation or scheme to defraud.841 The court reasoned that the "bundle of rights" conferred by copyright is unique and distinguishable from the broad range of property interests protected by the mail and wire fraud statutes which precludes prosecution for fraud.842 The scope of this decision is arguably limited to where there is no evidence of misrepresentation or fraud.843
[b] Intangible Rights
Prior to 1987, the government routinely charged public officials under the mail and wire fraud on the basis that the scheme was intended to defraud citizens of their intangible right to honest government. The Supreme Court rejected the intangible rights theory in McNally v. United States, described above, holding that the purpose of the wire and mail fraud statutes was to make criminal fraudulent schemes involving money or property and not intangible rights. In response to McNally, Congress enacted Section 1346 which expressly provided that the mail and wire fraud statutes extended to any " 'scheme or artifice' to deprive another of the intangible right of honest services."844 This amendment effectively overturned McNally and restored the intangible rights theory to its pre-1987 status.
Case law has recognized three kinds of intangible rights which could form the basis of a scheme to defraud under the mail and wire fraud statutes: (1) nonmonetary intangible interests; (2) honest governmental services; and (3) fiduciary duties.845 The intangible rights theory can be further broken down between public sector honest services fraud and fraudulent activity by defendants in the private area. The former generally falls down into two categories. First, a public official owes a iduciary duty to the public, and misuse of his office for private gain is a fraud.846 For example, a government official may be guilty of honest services fraud if he or she withholds material information.847 Second, an individual without formal office may be held to be a public fiduciary if others rely on him because of a special relationship in the government and he in fact makes governmental decisions.848 The basis for both categories, however, is the same that "[I]n a democracy, citizens elect public officials to act for the common good. When official action is corrupted by secret bribes or kickbacks, the essence of the political contract is violated."849 Thus, when a public official secretly makes decisions based on his own personal interests, the official defrauds the public of his or her honest services.850
In contrast, such a strict duty of loyalty ordinarily is not part of private sector relationships. Most private sector interactions do not involve duties of, or rights to, the "honest services" of either party. Relationships may be accompanied by obligations of good faith and fair dealing, even in arms-length transactions. These and similar duties are quite unlike, however, the duty of loyalty and fidelity to purpose required of public officials. For example, "[e]mployee loyalty is not an end in itself, it is a means to obtain and preserve pecuniary benefits for the employer. An employee's undisclosed conflict of interest does not by itself necessarily pose the threat of economic harm to the employer."851 A public official's undisclosed conflict of interest, in contrast, does by itself harm the constituents' interests in the end for which the official serves—honest government in the public's best interest. The "intangible right of honest services" has been given an analogous interpretation in the public sector by permitting the government to prosecute individuals who defraud private entities.852 Courts have noted, however, that in the private sector context Section 1346 poses special risks. Every material act of dishonesty by an employee deprives the...
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