A recent Ninth Circuit opinion instills the importance of raising an often overlooked defense in federal fraud cases: that the defendant’s misrepresentation did not affect the “nature of the bargain.” In United States v. Milheiser, the panel recently vacated six defendants’ convictions for mail fraud, holding that merely lying to influence a transaction does not rise to the level of fraud. Instead, a “lie must go to the nature of the bargain” to support a conviction.

The Government argued that if the defendants made any material representation that induced a victim to part with money, which is often cited as the common law definition of fraud, they should be found guilty. At trial, based on that theory, all six defendants in Milheiser were convicted of mail fraud and conspiracy to commit mail fraud. But after considering the appeal, the Ninth Circuit vacated all six convictions on April 9, 2024. It held that though the sales tactics defendants employed did deceive their customers, they did not misrepresent or lie about the nature of the bargain. This decision could be a signal of a shift in federal courts away from overly broad interpretations of fraudulent business activity.

The scheme charged in Milheiser surrounded defendants’ sales of printer toner. Defendants’ sales company’s representatives would call a business, falsely imply that the sales company was that business’s regular printer toner supplier, and lie about an upcoming increase in the price of toner. The sales representatives would then promise the old price if the business ordered more toner that day. When the businesses ordered toner from defendants after these misrepresentations, defendants would deliver the product at the agreed upon price. Based on these facts, several defendants pled guilty before the case even went to trial.

During trial, many witnesses testified that they would not have bought toner from defendants if not for the sales representatives’ lies. The District Court allowed jury instructions and closing arguments that described mail fraud as “making a misrepresentation that would be expected to and does cause a person to part with money.” The Government stated in closing: “When you lie to somebody on an important fact that causes them to give you money, you have defrauded them. That is mail fraud in a nutshell.” But with this ruling, the Ninth Circuit rejected that broad understanding of fraud for federal criminal cases. 

In its decision, the Ninth Circuit cited precedent from the Second, Eleventh, and D.C. Circuits. These Circuits have also held that to commit fraud, a lie “must go to the nature of the bargain,” like price, quality or other essential aspects of the transaction. The three cited cases, United States v. Regent Office Supply Co.,[1] United States v. Takhalov[2], and United States v. Guertin,[3] all agree that not every false representation that leads someone to part with money rises to the level of federal fraud, specifically not when regardless of the misrepresentation, the alleged victim “received exactly what they paid for.”[4] But it should be noted that not every federal court has adopted this standard for deciding when lies show fraudulent intent. Just this year, a D.C. District Court declined to follow the “nature of the bargain” standard and indicated that it saw a circuit split (and perhaps an intra-circuit split) on what is required to prove an intent to defraud.[5]

Whether a Circuit split develops or not, the Milheiser decision shows that it is now essential to raise the argument that a lie did not go to the ‘nature of the bargain’ in defense of relevant federal fraud cases in any Circuit. The difference between a ‘material misrepresentation’ and a lie that goes to the ‘nature of the bargain’ may seem like a small distinction, but in practice, this change can have an influential impact. In Milheiser, the defendants certainly lied to their potential customers. The Government also showed that these lies were what induced the customers to part with their money to purchase toner, making them material misrepresentations. However, with this ruling, the Court established that the real question is not whether lies were told, but what they were told about. Here, the defendants offered toner and then provided it at the agreed upon price. Any facts beyond this were extraneous and did not go to the nature of this simple transaction.

When charges involve complex facts and broadly alleged schemes, it will be vital to separate alleged misrepresentations that may seem material, from those that actually reach the ultimate terms of the bargain. The Ninth Circuit warned that the “nature of the bargain” will be very context-specific based on the type of transaction. The panel specifically rejected the idea that only direct misrepresentations about price or quality satisfy. This means the facts surrounding any alleged fraud need to be properly investigated, the implications of any alleged false statements determined, and the exact nature of the transaction defined. However, even with this warning, the Milheiser decision makes it abundantly clear that this can be a case-winning argument for clients.

FOOTNOTES

[1] 421 F.2d 1174 (2d Cir. 1970)

[2] 827 F.3d 1307 (11th Cir.), as revised (Oct. 3, 2016), opinion modified on denial of reh’g, 838 F.3d 1168 (11th Cir. 2016)

[3] 67 F.4th 445 (D.C. Cir. 2023)

[4] Takhalov at 1314.

[5] United States v. Venkata, — F.Supp.3d —- (2024)