Is Stealing Dreams a Crime?

One of the recurring themes of this blog is how decisions in criminal cases can affect civil cases that somehow invoke criminal law. This is especially true in civil RICO cases, which usually involve allegations that the defendant has violated the federal mail or wire fraud statutes.

The latest example is brought to us by Elon Musk, whose litigation exploits--while often just as innovative as his cars and spaceships--have a record more akin to his social media ventures. 

This time, Musk has filed a RICO case against OpenAI and its founders Sam Altman and Greg Brockman, alleging that they persuaded him to give millions of dollars and lend his good name to what they promised would be a non-profit effort to develop artificial intelligence for the good of humanity, but then converted it into a purely profit-driven enterprise.

The story set out in the complaint is an interesting one, even if the "perfidy and deceit" it describes are not quite of the "Shakespearean proportions" Musk touts. But a key component of the RICO theory seems to be missing.

As expected, Musk alleges that the conduct of Altman, Brockman, and the others amounts to a recurring pattern of federal wire fraud. But under the Ninth Circuit's recent decision in U.S. v. Milheiser, even if a defendant "lie[s] to somebody about an important fact that causes them to give [the defendant] money," it is not wire fraud unless the lie goes to the "nature of the bargain." In Milheiser, the defendants tricked companies into buying printer toner from them by claiming that the defendants were the companies' regular supplier and that toner prices were about to go up. While that was not true, the Ninth Circuit said that because the companies got exactly the printer toner they paid for, there was no wire fraud.

Other courts have considered the same issue. Some took the same view as Milheiser. See United States v. Starr, 816 F.2d 94 (2d Cir. 1987); United States v. Sadler, 750 F.3d 585 (6th Cir. 2014); United States v. Takhalov, 827 F.3d 1307 (11th Cir. 2016); United States v. Guertin, 67 F.4th 445 (D.C. Cir. 2023). Some took the opposite position, holding that such misrepresentations counted as mail or wire fraud. United States v. Leahy, 464 F.3d 773 (7th Cir. 2006); United States v. Granberry, 908 F.2d 278 (8th Cir. 1990); United States v. Kousisis, 66 F.4th 406 (3d Cir. 2023).

The Supreme Court may soon weigh in on the same issue. In U.S. v. Kousisis, a painting company won a contract from a state agency. Although it was the lowest-price bidder and did quality work, the state agency claimed it was misled into choosing the company because of the company's false claims that it complied with certain requirements designed to ensure contract funds would go to "socially and economically disadvantaged" persons. DOJ prosecuted the company and its owner for wire fraud, and they were convicted. On appeal, the Third Circuit held that even though they provided the contracted service at the promised price, they had violated the law because the disadvantaged-persons provision was an "essential component of the contract."

The defendants the petitioned for Supreme Court review, and in June 2024, the Court granted certiorari. One of the questions presented is "[w]hether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme." The Court will take up the case this fall.

In the OpenAI case, Musk claims that based on the promises from Altman and Brockman, he gave $44 million to the non-profit corporation, OpenAI Inc., that was the original base for OpenAI's operations. As a Delaware non-profit, however, OpenAI Inc. has no shareholders or other owners. All that Musk got for his money was a seat on the company's board of directors, from which he resigned in 2018. By his own account--and by the entity's non-profit nature--he did not expect any financial return on his investment. In effect, it was a donation made in return for the moral or psychological benefit of making the world a better place.

Assuming that Altman and Brockman misled Musk regarding their ultimate intentions for OpenAI (which they deny), would that amount to wire fraud? The Ninth Circuit (which covers Musk's suit) and the courts that side with it may well say no. In property terms, Musk got exactly what he bargained for--that is, nothing but a vote in the company's decisions. While he may have been denied the satisfaction of seeing the organization grow according to his vision, that is likely not the sort of property right that the Supreme Court has said must be the object of a mail or wire fraud scheme. And if the Court in Kousisis does away with the fraudulent inducement theory of mail and wire fraud, that could seal the lawsuit's fate even further.

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There is another, related problem with the Musk's RICO claim. In order to have standing under RICO, Musk must have suffered injury to his "business or property"--that is, a "concrete financial loss"--as a result of the defendants' actions. In the case of OpenAI, it is not clear that the deprivation of Musk's hopes and dreams for the company would suffice.

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Such is Elon's enthusiasm for RICO that, after separately suing various companies for antitrust violations based on their boycotting advertisement on X, he suggested that the conduct could also support a RICO claim. That one is easy: antitrust violations do not qualify as "racketeering" for RICO purposes, so such a claim would get no further than a Model X after a 5-day blackout.

Living in a Material World

Following recent precedent, I am making my own sacrifice for the country and bowing out of further political commentary. This week's entry will stick closer to things I am arguably more qualified to discuss.

The Supreme Court has been busy taking away many of DOJ's favorite toys. The mail and wire fraud statutes, the honest services fraud statute, key statutes on bribery of federal and state/local officials--the government had used them for years as Swiss-Army knives of white collar crime enforcement, until the Court began imposing stricter limits on each of them.

It may soon be the false statement statute's turn.

18 U.S.C. § 1001 makes it a crime, in any "matter within the jurisdiction of the executive, legislative, or judicial branch" of the federal government, to "knowingly and willfully"(1) falsify, conceal, or cover up a material fact; (2) make a materially false, fictitious, or fraudulent statement; or (3) make or use a false writing or document containing such a statement. Whenever someone makes a false statement--including checking a "no" box when the answer to a question is "yes"--on a form relating to a federal program, or makes an inaccurate claim in an interview with a federal agent, the government may allege that it was done knowingly, and pursue a § 1001 charge.

DOJ often charges § 1001 when it has come up short on more substantive charges in an investigation. For example, while investigating suspected illegal campaign donations to then-Congressman Jeff Fortenberry, DOJ had a cooperating witness make a recorded phone call to Fortenberry, telling him that illegal contributions had probably been made. FBI agents then interviewed Fortenberry, who told them he was not aware of any illegal contributions. He said the same in a later meeting with agents and prosecutors. The government did not charge him with any campaign finance violation, but instead charged him with false statements under § 1001, based on the interview statements. He was convicted, though the conviction was later vacated, and DOJ has re-charged the case.

You could see how the government might get carried away with these kinds of charges.

One protection against that is supposed to be the requirement that the false statement be "material" (important) to the government matter--e.g., the federal investigation. But in reality, courts take a fairly broad view of what is "material." It does not matter whether the false statement actually causes the government to change its decisions or behavior in any way. It is enough if the statement has a "natural tendency to influence, or was capable of influencing" the decision.

But what does that mean? In Fortenberry's case, the prosecutors and agents already knew what information Fortenberry had about the campaign contribution, because the government (through a cooperator) had secretly fed that information to him. One might ask how hearing him later deny having that information could possibly cause the government to do anything differently. How would it be capable of influencing the government?

Courts have responded to these types of arguments by pointing out that the materiality of a statement is based on the "intrinsic capabilities of the false statement itself," and does not depend on the context in which it is made--such as what the government already knows. This is not so easy to wrap one's head around, but it seems to mean that you look at the statement in a vacuum--in a hypothetical situation in which the government does not already have the relevant knowledge and has not yet acted--and consider whether a statement of that type could ever affect the government's decision. If yes, then it is material.

Or maybe not? In United States v. Tao, the 10th Circuit recently took a somewhat different approach to materiality in reversing a false statements conviction. In that case, a University of Kansas professor had applied for and obtained federal research grants, and then later accepted money and other benefits from a Chinese university as well. In a subsequent update form he submitted to the university (related to the government program), the professor failed to disclose the relationship with the Chinese university as required, but certified that he had made all necessary disclosures. DOJ charged him with false statements under § 1001, and he was convicted.

The 10th Circuit held that the above facts were not enough to show the false statement was material. This was mainly because the government had already given him the grant money before he made the statement; there were no further grants after that. As the court explained, "without evidence of an actual decision capable of being influenced by the statement, the government cannot establish materiality."

This seems like common sense. Absent a modified DeLorean, how could a statement made at one time affect a funding decision that had already been made in the past? But recall that the general rule had been that you don't look at the context of the statement, just the contents of the statement itself, and you ask whether that statement is the type that could influence the government in some situation. In Tao, the court seems to have taken a different (and more rational) approach, recognizing that it would seem facially absurd not to consider the context of the statement in the government proceeding, at least in some sense. Without looking outside the statement to that context, how could one tell whether there was an "actual decision capable of being influenced"?

Transmuted to other cases, one could argue that this approach means that when the government already knows the truth about something and intends to file charges based on it, then asks the investigation target about it just to see whether he will lie, the answer cannot be material--the charges were going to be filed either way. Or in Fortenberry's case, no other charges were going to be filed either way.

It is still not a good thing to lie to federal agents or on federal forms. And if you are charged with a different crime, then such lies--whether material or not--can also be powerful evidence demonstrating your criminal state of mind and lack of credibility. But Tao suggests that a different approach to materiality could make it harder for the government to turn just any false statement into a federal crime of its own.

If SCOTUS is not finished building guardrails around some of DOJ's favorite white collar statutes, it may want to save a few rivets for § 1001.

In Defense of Civility

Conflict is at the heart of the law. As lawyers, we are students, practitioners, and aficionados of conflict. The premise of our work--the thesis of our profession--is that conflict should be resolved through reason, evidence, and rules, rather than through force. The better facts, better words, better arguments win the day.

Although sometimes honored in the breach, civility remains among the highest values we hold. We instill it in our codes and invoke it in our pleadings and opinions.  Litigation is not war, and our opponents are not our enemies.

Not so, it seems, in politics, where civility is often denigrated as a form of weakness, disloyalty, lack of commitment--of a willingness to accept a corrupt and intolerable status quo or an existential threat from the other side. The rhetoric is martial, the imagined outcomes apocalyptic, the proposed remedies extreme.

Yesterday was a dark one for this country, as was January 6 and the others over the past few years marred by episodes of political violence--all of them direct assaults on the rule of law. Dark, but not entirely surprising. Although it is hard to feel optimism, I can at least hope that those who deride civility will consider where our current road leads, and give the concept another thought.