CLEVELAND v. UNITED STATES
Louisiana law authorizes the State to award nontransferable, annually renewable licenses to operate video poker machines. In 1992, Fred Goodson and his family formed Truck Stop Gaming, Ltd. (TSG), a video poker business. Carl Cleveland, a lawyer, assisted Goodson in preparing TSG's video poker license applications, each of which identified Goodson's children as the sole beneficial owners of the partnership. From 1992 through 1995, TSG successfully renewed its license. In 1996, Cleveland and Goodson were charged with money laundering under federal law, along with racketeering and conspiracy in connection with a scheme to bribe state legislators to vote in a manner favorable to the video poker industry. Acts supporting these charges came from federal mail fraud charges, defined as "any scheme or artifice to defraud, or for obtaining...property by means of...fraudulent...representations." The indictment alleged that Cleveland and Goodson fraudulently concealed that they were the true owners of TSG in the license applications they had mailed to the State because they had tax and financial problems that could have undermined their ability to receive a video poker license. Before trial, Cleveland moved to dismiss the mail fraud counts on the ground that the alleged fraud did not deprive the State of "property." The District Court denied the motion, concluding that licenses constitute property even before they are issued. A jury found Cleveland guilty. The Court of Appeals affirmed.
Do state video poker licenses qualify as property for purposes of the federal mail fraud statute?
Legal provision: 18 U.S.C. 1341
No. In a unanimous opinion delivered by Justice Ruth Bader Ginsburg, the Court held that State and municipal licenses in general, and Louisiana's video poker licenses in particular, do not rank as "property," for purposes of federal law, in the hands of the official licensor. Thus, Cleveland's conviction for making false statements to obtain state video poker license was vacated. "Equating issuance of licenses or permits with deprivation of property would subject to federal mail fraud prosecution a wide range of conduct traditionally regulated by state and local authorities," wrote Justice Ginsburg for the Court.
Argument of Paul Mogin
Chief Justice Rehnquist: We'll hear argument now in Number 99-804, Carl W. Cleveland v. The United States.
Mr. Mogin: Mr. Chief Justice and may it please the Court--
The issue in this case is whether for purposes of the Federal mail fraud statute a State or municipality parts with property when it issues a license.
In this case, the Fifth Circuit has used a novel concept of property to give the Federal Government the power to police State and local license applications under the mail fraud statute when State and local governments are fully capable of administering and implementing their own licensing schemes and punishing misconduct involving licensing schemes when it occurs.
Justice Scalia: What would they be punished under?
What kind of State laws would cover--
Mr. Mogin: Well in this case, for example, there's a false statement provision in the Louisiana video poker statute.
Justice Scalia: --And that's fairly standard in State licensing schemes?
Mr. Mogin: I think it is, that there be a... that false statements are ordinarily punished... punishable by criminal provisions.
I can't say that we've undertaken a survey of that.
In addition, in the area of gambling, Justice Scalia, 18 U.S.C. 1955 is available for conducting an illegal gambling enterprise and, in fact, that was one of the charges here.
Petitioner was acquitted on it, and the very theory was that the gambling operation was illegal because of alleged false statements in the license applications, so... and that had also been the charge in the Salvatore case, so that would be--
Justice Ginsburg: Is it the case that the same would apply to a Federal agency?
This is not... the statute is not peculiarly directed at State agencies.
Mr. Mogin: --That's correct, Justice Ginsburg.
Most of our argument would apply if this was a Federal agency, although in this case we have the United States v. Bass and the principle about not lightly interpreting statutes to reach--
Justice Ginsburg: But in any case it would be... any application for a permit to a Federal authority would be susceptible to the same argument.
There's no distinction that's being made, a Federal power against the State as against the Federal Government.
Mr. Mogin: --Under the Fifth Circuit's analysis I think it would be possible that a Federal license application perhaps could be prosecuted if it met the Fifth Circuit's test, which is somewhat difficult to discern from the opinion, but there's nothing in what the Fifth Circuit says that would confine it to a State application, if that answers your question.
Justice Ginsburg: Or in the statute.
Mr. Mogin: Right.
Justice O'Connor: Mr. Mogin, I think it would be helpful if we focused somewhat on the statutory language in this case to figure out what it covers, and we have to read it, I suppose, in light of this Court's decision in McNally, which does appear to suggest that it... the statute covers only the scheme to defraud the victim of money or property, although the statute doesn't say so in so many words.
Now, let me ask you this.
Here, I take it the State did more than just issue a license.
It issued a license with an ongoing substantial revenue component for the State.
It wasn't just a one time payment of a license fee and then you have this forever.
It contemplates, does it not, the payment of substantial amounts of money to the State thereafter, and does that distinguish it, or make it somehow more of a property interest than otherwise might be the case?
Mr. Mogin: Justice O'Connor, there is no question the State is taking a substantial share of the revenue from video poker operations in Louisiana, but we don't see how that gives rise to any property interest.
Certainly, under the analysis in College Savings Bank, cited by this Court in 1999, the fact that there's a pecuniary interest involved would not establish a property right.
Justice O'Connor: Well, taking money from the victim is covered, according to McNally, so is it taking money from the State, in a sense, because of this revenues--
Mr. Mogin: No, Justice O'Connor, we would say it is not.
To the contrary, the State views video poker operations as a source of revenue for the State, and it has been a very significant source of revenue for the State.
There was no allegation in this case that anything was not paid that shouldn't have been paid in terms of the State's pro rata share and, really, the States here--
Justice Kennedy: --Did the State ever argue that it has an interest in assuring the users of these machines that the operators are honest and that by this alleged misstatement the goodwill, the confidence that the State has in its own licenses is somehow diminished, and that that's a taking of property, and of course you might say this is intangible property, but did they ever make that sort of argument?
Mr. Mogin: --No, I don't believe that that argument has been made by the Government and, of course, there's no question that the regulatory scheme is designed to ensure the honesty and suitability of licensees.
That argument was not made, that I recall.
I mean, there's been no question that the licensing process serves a legitimate purpose to identify appropriate licensees, but it's hard to see how that would be a property--
Justice Kennedy: Are the licenses limited in number?
Mr. Mogin: --No, they're not, Justice Kennedy.
Justice Kennedy: Would that have made a difference?
It would be like a taxi cab medallion in New York or something?
Mr. Mogin: Well, it's our position that even if there were a limitation to some large number of licenses, that the same analysis would apply, but certainly that would be a factor to consider, and when you get to a very limited number of licenses, you may have a different analysis, because then there's... people are actually competing with each other for a license, and something important is being given away by the State.
Justice Souter: Well, but even in that case, how would it affect any property interest of the State, unless you could show that the person who got the license somehow intended to exercise the rights under it, less than some other holder might have done, and thereby produce less revenue from the State, which is at least on the face of it counterintuitive, because the State and the licensee has the same interest in maximizing the amount of gambling that goes on, but save in that odd situation, how would a limited number of licenses affect your property analysis?
Mr. Mogin: Well, I think that you're right, the mere fact that there's a limitation on the number would not, in our view, give rise to a property deprivation.
It's one factor to consider, and--
Justice Souter: Would it be a basis for saying that there is a property interest at all, where there is not, as you argue, under these circumstances?
Mr. Mogin: --Well, we think the term license is used in many different contexts, radio licenses, whatnot.
There may be situations in which the State is giving away only one or 5 or 10 licenses, and our analysis doesn't foreclose what would happen in such a case, but here there's a mere grant of Government permission.
There's nothing in what the Government is doing that can be analogized to giving away an easement.
The applicants are not competing with each other, so I simply--
Justice Scalia: That would be true if there were just one license being given away, if there were only one gambling casino allowed in the whole State.
I mean, you know, do you stand by your analysis or not?
It seems to me if you stand by your analysis you have to say... it would be a more appealing case, I suppose, if there were only one license, but on the analysis that you've brought us, even if there's only one license, there's no property involved, isn't that right?
Mr. Mogin: --That is our position, Justice Scalia.
The one... the difference is, if there were only one license, then the State really would be losing something in giving away the license.
We still would not think that that's a property right, but there's certainly no clear definition in the cases of what property is.
Justice Breyer: Well, I don't--
Chief Justice Rehnquist: --How does the State lose something giving away one license, but not lose something giving away a number of licenses?
Mr. Mogin: Well, if... Mr. Chief Justice, if there were only one license available, and if it were understood that once given it couldn't be taken back, then perhaps it could be said that the State was losing something because by giving the license it lost the ability to give it to anyone else.
Justice Souter: But that's true if it gives away 10 licenses or 100 licenses, doesn't it?
Mr. Mogin: Well, in this scheme, if 10 licenses are given out for video poker--
Justice Souter: Oh, I see.
If it's an infinite number, sure, they can always create one more license, but I don't see how that affects the property analysis as opposed to a regulatory analysis.
Mr. Mogin: --And we don't disagree.
The additional point we'd make is that there's no reason to stretch the concept of property, as the Fifth Circuit did in this case.
State licensing schemes, of course, are designed, drafted, implemented by State and local officials.
Those are the officials that are in the best position to interpret them, to decide whether they've been violated in a particular case.
This case, in fact, arose during the early years of the Louisiana video poker scheme, and State and local officials can decide the appropriate sanction, if there is misconduct.
Now, the Government argues that this license is special because the State has a substantial economic stake in the... in video poker operations.
We would respond, since when has the existence of a property right depended on something as amorphous as whether there's a substantial economic stake, or the reach of a criminal statute?
That's not an appropriate test for defining criminal liability.
There would be a whole host of questions that would be raised under the Government's theory.
How much is substantial?
Is it a dollar amount that counts?
Should it be the percentage?
Does it matter what other revenues the licensing authority has, so that it might have a different situation if the license was issued by a poor rural county as opposed to a wealthy, suburban county.
Justice Stevens: Mr. Mogin, what do you do with the Government's argument that under the second clause of the statute you don't need a victim?
They obtain money pursuant to a scheme to defraud, and so forth and so on.
Mr. Mogin: Justice Stevens, we have a number of responses to that.
Passing over the procedural point which is made in our brief, that is not before the Court, because it wasn't raised until the brief on the merits.
Justice Stevens: An alternative basis to affirm.
Mr. Mogin: Right.
We've argued in our brief that under the Tuttle decision and other decisions this Court has only rarely considered issues raised by the respondent for the first time in the brief on the merits, but on the merits of the point, the Court was unanimous in McNally that the 1909 amendment merely codified Durland, and McNally held that the statute is limited in scope to the protection of property rights, and that when the Government is the alleged victim, and I quote, any benefit which the Government derives from the statute must be limited to the Government's interest as property holder.
So that was then reaffirmed... the basic holding was reaffirmed in Carpenter, and I think it was a premise of Neder, the Neder decision in 1999 as well, as we've explained in our brief, and we've also covered the background of the 1909 amendment in our brief, the commission report, which there's really no suggestion that Congress was attempting to create a new basis of liability.
Justice Ginsburg: How many years since McNally?
Mr. Mogin: 13 years.
That was decided in 1987.
Justice Ginsburg: So we can assume that someone in Congress knew of this Court's interpretation and could have done something about it if it disagreed.
Mr. Mogin: That's right, Justice Ginsburg, and in fact in 1988 the statute was amended to deal with honest services cases, which had been thought to be the most important application of intangible rights doctrine, and those were brought under the statute if there was a deprivation of honest services.
Even today, just acquiring someone's services is not enough.
You have to have a scheme to deprive another of honest services, but Congress in 1988 did not otherwise change the McNally ruling, even though it was fully aware of it.
Justice Souter: Would you give me an example... maybe the most obvious example you can think of... of the deprivation of honest services?
I may not understand what that term refers to.
Mr. Mogin: Justice Souter, that refers to the principle that an employer has a right to expect that an employee will provide honest services, and so--
Unknown Speaker: What kinds of acts would be forbidden?
Mr. Mogin: --A scheme involving kickbacks, for example, where the employee is paid a kickback to divert business.
Justice Souter: Basically any kind of corruption on the part of the employee.
Mr. Mogin: Yes.
Justice Souter: Yes.
Mr. Mogin: The theory that the Government has presented of substantial economic stake, if adopted, would raise all kinds of thorny applications, thorny questions in application, which would be particularly troublesome, because it's a criminal statute, so the trial judges would be required to explain the standard to the jury so the jury could apply it in a particular case, and that makes the situation particularly intolerable.
The State's expectation of receiving revenue simply does not mean that when the State issues a license it parts with property.
To go back to the College Savings Bank case, I think that makes it clear that even business in the sense of... the Court said business in the sense of the activity of doing business and making a profit is not property, so the State's mere expectation of obtaining revenue after a license is issued.
Justice Ginsburg: Are there other licenses, State licenses where the Government's revenue is a percentage of the proceeds of the business, as distinguished from the tax on the income?
Mr. Mogin: Well, yes, in the area of hotels, of course, rooms are taxed generally based on occupancy, so that in New York City, for example, the city would obtain very substantial revenue from the occupancy tax.
Formerly it was over 20 percent.
In the mid nineties it was reduced to about 15 percent.
Now, that's called a tax.
Chief Justice Rehnquist: Some States administer their sales tax by issuing licenses to do business, don't they, and all it means is that you have to pay a sales tax on your gross receipts.
Mr. Mogin: That's common, and taxes can be quite substantial, and the Governments raise money, of course, through fees and charges of all sorts, not merely assessments that are called taxes, so the fact that the State is getting significant revenue here... I don't know why that indicates that it's losing property when it issues the license.
Justice Stevens: Mr. Mogin, I can probably find this out myself, but on this issue, had this issue arisen before McNally was decided?
I know there were a bunch of post McNally cases.
Mr. Mogin: Well, there were limited instances, and there was case called United States v. Green, brought in California, a prosecution involving obtaining a driver's license, and the State prosecuted that under the intangible rights theory.
That's really the only clear case that I'm aware of.
There are a couple of cases involving licenses, and because the intangible rights theory had been widely accepted in the courts of appeals, that was the doctrine that was generally relied on when a license was involved.
So it's our submission--
Chief Justice Rehnquist: What about an automobile license, a vehicle license?
Supposing there's a fraudulent application for a vehicle license and the Government says, well, we did part with property, it cost us 76 cents to make that license, although they get 300 for it.
Mr. Mogin: --Well, the courts of appeals at least I think have been in agreement that the mere cost of printing the paper for the license is to de minimis to support a charge, and so the analysis has focused on whether some other... on some other basis it can be said that the State is losing property.
We think the Government's theory of liability in this case is contrary to traditional law, is not supported by any established concept of property, and of course the Government is doing this in a criminal case.
Civil RICO plaintiffs, of course, could take advantage of the theory if it were endorsed by the Court, and the very novelty of the theory makes an inadequate basis for injecting Federal law into the area of State laws, local licensing, so for that reason we submit the petitioner's conviction should be reversed.
If there are no further questions, I reserve the balance of my time for rebuttal.
Argument of Michael R. Dreeben
Chief Justice Rehnquist: Very well, Mr. Mogin.
Mr. Dreeben, we'll hear from you.
Mr. Dreeben: Mr. Chief Justice, and may it please the Court--
A video poker license is property both in the hands of the State and in the hands of the licensee.
Petitioner's scheme therefore violates both the first and the second clauses of the mail fraud statute.
I'll address first why a video poker license is property in the hands of the State.
A video poker license represents the State's right to a stream of payments from an enormously lucrative business, a business that the State has absolute power to conduct itself.
Instead of conducting the business itself, the State franchises that opportunity to private individuals while asserting control over every aspect of the business and retaining a right to a large share of the revenues.
Justice Souter: How has that property interest been infringed in any way, because there's no claim, as I understand it, and I don't know whether your argument suggests that there was any intent here to deprive the State of its licensing fees, and no intent here to deprive the State of its percentage, and no intent here, in effect, to conduct less gambling than would otherwise be possible in order to minimize revenue, so even if we accept your theory that there are property interests that the State can claim, how have any of them been infringed on the allegations of this complaint?
Mr. Dreeben: --Justice Souter, I would agree that if there were a direct fraud at money or property of the State in a tangible form or in a financial form, that would be an easier case than this one.
This case, I suggest the best way to look at it is to start from the premise that the State is to be treated as any property owner under the mail fraud statute.
It is to be no less and no more protected than a private individual similarly situated, and to understand how the State loses property, you have to compare the State to a similarly situated private individual.
Now, the two analogies that most readily show how the State loses an intangible property right are a private franchise business, which has the right to exercise franchises and grant franchises to private parties, and has a contract right not to be defrauded in choosing the franchisees that it chooses.
Justice Souter: But I don't see where the fraud comes into it.
In other words, the only basis upon which I can see any fraud here, if we start with the assumptions that I made, that there's no claim that they were minimizing business or skimping on the percentage or whatnot, the only basis to say that there has been... that the State has been defrauded of something is to say that the property right must be some kind of metaphysical entity that somehow goes beyond the right to receive the fees, and the right to receive the percentage, and I don't know why we should take that step and recognize some kind of a metaphysical property right in addition to these quite easily defined property interests.
Mr. Dreeben: Well, it's not a metaphysical property right.
It is an intangible property right, and under this Court's decision in Carpenter v. United States, intangible property rights are just as protected as tangible ones.
Now, the way that an intangible property right is identified is by looking at the legal scheme that creates those rights, and Louisiana created a legal scheme under which it has the exclusive right to determine who may engage in the video poker business.
Justice Souter: Okay, but as I understand it, then, the... what I was sort of disparaging as the metaphysical right is basically the State's regulatory interest.
It has nothing to do directly... well, strike that.
It is a right of... to dispose of licenses conceived of as something connected to but nonetheless distinguishable from the right to receive the fee, the right to receive the percentage and so on.
Mr. Dreeben: It is both a regulatory and a proprietary interest.
Justice Souter: But if we were to say, we're going to distinguish for purposes of this statute between the State's regulatory interest and the State's property interest, then you'd have to lose, wouldn't you?
Mr. Dreeben: No, because I would define the State's property interest more broadly than simply the actual currency that is received under the license.
Chief Justice Rehnquist: Did the State lose any revenue here because of the fraud?
Mr. Dreeben: No.
We didn't charge or attempt to prove that the State lost revenue and, in fact, Louisiana connects the gambling, the video poker terminals to a central computer to ensure that skimming of revenues does not occur.
Chief Justice Rehnquist: Well then, why isn't Justice Souter's question correct, that you're not talking about any orthodox property interest here that was lost to the State.
You're talking about a loss of its regulatory authority.
Mr. Dreeben: No, I think we are talking about a property interest that in the private sector would clearly be recognized as such.
It would be analogizeable most closely to a contract interest of a party that runs a franchise business and selects its own franchisees, and if it is lied to by the franchisees, it is defrauded in its act of letting a contract to that franchise holder.
Chief Justice Rehnquist: But in a private action you have to show money damages.
Mr. Dreeben: That is true, but under the mail fraud statute we do not.
Chief Justice Rehnquist: Well, I know.
That's why I think your analogy is quite imperfect.
Mr. Dreeben: I think that the analogy is an analogy which attempts to compare the State to a private party, and the difference is that the State can always be said in some sense to be acting as a regulator.
Justice Kennedy: Were there money damages in Carpenter to the Wall Street Journal?
Mr. Dreeben: No.
There were no money damages in the Wall Street Journal case at all, because all the Wall Street Journal lost was its exclusive right to determine when to publish certain columns, and Winans and Carpenter were accused in that case of having taken from the Journal their right, the Journal's right to decide when to disclose the contents of that column.
It was highly intangible.
It's an interest only created by law, and by direct analogy here the interest that is created is Louisiana's interest in deciding which proprietary parties will work with it in the video poker--
Justice Breyer: Well, does, under Louisiana law, under the statutes of Louisiana, can the State of Louisiana give itself a license and go into the video poker business?
Mr. Dreeben: --Under the Louisiana law, the answer is no.
Justice Breyer: Okay.
Under Louisiana law, could the State of Louisiana sell to Mr. Joe Smith, a private citizen, the right to give out franchises to others?
Mr. Dreeben: Under Louisiana law--
Justice Breyer: Yes.
Mr. Dreeben: --I don't believe that the State has that authority.
Justice Breyer: No, I don't think so, either.
Therefore, it doesn't sound like McDonald's at all.
Mr. Dreeben: Well, it would be--
Justice Breyer: I mean, McDonald's can give the right to sell to others.
McDonald's has something that's valuable because it could go into business itself.
It can do what it wants.
Mr. Dreeben: --The State--
Justice Breyer: --I mean, that's your analogy.
Mr. Dreeben: The State could choose to operate in precisely that manner.
The State could have--
Justice Breyer: Oh, of course, under the Constitution it could, of the United States, but the question is, what is the scheme that Louisiana has set up under positive law.
Mr. Dreeben: --But I think--
Justice Breyer: And under positive law, I'm just saying in the two respects I mentioned it does not sound like McDonald's.
Mr. Dreeben: --Justice Breyer, I agree with you that the State has not assigned to itself the right to sell video poker licenses.
Justice Breyer: Could not.
It could not.
Mr. Dreeben: No, I don't see any reason--
Justice Breyer: No, it could under the Constitution.
It couldn't under the statute.
Mr. Dreeben: --Under its own statute, but if you're looking at the legal rights that it has invested in itself, it is as if Louisiana has made the State the exclusive holder and determiner of who may participate in the video poker industry with a substantial revenue share being assigned back to the State.
The State could have done the exact same thing in a different manner.
It could have said, you, the State, shall select someone who will choose all these State franchise holders who will do the video poker business and it could have sold that interest, could have said, a private party can take over the role of deciding who gets a license and collect all the money and give some of the money back to the State, but it did not do that.
Instead, it retained those legal rights in itself, and those legal rights would have been viewed as property had a private property holder exercised them.
Justice Ginsburg: Mr. Dreeben, how does that differ from giving out liquor licenses, or giving out taxi medallions?
My question is, how far this theory of yours spreads, and as I read it in your brief it seems very far.
Mr. Dreeben: Justice Ginsburg, it spreads only to those licenses and those State activities that are generically speaking more in a proprietary mold than in a regulatory mold, and there is a classification question that arises.
Both liquor licenses and taxi medallions share some features with the Louisiana scheme and, therefore, arguably both of those would fall on the property side of the equation.
Justice Ginsburg: Well, tell me, what is the Government's position?
What falls, what licenses would fall under the Government's theory, and which ones would be left out?
Mr. Dreeben: Our position is that a purely regulatory license, such as a license to practice medicine, or a driver's license, is not encompassed within this theory of property, but a license, or a regulatory proprietary scheme such as a franchise scheme, or a license that is very closely linked in the revenue stream that goes back to the State and in the regulatory component is.
Justice Ginsburg: Well, suppose there is, like with the example of the hotel and the occupancy tax that Mr. Mogin raised, or people who run liquor establishments get a much higher tax than people who are in other businesses.
That's special to that business.
Do those qualify?
Mr. Dreeben: I think that they do under a strict analytical approach, but I also think that there is a component to the analysis that is narrower than assuming that all such licenses fall within the scope of the mail fraud statute, and--
Justice Stevens: Mr. Dreeben... if you answered the question... it seems to me that you really... the property right that I would think of in terms of normal usage would be the right to exclude as one of the bundle of rights, but you don't claim the right to exclude is sufficient, because you would not include the bar, the control of the membership in the bar, is that right?
Mr. Dreeben: --That's correct.
Justice Stevens: You are not claiming... every right to exclude is not a--
Mr. Dreeben: That's correct.
Justice Stevens: --But then I don't... I really don't understand why it makes any difference that the State shares in the revenues.
I don't see why it would be a different case if they didn't, they just taxed the video people on some income basis, rather than sharing in the revenues.
Mr. Dreeben: Well, I think if there was no linkage between the taxation and the licensing scheme, then it's harder to say that the State is acting in a proprietary than in a regulatory--
Justice Stevens: But even if it's acting in a proprietary way, it's not deprived of any revenue.
It's not deprived of anything, except the right to exclude these people, and that's not itself sufficient.
Mr. Dreeben: --It's not itself sufficient, but in combination with a scheme such as this, that creates in the State the power to participate in a particular industry, and to select, in effect, the participants in the industry, the agents who will carry out the work, the State has acted in a way that far more closely resembles a franchise business than it does a pure, sovereign regulator, and that is the question that has to be asked under the mail fraud statute.
Justice Scalia: I don't--
Justice O'Connor: --Mr. Dreeben, you seem to be... the Government's position seems to be somewhat of a shifting target.
You appear to be arguing today that the State itself is deprived of property under this scheme, and when it's a proprietary licensing scheme that is the situation.
I thought in your brief the focus was an argument to the effect that the statute is satisfied so long as the licensee gets some kind of money or property.
It doesn't matter if the victim, here the State, is deprived of property.
Are you abandoning that argument now?
Mr. Dreeben: No, Justice--
Justice O'Connor: It was new.
I don't think it was pressed below.
Mr. Dreeben: --Correct.
Justice O'Connor: But do you still adhere to that as well?
Mr. Dreeben: Yes, I do.
It is our alternative theory of why--
Justice O'Connor: Is there any reason why we should address it, since it came so late in the day?
Mr. Dreeben: --Well, the Court has discretion to address it.
It certainly isn't required to address it.
We did not argue it below.
But I will say that in favor of the Court addressing it and resolving it is that it is a purely legal argument that the Government made in McNally, that the Court did not squarely address in McNally for a variety of--
Justice O'Connor: Well, by implication McNally seemed to assume that it was... the statute covers only money or property obtained from the victim.
I mean, that's how the opinion seems to be focused, anyway.
Mr. Dreeben: --Well, there is language in McNally, without doubt, that reads that way, but that language could not have announced a holding in McNally, because the actual holding of McNally was, in addition to the well known part of McNally that an intangible right to good government is not a property right, the Court also held that there was no deception of the State and there were no false statements made to any third party, so there was no factual predicate in McNally itself for deciding whether the second clause applies.
Chief Justice Rehnquist: I suppose one argument in favor of exercising our discretion here is that we took the case to construe the meaning of a statute, there's a conflict in the circuits, and to say, you know, we're construing it this way but there's another argument that we might accede to in some other case wouldn't be the best use of our resources.
Mr. Dreeben: I agree, Mr. Chief Justice, particularly--
Justice Scalia: But you say that's what we did in McNally.
You said this argument was available there and we chose not to address it, and to leave everything sort of up in the air.
Mr. Dreeben: --Well, there is--
Justice Scalia: I mean, I was here in McNally.
I didn't realize we had done that.
Mr. Dreeben: --Well, there is actually no discussion in the opinion itself of the theory that the Government raised that the false statements alone, when the defendant obtains property, are sufficient.
Justice Scalia: Oh, you're saying we did in McNally what you are now arguing it would be irresponsible for us to do now.
I don't think we did that in McNally.
I thought we had addressed the statute.
Mr. Dreeben: Well, as I said, Justice Scalia, there... the square holdings of McNally did not require the Court to come to a definitive answer to it, and if you read the McNally opinion, which is fairly brief, it doesn't identify and reject in terms this theory.
What the McNally opinion does do is point out that the second clause of the statute, which was added in 1909, has the effect of codifying this Court's decision in Durland v. United States, which held that--
Justice Breyer: If--
Mr. Dreeben: --false promises come within the mail fraud statute.
Justice Scalia: --That's contrary to your interpretation of what the amendment did.
Mr. Dreeben: No, it's not contrary to it.
I think that the amendment did more than that.
It clearly at least codifies Durland.
There's no question about that.
But the plain language of the statute does not require that there be a deprivation of property.
Justice Scalia: But if it did more than that, we should have said that in McNally.
We shouldn't have said, it just did this, which would have reached the result that we reached in McNally, and simply ignored the fact that it did more than that, which would have produced a different result in McNally.
Mr. Dreeben: It would not have produced a different result in McNally, Justice Scalia, because the Court made quite clear in footnote 9 of its opinion that there was no deception of the State at all.
The Government's theory in McNally was that State officeholders who have an adverse interest to the State are required to disclose it to the State, and this Court said in footnote 9 of McNally that we should not assume that there was any such duty of disclosure, and without a duty of disclosure, there could have been no fraud that would have triggered the second clause of the statute.
Justice Scalia: You also would never reach the principal holding of McNally if you're going to put all of the weight on that footnote.
Mr. Dreeben: The Court could have decided the case based on that analysis, but it decided it on a broader analysis, which is--
Justice Scalia: Right.
I don't think footnote... what note was it?
Mr. Dreeben: --Footnote 9.
Justice Scalia: --9, I don't think footnote 9 was meant to preclude the question that's before us here, any more than it was meant to preclude the question of whether intangible services can qualify under the statute.
Certainly everybody assumed that's what the case decided, despite footnote 9.
Mr. Dreeben: What I think is evident from McNally is that the Court at various points in the opinion wrote broadly about the mail fraud statute.
But there is a distinct theory of liability that we briefed before this Court in McNally and that was not addressed in terms, and I think that there is an explanation for why that theory was not addressed, which is that there were no false representations to anybody that were charged in the jury instructions that could have supported that theory.
Justice Breyer: If we did have that, if that theory's in front of us, it seemed a little broad.
It seemed that it would make guilty of mail fraud... I was thinking, you know, Richard, on the Survivors program--
Unknown Speaker: [Laughter]
Justice Breyer: You don't know that.
But I mean, he seemed absolutely guilty under your interpretation--
Unknown Speaker: [Laughter]
Justice Breyer: --and then I thought that probably... probably any competitor, by the way, in a commercial context, anybody who lies to his competitor, any boss who lies to his subordinate, any subordinate who lies to his boss or a coworker, they're all out to get money, and they're telling lies or scheming to get money, just like Richard on the Survivors program, and I was a little surprised that the Government is suddenly going to make criminal under the mail fraud statute... I mean, bring back Cotton Mather.
I mean, this is... any lying in a commercial context where you're trying to get money out of it is now mail fraud.
Is that right?
Mr. Dreeben: Well, I don't want to speak to Richard in the Survivors, since--
--we haven't charged that case and I'm not familiar with it.
Justice Breyer: I hope not.
Unknown Speaker: [Laughter]
Mr. Dreeben: But as far as the breadth of the theory, it is a broad theory.
I'm not sure, Justice Breyer, whether it covers all of the hypotheticals in your question, but it is a broader theory than the license as a proprietary activity theory, because it would apply whenever an individual lies for the purpose of obtaining property--
Justice Breyer: So what I'm most worried about in that, of course, is that it is possible, you know, that competitors in a commercial context may tell each other lies sometime.
I'm going to the trade show, and then when your competitor goes you stay home and take his customer away.
Well, each one of those is a RICO suit, and I--
Mr. Dreeben: --I don't think so.
Justice Breyer: --No?
Mr. Dreeben: No.
I think there is a materiality component in the mail fraud statute that this Court described in Neder v. United States--
Justice Breyer: It's material. You get your competitor to go to the trade show and then while he's away you take his customer.
There was quite a lot of money there.
Mr. Dreeben: --I haven't tried to frame this as an application that would sweep in routine commercial conduct.
Justice Ginsburg: But you said you were going to treat the Government just as a private person would be treated under this statute that was... but are you saying that's true of the theory that it's property in the hands of the Government as well, and not true under this alternative theory?
Mr. Dreeben: No, Justice Ginsburg, but in this particular case what the defendant did was lie to the State, concealing adverse facts about his background in order to obtain a valuable license, which--
Justice Ginsburg: Well, that could apply, at least in the cases you excluded from your first theory.
That is, the license to practice law, the license to practice medicine, those are very valuable in the hands of the recipient.
Mr. Dreeben: --That is true.
Justice Ginsburg: And I think sometimes when they divide property on termination of marriage those are attributed a monetary value.
Mr. Dreeben: That is true, and there is yet another theory of the mail fraud statute which we have not raised in this case and we haven't briefed in this case, which holds that lying to, for example, the State in order to obtain a regulatory approval that will then allow someone to obtain money from a third party fits within even the first clause of the mail fraud statute.
Justice Ginsburg: Well, my problem with your large interpretation, Mr. Dreeben, is you're essentially making the Federal Government monitors of what would be a false statement to a Government agency.
18 U.S.C. 1001, that operates on the Federal level.
You're just saying, well, we do the same thing with overall monitoring, of making a false statement to a Government official, State or Federal, and that's the kind of thing, if Congress meant to do, shouldn't it be required to speak clearly?
Shouldn't a clear statement rule apply to that level of monitoring, false statements made to State agencies?
Mr. Dreeben: I think, Justice Ginsburg, that Congress has attempted to speak very clearly and comprehensively in the mail fraud statute.
When this Court ruled in McNally that it did not apply to the intangible right to honest services, Congress came back and amended the statute to make clear that it did want the Federal Government in that line of business.
Justice Scalia: Well now, wait.
It was a later Congress that decided that's what they wanted to do.
That doesn't have anything to say about what the earlier Congress intended when they passed this fraud statute.
Mr. Dreeben: I don't suggest that it does, Justice Scalia.
Justice Scalia: These were different people in Congress, after McNally, and they decided that they agreed with the Government that there should be a way to get these people, but that says nothing at all about whether the statute, as originally drafted by another Congress many years ago, all of whom are gone, meant what we said it meant in McNally.
Mr. Dreeben: Even taking the Court's own holding in McNally, the Court's holding is that the State is not to be less favored than a private party insofar as it's a property holder.
It's to be treated on the same footing if the defendant uses a Federal jurisdictional means which subjects him to a Federal regulatory system, and there are lots and lots of defendants who make false statements to Governments in connection with obtaining money or property or even defrauding a State of tax revenue, which some people might think are quintessential things for the States to handle all on their own.
Chief Justice Rehnquist: I don't know whether one... 18 U.S.C. 1001 was passed before or after the mail fraud statute, but the Government, intimated by Justice Ginsburg, really doesn't need 1001 if you're right about the mail fraud statute.
Mr. Dreeben: Well, the elements of the two statutes are different, and there are many applications where 1001 would fit where we wouldn't necessarily be able to establish a scheme to defraud under the mail fraud statute, so the--
Chief Justice Rehnquist: Well, can you give me perhaps one of those?
Mr. Dreeben: --Well, you'd... under our second theory, we do not need to show that there is an intent to deprive the State or the Federal Government of a property interest, whereas--
Chief Justice Rehnquist: So you say basically the mail fraud is much broader than 1001.
Mr. Dreeben: --In some ways it's broader, and in some ways it's narrower.
Chief Justice Rehnquist: In what way is it narrower?
Mr. Dreeben: Well, mail fraud requires a use of the jurisdictional means that you have mail fraud, and it also under the scheme to... you need to have proof of the mails in other words, which is not true for 1001.
1001 involves any Federal agency, any false statement in a matter within the Federal agency's jurisdiction, and it need not involve any money or property loss or gain.
So the two statutes have a substantially different sweep.
Justice Ginsburg: If it's only the jurisdictional peg, I guess the wire... isn't there... there are parallel statute that deals with use of wire communications?
Mr. Dreeben: Correct.
Justice Stevens: Which--
Justice Ginsburg: --It seems to me there's hardly any application for anything that wouldn't use one or the other, a telephone or the mail.
Mr. Dreeben: That may be true, and there's also an intent element, though, in the mail fraud statute of an intent to defraud, which is not present in the 1001.
1001 simply applies to a knowing false statement within the jurisdiction of a Federal agency.
Justice Stevens: Would your theory apply, assuming there's a mailing, of course, to false statements in an employment application?
Mr. Dreeben: To the State?
Justice Stevens: Yes.
You want to get a State job, and you lie about your background in some way, misstate your age, or you say you were never caught speeding or something like that.
Would it apply?
Mr. Dreeben: Well, certainly the second clause as we have construed it would apply in such a case, because the employment applicant seeks employment.
Justice Scalia: What about a misstatement in a tax return, State filed tax return?
Mr. Dreeben: A misstatement that is intended to result in a greater tax--
Justice Scalia: Greater deduction, or lesser tax.
Mr. Dreeben: --Yes.
But Justice Scalia, that would be covered under anybody's interpretation of the mail fraud statute, because it's a scheme to acquire money or property that should belong to the State, and that's fundamentally--
Justice Scalia: It's a scheme to keep your own property, which you're supposed to give to the State.
I'm not sure that anything is being taken from the State.
Mr. Dreeben: --No, the State has a right to--
Justice Scalia: You don't read the statute too closely, do you?
Mr. Dreeben: --I think that I read the statute broadly in respect of money or property losses to the State, and apply it in a way that makes it congruent with what a private party would be subjected to.
Justice Souter: Mr. Dreeben, I have, I guess, a basic problem with how we even get to your second theory, because as I understand it the trial judge in this case charged the jury simply on the theory of depriving the third party of property, so I don't see how we could even get into this if we wanted to.
Mr. Dreeben: The trial judge combined the first clause and the second clause of the statute which were charged in the indictment.
He combined them by saying a scheme to defraud by making false or fraudulent representations to the State.
Justice Souter: But he did it on a theory of defrauding, i.e., getting the other person's property, didn't he?
Mr. Dreeben: He did, but a jury that found guilt on those instructions necessarily found that the object of the scheme was to make false statements to the State to obtain the license and, indeed, the charged mailings were the mailings of the license to the defendants.
Justice Souter: So you're saying it's like lesser included?
Mr. Dreeben: It's exactly included within what the jury had to find in order to render the conviction on the instructions that were given.
Justice Ginsburg: Mr. Dreeben, your alternate theory is admittedly very broad.
You gave a yes answer to the employment application.
Is there any guidelines that are given to Federal prosecutors, given the tremendous potential sweep of the statute as you construe it?
Mr. Dreeben: There are no guidelines beyond the legal requirements for charging mail fraud that are given to Federal prosecutors.
Justice Ginsburg: So the individual prosecutor can decide if he or she would like to go after the would be employee who lied on an application for State employment?
Mr. Dreeben: In theory.
In theory, Justice Ginsburg.
I would also say that under the property prong of mail fraud individual prosecutors have discretion on what level of case they are going to bring, and the competing obligations and case loads of Federal prosecutors tend to send those cases to the wayside, but there are small cases brought even where the State is defrauded of a relatively small amount of property.
And one of the reasons why that is is because frauds against the State often involve State actors in collusion with the private parties, and the Federal Government there serves a very valuable role in coming in and being able to prosecute when the States themselves seem to be less able to do so, and this case itself had a corruption component in it involving charges against State Senators, which the jury ended up rejecting, but there was a reason why the Federal Government was involved in this case in the beginning.
Chief Justice Rehnquist: You don't think the people of Louisiana deserve the kind of government that they elect.
Unknown Speaker: [Laughter]
Mr. Dreeben: I think the people of the State of Louisiana are actually benefited by having the Federal Government available as a supplementary prosecutorial tool.
Rebuttal of Paul Mogin
Chief Justice Rehnquist: Thank you, Mr. Dreeben.
Mr. Mogin, you have 11 minutes remaining.
Mr. Mogin: Mr. Chief Justice, we will waive rebuttal unless there are questions.
Justice Kennedy: How do you distinguish the Carpenter case, because the Carpenter case held that the confidential information of the Wall Street Journal was traditionally protected as property because it would be subject to protection in equity, et cetera.
Mr. Mogin: The key distinction is that there this Court was able to find prior law that recognized confidential business information as property.
The Ruckelshaus case in this Court, a case from... the International News case I believe it is, a treatise was cited in the opinion.
There was substantial prior law indicating that confidential business information was protected as property under the civil law, so the Court was not required to announce a new theory of property in that case.
Justice Stevens: May I ask this, Mr. Mogin.
The right to exclude is mentioned over and over again in property cases as one of the bundles of rights that's a property right, and so forth.
I know the Government doesn't press this to the extreme it would go, but why isn't... why couldn't one view the video poker industry as an industry that is controlled by the State and they have the right to exclude newcomers, oldcomers, and that's just an old fashioned property right?
Mr. Mogin: Well, this Court has pointed out that there's no precise or universal definition of property.
That's been said in some bankruptcy cases, and--
Justice Stevens: But isn't it true that the right to exclude is referred to in many, many property cases as a strand of property right?
Mr. Mogin: --Yes, but I don't think that from that one could conclude that every right to exclude is a property right, because here you have the breadth of it, that the licensing and approvals and permits and certifications and registrations that the Government issues is truly extraordinary.
It's never been thought that those are property rights that the Government is exercising, and property law has been formed... is based a lot on history and tradition, and not merely on characteristics.
There's no one characteristic, such as the right to exclude, that can be focused on and is the be all and end all of whether there's a property right.
Justice Souter: Well, because in this case or in any regulatory case, as distinct from the case of private ownership or private property, there are two capacities, I suppose, on the part of the supposed property owner, and one is a regulatory capacity and one is arguably a proprietary one, and I suppose... I mean, wouldn't it be your argument that the right to exclude would have to be classified on the regulatory side rather than the property side?
So in other words, the right to exclude is here, but the reason it isn't property in the case of the Government is that the Government holds it in a different capacity as regulator, which is a capacity that the private property owner doesn't have.
Mr. Mogin: I think that's exactly right, and that's why the Government prohibits all types of things, excludes people from all types of activities.
The mere fact that the Government is excluding something does not mean it's exercising a property right.
One has to look at the nature of the decision and see whether the Government is acting in a regulatory or proprietary capacity.
As we cite in our briefs, the courts have always viewed licensing decisions and revocation decisions as regulatory rather than proprietary.
Chief Justice Rehnquist: Thank you, Mr. Mogin.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in Cleveland against Untied States will be announced by Justice Ginsburg.
Argument of Justice Ginsburg
Mr. Ginsburg: About federal mail fraud and Louisiana licenses to operate video poker machines.
Louisiana permits private operators to run video poker devices upon demonstration of the applicant’s good character and fiscal integrity, conditions on the payment of fees and apportion of net revenues to the State.
In 1992, Carl Cleveland a lawyer helped his client Fred Goodson prepare a video poker license application for a partnerships called Truck Stop Gaming.
The application identified Goodson’s children as the sole owners of the partnership.
Louisiana issued the license and Truck Stop Gaming renewed it in 1993, 1994 and 1995.
In 1996, Cleveland and Goodson were charged with money laundering, racketeering and conspiracy in connection with the scheme to bribe state legislators to caste votes favorable to the video poker industry.
The acts underline these charges included four alleged violations of the federal mail fraud statute, the statute that makes it a crime to use the mails to further, “any scheme to defraud, or for obtaining money, or property by means of fraudulent representations”.
Indictment charged that Cleveland and Goodson had concealed their true ownership of Truck Stop Gaming because their tax and financial problems could have disqualified them from receiving a license.
A jury found Cleveland guilty of mail fraud and the related offenses.
The Fifth Circuit affirmed the conviction recognizing that the mail fraud statute targets depravation of money and property, and holding that video poker licenses qualify as property in the hands of the State.
We reverse that determination.
The licensing statute leaves no doubt that the State’s core concern is regulatory, it permits private actors to pursue activities they may not pursue without official authorization.
Thus, the licensing scheme also generate property held by the State within the mail fraud statutes compass, we think not.
The government emphasizes that the State collects a fee for each license and receives substantial payment from each licensee while the license is in affect.
But Louisiana does not receive the lion’s share of its expected revenue, while the licenses are in its own hands; it receives ongoing revenue only after permits have been issue to licensees.
Licenses' pre-issuance merely entitle the State to collect a processing fee from applicants.
Were this sufficient to establish a property right, then States would have property rights in drivers’ licenses, medical licenses, and other licenses that the Government concedes are purely regulatory.
Tellingly, the Government does not allege that Cleveland deprived Louisiana of any money to which it was entitled by law, in fact Truck Stop Gaming paid the State its proper share of revenue over $1.2 between 1993 and 1995.
The government also contends that Cleveland deprived the State of its right to control the issuance, renewal, and revocation of video poker licenses.
It compares this right to a patent holder’s right to license a patent and to a franchisor's right to select its franchisees.
But unlike a patent holder or franchisor, Louisiana does not sell licenses as a commercial commodity, it cannot sell its licensing authority and it does not hold licenses in order to run video poker machines itself, the licensing scheme in short is in design an operation a paradigmatic police power exercise.
An alternative argument the government presents.
Read the mail fraud statute to define two discreet offenses: one, schemes to defraud and two, schemes for obtaining money or property by fraud.
Because a video poker license is property to the licensee the government argues, Cleveland obtain property and thereby he committed mail fraud.
But in McNally against United States, a 1987 decision, we refused to read the statute to define two discreet offenses.
Adhering to McNally we reaffirm that the object of the fraud must be property in the hands of the victim.
Our opinion is unanimous.