What is fraudulent inducement theory?

| by Max Soni

Thanks for visiting Spodek Law Group. We’re a second-generation law firm managed by Todd Spodek – with over 40 years of combined experience handling the toughest criminal defense and civil litigation cases. You’ve heard of some of our work, like representing Anna Delvey in the case that became a Netflix series, handling the Ghislaine Maxwell juror misconduct matter, and defending clients others claimed were unwinnable. If you’re dealing with fraudulent inducement allegations – whether you’re accused or you’ve been victimized – you need lawyers who understand how this theory works in both civil and criminal contexts.

Fraudulent inducement theory is about lies told before you sign. Someone tricks you into entering a contract by making false statements that matter – statements you rely on when deciding whether to sign. The key word is “inducement” – the lie is designed to get you into the deal. What makes this area dangerous right now is that the law changed dramatically in 2025, and most people – including many attorneys – don’t realize how broad federal prosecutors’ power has become.

The civil side is straightforward enough. You enter a contract because someone lied to you about something important. Let’s say you’re buying a business, and the seller tells you annual revenue is $2 million when it’s actually $800,000. That lie induced you to buy. To prove fraudulent inducement in civil court, you need six things: a false statement, the statement mattered to the deal, the person knew it was false or didn’t care if it was true, they intended to trick you into signing, you reasonably relied on the lie, and you got hurt financially. If you can prove all six, the contract is voidable – you can walk away and sue for damages.

Timing matters here. Fraudulent inducement happens before the contract gets signed – it’s what tricks you into entering the deal. Regular fraud can happen anytime, and fraud in the execution is when someone tricks you about the nature of the document itself.

Contracts induced by fraud aren’t void – they’re voidable. You have a choice. You can affirm the contract and move forward, or rescind it and sue for damages. Sometimes the deal still makes sense even after discovering the lie, or you want to hold the other side to their obligations while seeking damages.

The remedies in civil fraudulent inducement cases include rescission – unwinding the deal and putting everyone back where they started – or damages. You can seek compensatory damages to cover your actual losses, and in many states, punitive damages to punish the wrongdoer. Punitive damages are significant because they’re rare in contract cases, but fraud changes the analysis. Courts view fraudulent inducement as intentional wrongdoing, not just a broken promise.

Now here’s where it gets serious – the criminal side. In May 2025, the Supreme Court decided Kousisis v. United States, and this case fundamentally changed federal wire fraud law. The Court held that you can be convicted of wire fraud based on fraudulent inducement even if the victim never suffered any economic loss. Read that again – no financial harm required for a federal fraud conviction.

The Kousisis case involved a painting contractor who lied to get government contracts. Alpha Painting told the Pennsylvania Department of Transportation they’d use a disadvantaged business enterprise to supply materials – a requirement for bidding on the contracts. They didn’t. They used the supplier as a pass-through, faking the paperwork while doing the work themselves. But here’s the thing – Alpha completed both contracts perfectly, charged the lowest bid, and PennDOT got exactly what they paid for. No financial loss to the government whatsoever.

The Supreme Court said it doesn’t matter. If you lie to induce someone into a transaction – even if you fully perform and cause no economic harm – you’ve committed federal wire fraud. The owner got 70 months in federal prison. The company paid a $500,000 fine and forfeited all profits from both contracts. This wasn’t a case of stealing money or delivering shoddy work – this was pure fraudulent inducement, and it was enough for a federal conviction.

What this means practically is that fraudulent inducement is now a species of federal fraud all on its own. You don’t need to show the victim lost money or property in the traditional sense. You just need to show: material misrepresentation, intent to deceive, and that the lie induced the victim to part with money or property – even if they got full value in return. Justice Amy Coney Barrett wrote the opinion, and it was unanimous. All nine justices agreed.

That said, some justices wrote separately to express concern about how broad this theory is, and that’s where defense strategies come in. Justice Thomas focused on materiality – the requirement that the lie actually matter to the transaction. Not every false statement is material. Puffing, trade talk, statements of opinion – these don’t count as fraudulent inducement because no reasonable person would rely on them. The materiality requirement, according to Thomas, is demanding and should limit prosecutorial overreach.

Defense counsel are already using the materiality arguments to push back against charges. Just because you made a false statement doesn’t mean it’s criminal fraud – it has to be significant enough that it actually affected the other party’s decision to enter the transaction. This is likely where most fraudulent inducement cases will be fought in the coming years, both civil and criminal.

The other major defense is lack of intent. You can’t accidentally commit fraudulent inducement. The prosecution or plaintiff has to prove you knew the statement was false or that you made it with reckless disregard for the truth. If you genuinely believed what you said was accurate – even if you were wrong – that’s not fraud. Negligent misrepresentation exists as a separate claim, but it’s not fraudulent inducement.

Reliance must be reasonable too. If someone tells you they’ll give you a billion dollars for $100 and you believe them, that’s not reasonable – you should know better. Courts look at whether the victim could have investigated and whether the representation was verifiable.

At Spodek Law Group – we’ve handled fraud cases from both sides. Sometimes we’re defending clients accused of making false representations to obtain contracts, loans, or other benefits. Other times we’re representing victims who were tricked into bad deals. The 2025 Kousisis decision changed the landscape for anyone facing federal charges, and you need lawyers who understand these changes and can fight on the materiality and intent elements where the real battles happen now. Many of the cases we’re famous for handling – are cases that others say were unwinnable, and fraudulent inducement cases often fall into that category because the facts are messy and the law keeps shifting.

Fraudulent inducement theory isn’t going away – if anything, it’s expanding. Federal prosecutors have a powerful new tool after Kousisis, and civil litigants have always had strong remedies when they can prove the elements. Whether you’re facing charges or you’ve been victimized, the key is understanding that lies told before signing can have consequences far beyond just breaking a contract – they can be federal crimes carrying serious prison time.