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The U.S. Supreme Court recently trained a skeptical eye on the federal government’s attempt to bring certain state license applications sought by business owners into the crosshairs of the powerful federal mail fraud statute. The high court on Oct. 10 heard arguments in Cleveland v. U.S., No. 99-804, in which lawyer-businessman Carl Cleveland and his associate Fred Goodson seek to overturn their mail fraud convictions for submitting false and incomplete information on applications for a state license to run video poker sites in Louisiana. The issue before the justices is whether an unissued state license is “property” for purposes of the mail fraud statute. That relatively straightforward question has galvanized the nation’s business community, which applies for hundreds of thousands of state and local licenses annually to operate their commercial activities, the U.S. Chamber of Commerce says in an amicus brief. If the justices read the statute broadly to include unissued standard business licenses, the Chamber argues, mail fraud involving those license applications could be the basis for RICO treble damages actions and qui tam suits under the False Claims Act. FRAUD STATUTE The mail fraud statute prohibits “any scheme or artifice to defraud” and schemes “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises” in connection with use of the mail. The federal circuits that have considered the license-property question have split. A majority have concluded that licenses are not property. But the 5th U.S. Circuit Court of Appeals, in Cleveland, held that video poker licenses were property; the 3rd Circuit has found that a fraudulent scheme to obtain a medical license qualified; and the 1st Circuit held that procurement of a liquor/entertainment license through mail fraud was “property” sufficient to uphold a conviction. Cleveland’s high court counsel, Paul Mogin of Washington, D.C.’s Williams & Connolly, told the justices that the 5th Circuit “has used a novel concept of property” to give the federal government power to regulate licenses — licenses that state and local governments are fully capable of policing through their own licensing schemes. Licensing and revocation decisions have always been viewed as regulatory acts, not proprietary acts involving the transfer of government property, he argued. But Justice Sandra Day O’Connor suggested that the video poker license might be a different kind of license because it contains “an ongoing revenue component” for the state. Louisiana collects 22.5 percent of net revenues generated by the machines. “Does that make it somehow more of a property interest” for the state? she asked. “There’s no question the state is taking a substantial share, but I don’t see how that gives rise to a property interest,” said Mogin. He said in response to subsequent questions that government takes a percentage share of other types of license/tax arrangements. “Since when has the existence of a property right depended on whether a substantial economic interest is at stake?” he asked, referring to one of the government’s key arguments. “How much is substantial? The state’s expectation of receiving revenue does not make that a property interest.” But Deputy Solicitor General Michael R. Dreeben countered that a video poker license is property in the hands of the state and represents the state’s right to a stream of payments from a lucrative business over which it retains significant control. He told the justices that the most apt analogy is to a franchise operation. But Justice David H. Souter said there was no attempt to deprive the state of its licensing fee or its revenue percentage. “How have interests been infringed here?” he asked. Dreeben said the state must be treated the same as a privately-situated individual. In the franchise analogy, he explained, there is a “contractual right not to be defrauded in choosing your franchisee.” But Justice Stephen G. Breyer said, “It doesn’t sound like McDonald’s at all.” And Justice Ruth Bader Ginsburg voiced concern about the breadth of the government’s position, saying, “As I read it, [your theory] would spread very far.” To which Dreeben replied, “Only as far as those licenses that are more of the proprietary mold.” But which licenses fall in and out of that mold, pressed Ginsburg. A purely regulatory license, such as a medical or driver’s license, said Dreeben, would not be covered, but a proprietary scheme with a revenue component, such as the video poker licenses, would be. A decision is expected by July.

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