Fraud and Misrepresentation

Pages169-208
169
CHAPTER VI
FRAUD AND MISREPRESENTATION
Fra ud and misrepr esentation cla ims may be a sserted in
connection with a broad range of commercial conduct. Disputes
between competitors may involve the joinder of antitrust claims
with claims of statutory or common law cla ims of fraudulent
conduct. Distributors or retailers may join antitrust cla ims
against suppliers with allegations of fraud or misrepresenta tion.
Just as the F ederal Trade Commission Act and Lanham Act
prohibit misrepresentations in mar kets for goods and services,
antifraud provisions of federal a nd state securities laws seek to
promote accur ate disclosure in ca pital mar kets. And civil claims
under federal and state anti-ra cketeering laws, which may be
predicated on allegations of fraud, are frequently brought in the
competitive context. This cha pter examines each of these
varieties of the business torts of fraud and misrepresentation.
Eds.
A. Introduction
Fraud is a frequently-asserted business tort. The necessity of proving
specific intent in combination with the “clear and convincing”
evidentiary standard imposed by many jurisdictions, however, often
makes it a difficult claim to sustain. Plaintiffs seeking to avoid these
hurdles may resort to the related tort of negligent misrepresentation,
which courts have applied in various circumstances to impose liability
upon those who are in the business of supplying information.
1
Statutory
causes of action may be available in addition to, or in lieu of, common
law claims for fraud or misrepresentation.
2
1
. Such cases include proceedings a gainst service professionals such as
attorneys, accountants, and bankers. See infra Section C(3).
2
. For example, states have enacted “little FTC” acts to prohibit, in one form
or another, deceptive, and sometimes unfair, trade practices. See Chapter
III, supra . See generally, ABA SECTION OF ANTITRUST LAW, CONSUMER
PROTECTION HANDBOOK (2004). While these statutes vary widely in their
exact wording, most either prohibit a detailed list of specified practices
and then contai n a ca tch-all provision, or simply omit the detailed listing
and contain only a broadly-worded prohibition. In addition to little FTC
170 Business Torts and Unfair Competition Hand book
B. Common Law Fraud
1.
Nature of the Action
Common law fraud is rooted in a desire to redress willful invasions
of commercial and other interests.
3
Also called “misrepresentation,”
“fraudulent misrepresentation” or “deceit,” fraud claims have been
asserted to protect economic interests of persons induced to enter into, or
perform transactions in reliance upon, the misrepresentations of others.
4
Fraud is distinct from breach of warranty, which also is based upon
commercial representations, in that fraud generally encompasses proof of
fault (an intent to deceive), whereas warranty liability is based upon an
implied obligation to guarantee the accuracy of the warrantor’s
statements.
5
2.
Elements
Courts have used anywhere from five to eleven elements to describe
a cause of action for fraud. The essential elements commonly include:
(1) A material misrepresentation made by the defendant;
(2) The defendant’s knowledge of the falsity of the representation,
sometimes referred to as “scienter;”
(3) The defendant’s intent to induce the plaintiff to rely upon the
misrepresentation;
(4) The plaintiff’s justifiable reliance upon the misrepresentation; and
(5) Damage resulting from the plai ntiff’s reliance upon the
misrepresentation.
6
acts, some states have enacted industry specific fraud sta tutes. See, e.g.,
TEX. BUS. & COM. CODE ANN. § 27.01, Fraud in Real Estate and Stock
Transactions; § 27.02, Certain Insurance Claims for Excessive Charges.
3
. See W. PAGE KEETON ET AL., PR OSSER AND KEETON ON THE LAW OF
TORTS § 105, at 726 (5th ed. 1984) [hereinafter KEETON].
4
. Id.
5
. Id. at 728-29.
6
. Landmark Screens, LLC v. Morgan, Lewis, & Bockius, LLP, 676 F.3d
1354, 1359 (Fed. Cir. 2012) (California law); Bohnsack v. Varco, L.P.,
668 F.3d 262, 272 (5th Cir. 2012) (Texas law); Boyd v. Tornier, Inc., 656
F.3d 487, 493 (7th Cir. 2011) (Missouri law); Andersons, Inc. v. Consol,
Inc., 348 F.3d 496 , 505 (6th Cir. 2003) (Ohio law); Spreitzer v. Hawkeye
State Bank, 779 N.W.2d 726, 735 (Iowa 2009); Booze v. Allstate Ins.
Co., 750 A.2d 877, 880 (Pa. Super. Ct. 2000).
Fra ud and Misrepresentation 171
3.
Material Misrepresentation
A claim for fraud generally begins with a specific misrepresentation
by the defendant to the plaintiff.
7
A representation susceptible of two
interpretations, one of which is false, also may support an action for
fraud.
8
Conduct, as well as words, may constitute a misrepresentation.
9
Most courts hold that an actionable misrepresentation must be a
statement of fact.
10
Consequently, statements of opinion are rarely
actionable as fraud.
11
Common forms of non-actionable “opinion”
include “sales talk” or “puffing,” which are shielded from liability for
fraud.
12
Misrepresentations of law also are generally considered to be
expressions of opinion, and thus not actionable absent special
circumstances such as when the speaker purports to have special
knowledge or stands in a fiduciary relationship to the recipient.
13
An
7
. Glen Holly Entm’t v. Tektronix Inc. 352 F.3d 367, 379 (9th Cir. 2003)
(California law; holding that “generalized, vague, and unspecific
assertions, constituting mere ‘puffery’” do not constitute
misrepresentation); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 538
(3d Cir. 1999) (“[V]ague and general statements of optimism ‘constitute
no more than puffery and are understood by reasonable investors as
such.’”) (citation omitted).
8
. In re LaFratte, 281 B.R. 575, 579 (M.D. Pa. 2002) (citing R ESTATEMENT
(SECOND) OF TORTS: AMBIGUOUS REPRESENTATION § 527 (1977)).
9
. E.g., Olney Sav. & Loan Ass’n v. Trinity Banc Sav. Ass’n, 885 F.2d 266,
272 (5th Cir. 1989); T.A. Pelsue Co. v. Grand Enters., 782 F. Supp. 14 76,
1488 (D. Colo. 1991); Chase Manhattan Bank, N.A. v. Fidata Corp., 700
F.Supp. 1252, 1261 (S.D.N.Y. 1988).
10
. See, e.g., Next Century Commc’ns Corp. v. Ellis, 318 F.3d 1023 , 1027-28
(11th Cir. 2003) (Georgia law); Wheatcraft v. Wheatcraft, 825 N.E.2d 23,
31 (Ind. Ct. App. 2005); Thompson v. Bank of N.Y., 862 So. 2d 768, 769
(Fla. Dist. Ct. App. 2003).
11
. Clardy Mfg. Co. v. Marine Mi dland Bus. Loans Inc., 88 F.3d 347, 359-60
(5th Cir. 1996); Matis v. Golden, 228 S.W.3d 301, 307 (Tex. App. 2007).
12
. Stokes v. Lusker, 425 F. App’x 18, 21 (2d Cir. 2011) (New York law);
Glen Holly, 352 F.3d at 379 (California law); Speakers of Sport, Inc. v.
ProServ, Inc., 178 F.3d 862, 866 (7th Cir. 1999) (Illinois law);
Greenberg v. Chrust, 282 F. Supp. 2d 112, 120-21 (S.D.N.Y. 2003); GJP,
Inc. v. Ghosh, 251 S.W.3d 854, 889 (Tex. Ct. App. 2008).
13
. Miller v. Yokoha ma Tire Corp., 358 F.3d 616, 621 (9th Cir. 2004)
(California law); see a lso Compressed Gas Corp. v. U.S. Steel Corp., 857
F.2d 346, 351 (6th Cir. 1988) (Kentucky la w); Amoco Oil Co. v.
Ashcraft, 791 F.2d 519, 521 (7th Cir. 1986) (“The argument for estoppel
founders on the principle of Indiana law that a misrepresentation about

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