Fraud and Misrepresentation

• Pages: 169-208

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