Dan B. Dobbs, The Law of Torts 1343-59(2000)
The bargaining or exchange context of misrepresentation. This section deals with common law liability for commercial harm caused by the plaintiff's justifiable reliance upon material misrepresentations of fact that lead to contracts, transfers of property, or other bargains. Misrepresentation of a fact includes deception created by nondisclosure in some instances, but it is distinct from a contractual promise. Sometimes the bargaining context is real but less than obvious because the defendant acts in the role of a fiduciary who is giving friendly counsel. Even third persons, who are not themselves involved in the transaction, may make and be liable for misrepresentations that affect a transaction with others. Statutes covering particular situations such as securities and consumer transactions1 have helped create specialized and sometimes intricate fields that may or may not offer more protection against fraud than the common law.
Examples of tortious misrepresentation include the homeowner who induces a sale by falsely representing that the basement does not flood;2 the employer who recruits desirable employees by falsely representing that it had no plans to move or close 3 or who induces older employees to quit by falsely representing retirement options;4 the adjuster who falsely says that a release to be signed by an injured person is merely a receipt;5 and even the HMO that induces members to join by falsely representing that it will expeditiously arbitrate disputes when in fact it stonewalls even the dying patient.6 If such representations are culpably false, the plaintiff who justifiably relies upon them may have a claim for damages or, in some cases, for equitable relief such as rescission of the transaction.
"Misrepresentation" as a tort. Fraudulent misrepresentation is a stand-alone economic or commercial tort that causes financial harm without causing physical harm either to person or to property. Negligent misrepresentation may also be actionable in some cases, but only when the defendant is under a duty to use care in communicating, as where the defendant is under a duty to use care in communicating, as where the defendant is in a special relationship with the plaintiff. Strict liability is also possible if the defendant's representation is a warranty or strict responsibility is imposed by statute.
"Misrepresentation" as description of a fact relevant in some other tort. The terms fraud, deceit, and misrepresentation are used as the name of a tort. However, these terms can also be used to describe an actual event or the communication of a statement that does not accord with the facts. In that descriptive sense, many misrepresentations are important in establishing legal liability for some other tort, one that has nothing to do with the kind of misrepresentation covered in this chapter. A former employer might subject others to danger by recommending a sexual predator for a job with children.7 A physician might cause emotional distress by representing to a patient that she has a disease when she does not.8 A driver might cause a collision by giving signals representing that it is safe to pass when it is not. A manufacturer might infringe a trademark by offering its goods under a counterfeit of the plaintiff's trademark, in effect misrepresenting the origin of the goods. None of these cases invoke the tort of fraud or misrepresentation. In the first three examples misrepresentation is merely a way in which personal injury or direct emotion harm is inflicted. They do not entail stand-alone economic harm at all and do not invoke the rules of emotional harm. For that reason, the defendant's negligence may be a sufficient basis for liability. The third example differs in that the trademark owner who sues is not the person who is misled by the counterfeit, so that owner's claim is not for fraud but for trademark infringement and governed by the rules for that tort.
Damages vs. rescission and other equitable remedies; constructive fraud. The plaintiff who suffers financial harm from reliance upon a misrepresentation can frequently seek rescission of any agreement that resulted from that reliance or raise the misrepresentation as a defense when she is sued for breach of the agreement. Sometimes she can capture whatever gains the defendant made from his fraud. The old equity courts applied the term constructive fraud to any conduct that would warrant equitable relief such as rescission or reformation9 and to any ground for equitable relief against fiduciaries.10 Constructive fraud in this sense is not actual fraud at all, but any conduct that would warrant equitable relief, including cases of innocent mistake that would justify rescission. The term is perhaps best avoided because it invites lawyers to confuse the rules for equitable relief and fiducial obligation with the rules for damages that traditionally require a knowing falsehood.11 The rules stated in this chapter are those governing the tort claim for damages except when specifically noted otherwise.
Courts list anywhere from four to nine elements of the common law fraudulent misrepresentation claim,12 but whatever the number, they agree in substance that the plaintiff must prove (1) an intentional misrepresentation (2) of fact or opinion (as intentional misrepresentation (2) of fact or opinion (as distinct from a promise) (3) that is material and (4) intended to induce and (5) does induce reasonable reliance by the plaintiff, (6) proximately causing pecuniary harm to the plaintiff. Procedurally the plaintiff may be required to plead fraud with particularity.13 Many courts add that fraud must be proved by clear and convincing evidence,14 although a number say a preponderance of the evidence is sufficient, at least under some conditions.
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Requirement of reliance. A representation is not actionable unless the plaintiff in fact relies upon it.15 To rely, the plaintiff must choose her conduct because of the representation, either acting or refraining from action because or partly because of the representation.16 For example, the plaintiff who enters into a transaction with the defendant does not rely upon the defendant's misrepresentation if she enters into the transaction without a belief in its truth, or doesn't learn of the misrepresentation until after the transaction has closed, or would have entered the transaction whether or not the misrepresentation had been made.17 If the misrepresentation is material, however, the plaintiff who acts in accordance with the representation has inferentially or presumptively relied upon it.18 The requirement of reliance in fact is a requirement that the defendant's representation is one of the causes in fact of the plaintiff's harm, although it need not be the sole cause.19
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Requirement of justified reliance. According to most courts, however, bare reliance is not enough. The plaintiff must go on to show that she justifiably relied.20 Reliance upon the defendant's material representations is ordinarily justified unless the plaintiff is on notice that the statement is not to be trusted or knows the statement to be false. Reliance is not ordinarily justifiable if the misrepresentation (a) is not material; (b) is mere puffing, states an opinion or judgment of one without specialized knowledge and who does not imply assertions of facts; (c) predicts some future course of events over which the defendant has little or no control; (d) states a legal conclusion by one without specialized knowledge and who does not imply assertions of facts.
1Some consumer protection law is public law, but most state statutes recognize a private right of action for misleading or deceptive practices. See, listing all state statutes, Restatement of Unfair Competition § 1, Reporter's Note. There are many statutes covering particular consumer problems, for instance, the federal Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701 et seq., the Truth and Lending Act, 15 U.S.C. § 1601 et seq. and others. Many statutes aim at more than providing full and accurate information, sometimes for bidding particular practices that are deemed coercive or unfair.
2Cf. Wasson v. Schuberg, 964 S.W.2d 520 (Mo. App. 1998) (similar).
3Cf. Meade v. Cedarapids, Inc., 164 F.3d 1218 (9th Cir. 1999) (similar).
4Cf. Voilas v. General Motors Corp., 170 F.3d 367 (3d Cir. 1999) (similar claim not preempted by labor laws).
5Cf. Lubin v. Johnson, 820 P.2d 328 (Ariz. 1991) (similar).
6Cf. Engalla v. Permanente Medical Group, Inc., 938 P.2d 903 (Cal. 1997) (similar).
7Cf. Randi W. v. Muroc Joint Unified Sch. Dist.. 14 Cal.4th 1066, 929 P.2d 582, 60 Cal. Rptr. 2d 263 (1997) (claim that school failed to qualify its positive recommendation for teacher who allegedly had been subject of previous complaints of sexual impropriety with students; in his new job, teacher allegedly molested a middle school student); ch. Estate of Shinaul v. State Dept. of Social & Health Services, 980 P.2d 800 (Wash. App. 1999) (social worker allegedly gave misleading information leading guardians to place child in allegedly unsafe institution where he met his death).
8See Molien v. Kaiser Found. Hosps., 616 P.2d 813 (Cal. 1980), modified, Burgess v. Superior Court, 831 P.2d 1197 (Cal. 1992).
9E.g., Wells v. Schuster-Hax Nat'l. Bank, 48 P. 809 (Colo. 1897) (conveyance without consideration that could defeat creditors' rights would be fraud in law though there was no specific misrepresentation or even intent); Gibson v. Gibson, 78 N.W. 917 (Wisc. 1899) (self dealing by fiduciary as constructive fraud).
10See Barger v. McCoy Hillard & Parks, 488 S.E.2d 215 (N.C. 1997) (defining constructive fraud); Stanley v. Luse, 58 P. 75 (Ore. 1899) (self dealing by fiduciary as constructive fraud).
11See, e.g., Hockett v. Winks, 485 P.2d 353 (N.M. 1971); Pugh's IGA, Inc. v. Super Food Services, Inc., 531 N.E.2d 1197 (Ind. App. 1988) (discussing but not applying constructive fraud rules in an ordinary damages claim).
12Restatement § 525 requires a (1) fraudulent misrepresentation (2) of fact, opinion, intention, or law, (3) for the purpose of inducing reliance, (4) justifiable reliance. Similar formulations are to be found in some cases. E.g., Walker v. Percy, 702 A.2d 313 (N.H. 1997). Courts often add that the misrepresentation must be material, e.g., D'Ambrosio v. Colonnade Council of Unit Owners, 717 A.2d 356 (D.C. Ct. App. 1998), but justifiable reliance may be regarded as encompassing materiality. The legal requirements imposed by this list of elements are not changed if the elements are broken down into more detailed parts. For example, the single element of fraudulent representation can be expressed as three elements--(i) a representation, (ii) which is false in fact, and (iii) known to be false. By a process like this, Arizona comes up with nine elements, see e.g., Nielson v. Flashberg, 419 P.2d 514 (Ariz. 1966), but they appear to exact essentially the same proof demands required by the Restatement.
13Hobson v. American Cast Iron Pipe Co., 690 So.2d 341 (Ala.1997); Hames v. Cravens, 966 S.W.2d 244 (Ark. 1998).
14Marriage of Cutler, 588 N.W.2d 425 (Iowa 1999); Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344 (Va. 1998). Where heightened standard is imposed, courts usually say the standard applies to all elements of the fraud claim, but some courts have reasonably said that it does not apply to proof of damages. See Kilduff v. Adams, Inc., 593 A.2d 478 (Conn. 1991).
15Restatement §§ 537(a) (fraudulent representations); 552(1) (negligent representations); 552C (innocent representation).
16St. Paul Fire & Marine Ins. Co. v. Russo Brothers, Inc., 641 A.2d 1297 (R.I. 1994); Restatement § 537(a).
17Schaaf v. Highfield, 896 P.2d 665 (Wash. 1995) (plaintiff-buyer did not rely upon negligent representation about roof because he intended to construct a new roof anyway, and further because he received the representation after purchase, not before).
18See Vasquez v. Superior Court, 484 P.2d 964 (Cal. 1971).
19Engalla v. Permanente Medical Group, Inc., 938 P.2d 903 (Cal. 1997); Horton v. Tyree, 139 S.E. 737 (W. Va. 1927).
20E.g., Johnson v. University Health Services, Inc., 161 F.3d 1334 (11th Cir. 1998); Hyler v. Garner, 548 N.W.2d 864 (Iowa 1996). Some authority holds that reliance alone is sufficient. Phinney v. Adelman, 564 N.W.2d 532 (Mich. Ct. App. 1997) (justification for reliance not required). Some consumer fraud statutes eliminate the justified reliance requirement and may even drop the requirement of reliance in fact. See Gennari v. Weichert Co. Realtors, 691 A.2d 350 (N.J. 1997). Justified reliance is a jury issue if reasonable people could differ. Marcus Bros. Textiles, Inc. v. Price Waterhouse, LLP., 513 S.E.2d 320 (N.C. 1999); Doyle v. Fairfield Mach. Co., Inc., 697 N.E.2d 667 (Ohio Ct. App. 1997). But rules on materiality, opinion, law, future predictions, and puffing are often enforced as a matter of law.