January 18, 2007
Reliance in Fraud
A frequent concern in fraud litigation is the somewhat-fading requirement to show reliance. A forthcoming Arizona Law Review article (on SSRN) by John C.P. Goldberg (Vanderbilt), Anthony J. Sebok (Brooklyn), and Benjamin C. Zipursky (Fordham), addresses the question, arguing that it needs to stay central in fraud claims but not necessarily consumer protection statutes. The abstract:
To prevail on a claim of common law fraud, the plaintiff must prove reliance on the defendant's misrepresentation. This requirement is puzzling, given that, under many modern formulations of the tort, the plaintiff must also prove that the misrepresentation was a factual and proximate cause of the plaintiff's detriment. One standard view of reliance emphasizes its role as the mechanism by which defendant's misrepresentation generates harm to the plaintiff. But, cast as such, it seems redundant with factual causation. Another way reliance is understood is as setting a practical limit on the amount of liability that a misrepresentation can generate. So regarded, it seems redundant with proximate cause.
In this Article, we explain why reliance forms a distinct element of fraud. Conceptually, we argue, the wrong of fraud is not an interference with the victim's interest in avoiding certain types of harm, such as economic loss, but instead an interference with her interest in being able to make certain kinds of decisions free of misinformation generated by others. Thus, a knowing misrepresentation that foreseeably causes harm to another does not defraud that other unless and until she is induced by that misrepresentation to make a decision she would not have otherwise made. Structurally, we argue that the requirement of reliance is linked to a more general feature of tort law, namely, the relational structure of tort duties. To commit a tort is to breach a duty that is owed by an actor to a class of potential victims. Therefore, to prevail, a tort plaintiff must establish not merely that wrongful conduct has caused harm to her, but that the conduct was wrongful as to a person in her position. When it comes to fraud, plaintiff's reliance is essential to establishing that the defendant's conduct was wrongful as to her, and hence to establishing her right to recover.
Having explained the place of reliance within fraud, we next explain why reliance need not be central to other wrongs that bear some resemblance to fraud, including, for example, private enforcement actions brought under consumer protection statutes. Likewise, we demonstrate that some claimants who have been injured by misrepresentations without relying on them will have valid claims for other torts, such as negligence and tortious interference with contract. The take-away point is this: An understanding of why reliance functions (or doesn't function) as a component of a legal wrong that involves misrepresentation must be sensitive to the institutional source of the legal prohibition that defines the wrong and, relatedly, the interests that are meant to be served by that prohibition.
For a different view, read this guest post from Arnold Friede from Pfizer.
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