Keith Mack
Fraud is a complex area of law that can take many forms, including bankruptcy fraud, credit card fraud, and insurance fraud. It is a common law claim that occurs when a party makes false statements to manipulate another party into a transaction. Common law fraud has nine elements, including the injured party's actual reliance on the statement and their right to rely on the statement, as well as proof of consequent injury or damage. The standard remedy for fraudulent misrepresentation is damages, which can take the form of out-of-pocket expenses, benefit-of-the-bargain damages, or punitive damages.
| Characteristics | Values |
|---|---|
| Common law fraud elements | The injured party's actual reliance on the truth of the representation |
| The injured party's right to rely on the representation | |
| Proof of the injured party's consequent and proximate injury | |
| The plaintiff must prove that the accused had acted with the intent to deceive and manipulate | |
| A misrepresentation (or lie) about a fact | |
| The speaker's knowledge that the fact is false | |
| Justifiable reliance on the misrepresentation for the translation | |
| Damages of that reliance | |
| The plaintiff must prove all elements of an intentional or negligent misrepresentation | |
| Reasonable reliance | |
| Resulting harm | |
| Pleading fraudulent concealment | |
| Exclusive acknowledgement of fraudulent conduct | |
| Pleading intent to default | |
| Types of damages | Out-of-pocket damages |
| Benefit-of-the-bargain damages | |
| Punitive damages |
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What You'll Learn
Common law fraud elements
Fraud is both a civil tort and a criminal wrong. It occurs when the accused makes false statements to manipulate the other party into a transaction.
There are nine elements of common law fraud. Firstly, there must be a representation of fact. Secondly, the representation must be false. The fourth element requires the representer to either have knowledge of the representation's falsity or be reckless in their ignorance of its truth. The sixth element is the injured party's ignorance of the representation's falsity. The seventh element is the injured party's actual reliance on the truth of the representation. The eighth element is the injured party's right to rely on the representation. Finally, the ninth element is proof of the injured party's consequent and proximate injury.
In the business context, opinions about a product are referred to as trade talk, which expresses the speaker's personal belief. In California, a jury may be instructed that an opinion can be considered a representation of fact if it is proven that the speaker claimed to have special knowledge of the subject matter that the listener did not have.
There are three types of damages that may arise in a fraud case: out-of-pocket damages, benefit-of-the-bargain damages, and punitive damages.
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Criminal fraud
Fraud is a crime often associated with theft, but there are differences between the two. Theft usually involves taking something using force or stealth, while fraud revolves around the purposeful misrepresentation of facts. Criminal fraud and civil fraud are also distinct from each other. In the case of criminal fraud, the case is brought by local, state, or federal prosecutors, who must prove that the accused intended to commit the fraud and to gain from it. In civil fraud cases, the victim of the fraud brings the case to court and must prove that the defendant materially misrepresented the facts, that they knew the facts were false, and that they intended the victim to act on the misrepresentation.
To prove fraud, it must be shown that the accused made false statements to manipulate the other party into a transaction. The plaintiff must also prove that the accused intended to deceive and manipulate, and that there was justifiable reliance on the misrepresentation. In other words, the injured party must have had the right to rely on the representation, and they must have actually relied on it.
In the United States, the Fraud Section (FRD) of the Criminal Division advises the Department of Justice on enforcement initiatives, crime prevention, and public education. They also coordinate investigations and provide training, advice, and assistance to prosecutors, regulators, law enforcement, and the private sector.
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Pleading standards
Fraud is typically difficult to prove, as courts assume that all parties involved understand and have the expertise to assess the validity of statements made during a transaction. To prove fraud, the plaintiff must show that the accused intended to deceive and manipulate. A claim for fraudulent misrepresentation must involve a misrepresentation (or lie) about a fact, the speaker’s knowledge that the statement is false, justifiable reliance on the misrepresentation, and damages resulting from that reliance.
In the context of common law fraud, a heightened pleading standard often leads to the early dismissal of fraud claims. This standard serves to protect the reputation of the accused and provides notice of the alleged misconduct. To overcome this standard, the claim must be set in fraudulent conduct in specific detail, with all evidence gathered before filing a lawsuit. There are three exceptions to this heightened pleading standard:
- Pleading fraudulent concealment: When one party withholds material information to complete a transaction.
- Exclusive acknowledgement of fraudulent conduct: When the accused parties have exclusive knowledge concerning the fraud.
- Pleading intent to default.
In addition, federal courts are currently split over the interpretation of Rule 9(b), which governs the pleading of allegations of scienter. Some courts apply the strong inference" standard, which has been used in the Second Circuit, while others apply the strong inference" standard created by the Private Securities Litigation Reform Act (PSRLA) and interpreted by the Court in Tellabs. This discrepancy has caused confusion, particularly in New York, where the high number of securities fraud cases handled has created a large body of confusing precedent.
To successfully plead fraud, plaintiffs must provide sufficient details of the alleged misconduct to support a reasonable inference that the allegations are true. Failure to plead fraud with particularity can result in the dismissal of a fraudulent inducement claim, as seen in the case of Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC. In this case, the plaintiff's allegations were deemed too vague, lacking specific statements and the identity of the speaker. Therefore, it is crucial for plaintiffs to provide detailed allegations that clearly identify the person making the representation, as well as the where, how, and when of the fraudulent statements.
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Types of damages
In a fraud claim, the plaintiff must prove five elements: a material misrepresentation of fact, knowledge of its falsity, an intention to induce reliance, justifiable reliance by the plaintiff, and damages. The plaintiff must meet each element for the claim to be valid.
There are three types of damages that may arise in a fraud case: out-of-pocket damages, benefit-of-the-bargain damages, and punitive damages. Out-of-pocket damages refer to the injury suffered by the party claiming fraud, including the amount of money expended by the defrauded party less any money received through the transaction. Benefit-of-the-bargain damages aim to restore the claiming party to the position they were in before the fraud and transaction occurred. Finally, punitive damages are additional damages awarded on top of compensatory damages, and the standards for these vary by state and jurisdiction.
In some jurisdictions, there is a loss causation requirement, which is the causal link between the alleged misconduct and the economic harm suffered by the plaintiff. This is synonymous with the concept of proximate cause found in other tort cases.
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Fraudulent misrepresentation
Fraud is a common law claim that occurs when false statements are made to manipulate another party into a transaction. Fraudulent misrepresentation is a tort claim that typically arises in contract law. It involves securing a contract based on a deliberate falsehood.
A fraudulent misrepresentation claim must include a misrepresentation or lie about a fact, the speaker's knowledge that the fact is false, justifiable reliance on the misrepresentation for the transaction, and damages resulting from that reliance. The misrepresentation must be a statement of fact and a positive, active assertion.
Courts may award damages or rescind a contract where fraudulent misrepresentation is proven. The standard remedy for fraudulent misrepresentation is damages. There are three types of damages: out-of-pocket damages, benefit-of-the-bargain damages, and punitive damages. Out-of-pocket damages are the amount of money expended by the defrauded party, while benefit-of-the-bargain damages restore the party claiming fraud to their pre-fraud position. Punitive damages are additional damages awarded with compensatory damages, and their standards vary by jurisdiction.
To determine whether fraudulent misrepresentation occurred, the court will consider six factors:
- The defendant made a false statement or acted without knowing the truth.
- The defendant intended for the plaintiff to rely on the misrepresentation.
- The plaintiff did rely on the misrepresentation.
- The plaintiff suffered harm as a result.
- The plaintiff had a right to rely on the representation.
- The plaintiff's actual reliance on the truth of the representation.
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