High-Tech Sports Equipment Plaintiff Alleges Viable Fraud Claim Against Electronic Sensor Supplier (Newspin v. Arrow – Part II)

In Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272, the Seventh Circuit affirmed the dismissal of plaintiff’s negligent misrepresentation claims but upheld its fraud claims.

Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was factually inaccurate, and (3) plaintiff’s reasonable reliance on the information.

New York’s economic loss rule softens the negligent misrepresentation theory, however. This rule prevents a plaintiff from recovering economic losses under a tort theory. Since the plaintiff’s alleged negligence damages – money it lost from the flawed electronic components – mirrored its breach of contract damages, the negligent misrepresentation claim was barred by the economic loss rule. [*10]

Plaintiff’s fraud claims fared better.  In New York, a fraud claim will not lie for a simple breach of contract.  That is, where the only “fraud” alleged is a defendant’s broken promise or lack of sincerity in making a promise, the fraud claim merely duplicates the breach of contract one.

To allege a fraud claim separate from a breach of contract, a plaintiff must establish (1) a legal duty separate from the duty to perform under a contract, or (2) demonstrate a misrepresentation collateral or extraneous to the contract, or (3) special damages caused by the misrepresentation that are not recoverable as contract damages. [*11] [32]-[33].

Applying these principles, the Court noted that the plaintiff alleged the defendant made present-tense factual representations concerning its experience, skill set and that its components met plaintiff’s specifications.  Taken together, these statements – if true – sufficiently pled a legal duty separate from the parties’ contractual relationship to state a colorable fraud claim.

The Court also rejected the defendant’s argument that the plaintiff’s fraud claims were subject to the UCC’s four-year limitations period governing sales of goods contracts.  Since the plaintiff’s fraud count differed from its breach of contract claim, Illinois’s five-year statute of limitations for common law fraud governed.  See 735 ILCS 5/13-205,  As a result, plaintiff’s 2017 filing date occurred within the five-year time limit and the fraud claim was timely. [*12] [35].

Afterwords:

The economic loss rule will bar a negligent misrepresentation claim where a plaintiff’s pleaded damages simply restate its breach of contract damages;

A fraud claim can survive a pleadings motion to dismiss so long as the predicate allegations go beyond the subject matter of the contract governing the parties’ relationship.

7th Cir. Addresses Guarantor Liability, Ratification Doctrine in Futures Trading Snafu

Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.

The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)

The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period.  Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.

In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim.  In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept.  A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability.  A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.

Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.

Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree.  As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.

The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.

Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.

Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.

The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.

The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended  the trial judge should have limited his fee award strictly to the CFA claim.

Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.

The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts.  A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.

But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.

Afterwords:

This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct.  Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.

This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.

Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.

Zillow ‘Zestimates’ Not Actionable Value Statements; Homeowner Plaintiffs’ Not Consumers Under IL Consumer Fraud Act – IL ND 2018

Decrying the defendants’ use of “suspect marketing gimmicks” that generate “confusion in the marketplace,” the class action plaintiffs’ allegations in Patel v. Zillow, Inc. didn’t go far enough to survive a Rule 12(b)(6) motion.

The Northern District of Illinois recently dismissed the real estate owning plaintiffs’ claims against the defendants, whose Zillow.com website is a popular online destination for property buyers, sellers, lenders and brokers.

The plaintiffs alleged Zillow violated Illinois’s deceptive trade practices and consumer fraud statutes by luring prospects to the site based on fabricated property valuation data, employing “bait and switch” sales tactics and false advertising and giving preferential treatment to brokers and lenders who pay advertising dollars to Zillow.

Plaintiffs took special aim at Zillow’s “Seller Boost” program – through which Zillow provides choice broker leads in exchange for ad dollars – and “Zestimate,” Zillow’s property valuation tool that is based on computer algorithms.

The Court first dismissed Plaintiffs’ Illinois Deceptive Trade Practices Act (IDTPA) claim (815 ILCS 510/1 et seq.). Plaintiffs alleged Zestimate was a “suspect marketing gimmick” designed to lure visitors to Zillow in an effort to increase ad revenue from real estate brokers and lenders, and perpetuated marketplace confusion and disparaged properties by refusing to take down Zestimates that were proven inaccurate. Plaintiffs also alleged Defendants advertise properties for sale they have no intention of actually selling.

The Court found that Zestimates are not false or misleading representations of fact likely to confuse consumers. They are simply estimates of a property’s market value. As Zillow’s disclaimer-laden site says, Zestimates are but “starting points” of a property’s value and no proxy for a professional appraisal. As a result, the Court found Zestimates were nonactionable opinions of value.
Plaintiffs’ allegation that Zestimate creates consumer confusion also fell short. An actionable IDTPA claim premised on likelihood of confusion means a defendant’s use of a given trade name, trademark or other distinctive symbol is likely to mislead consumers as to the source of an advertised product or service. Here, the plaintiffs’ allegations that Zestimate was falsely vaunted as a legitimate valuation tool did not assert confusion between Zillow’s and another’s products or services.

Plaintiffs’ “bait and switch” and commercial disparagement claims fared no better. A bait and switch claim asserts that at a seller advertised one product or service only to “switch” a customer to another, costlier one. A commercial disparagement claim, based on IDPTA Section 510/2(a)(8) prevents a defendant from denigrating the quality of a business’s goods and services through false or misleading statements of fact.

Since plaintiffs did not allege Zillow was enticing consumers with one product or service while later trying to hawk a more expensive item, the bait and switch IDTPA claim failed. The court dismissed the commercial disparagement claim since Zestimates are only opinions of value and not factual statements.

The Court next nixed Plaintiffs’ self-dealing claim: that Zillow secretly tried to enrich itself by funneling For Sale By Owner (FSBO) sellers to premier brokers. While Illinois does recognize that a real estate broker owes a duty of good faith when dealing with buyers, the Court noted that Zillow is not a real estate broker. As a result, Defendants owed plaintiffs no legal duty to abstain from self-dealing.

The glaring absence of likely future harm also doomed the plaintiffs’ IDTPA claim. (The likelihood of future consumer harm is an element of liability under the IDTPA.) The Court found that even if Plaintiffs were confused or misled by Zillow in the past, there was no risk of future confusion. In IDTPA consumer cases, once a plaintiff is aware of potentially deceptive marketing, he can simply refrain from purchasing the offending product or service.

Next, the court jettisoned plaintiffs’ consumer fraud claims which alleged Zestimates impeded homeowners efforts to sell their properties. A business (or another non-consumer) can still sue under ICFA where alleges a nexus between a defendant’s conduct and consumer harm. To meet this consumer nexus test, a corporate plaintiff must plead conduct involving trade practices addressed to the market generally or that otherwise implicates consumer protection concerns. If a non-consumer plaintiff cannot allege how defendant’s actions impact consumers other than the plaintiff, the ICFA claim fails.

The plaintiffs’ consumer fraud allegations missed the mark because plaintiffs were real estate sellers, not buyers. Moreover, the Court found that plaintiffs’ requested relief would not serve the interests of consumers since the claimed actual damages were unique to plaintiffs. The plaintiffs attempt to recover costs incidental to their inability to sell their homes, including mortgage payments, taxes, home owner association costs, utilities, and the like were not shared by the wider consumer marketplace. (For example, the Court noted that plaintiffs did not allege prospective consumer buyers will have to pay incidental out-of-pocket expenses related to Zillow’s Zestimate published values.)

Lastly, the Court dismissed plaintiffs’ deceptive practices portion of their ICFA claim. To state such a claim, the plaintiff must allege he suffered actual damages proximately caused by a defendant’s deception. But where a plaintiff isn’t actually deceived, it can’t allege a deceptive practice.

Here, in addition to falling short on the consumer nexus test, plaintiffs could not allege Zillow’s site content deceived them. This is because under Illinois fraud principles, a plaintiff who “knows the truth” can’t make out a valid ICFA deceptive practice claim. In their complaint, the plaintiffs’ plainly alleged they were aware of Zillow’s challenged tactics. Because of this, plaintiffs were unable to establish Zillow as the proximate cause of plaintiffs’ injury.

Afterwords:

Zillow provides a good primer on Federal court pleading standards in the post-Twombly era and gives a nice gloss on the requisite pleading elements required to state a viable cause of action for injunctive and monetary relief under Illinois’s deceptive practices and consumer fraud statutes.