Tag: promissory fraud

Illinois Consumer Fraud Act Applies To ‘Biz to Biz’ Insurance Dispute Says Fed. Court

In GoHealth, LLC v. Zoom Health, Inc., 2013 WL 6183024, the Northern District provides a detailed summary of the necessary Illinois pleading elements of some signature business torts in a diversity contract dispute involving the sale of insurance products.

Plaintiff and defendants entered into a written agreement where plaintiff would sell insurance product leads to defendants for a fee.  The defendants would in turn use the leads in peddling insurance products to its own customers.  The relationship soured and each side filed claims against each other.  Defendant’s counterclaims sounded in consumer fraud and common law fraud. Each side moved to dismiss.

The Court struck defendants’ fraud and negligent misrepresentation claims and upheld its consumer fraud and trade secrets counts.

Fraud Claim and Negligent Misrepresentation Claims

The Court dismissed the defendants’ common law fraud  and negligent misrepresentation claims.  An Illinois fraud plaintiff must allege a (i) knowingly false statement, (ii) intended to induce reliance in the plaintiff, (iii) reliance by the plaintiff and (iv) damages resulting from the reliance.

Negligent misrepresentation has the same elements as fraud except the plaintiff must allege a negligent or reckless (instead of intentional) false statement.  Federal specificity-in-pleading rules under Rule 9(b) don’t apply to a negligent misrepresentation claim. *9-10.

Defendants’ fraud count asserted that plaintiff falsely inflated defendants commission and renewal rates and misstated some sales projections.

The Court found that these two statements non-actionable as they involved future events (e.g. future sales and commissions projections).  Statements of future intent, opinions or of financial projections don’t equal fraud under the law.

The Court also rejected defendants’ argument that plaintiff was in business of providing information for the guidance of others in their business dealings – a key exception to the economic loss rule (this rule posits that you can’t recover in tort where a contract governs the parties’ relationship.)

The Court held that plaintiff was contractually obligated to provide sales leads and nothing else.  It wasn’t hired to provide sales projections or renewal forecasts – the bases for defendants’ fraud and negligent misrepresentation claims.  Any information provided by plaintiff in connection with the leads was peripheral to the contract’s core purpose.  *11.

Consumer Fraud Claims – Allowed

The court sustained defendants’ consumer fraud counterclaim. 815 ILCS 505/1 (the “Act”).  The consumer fraud count was based on plaintiff furnishing over 40,000 bogus and recycled sales leads to defendant instead of fresh leads.

Allowing the claim, the Court broadly construed the Act to encompass business-to-business relationships: “the protections of the Act are not limited to consumers”, but applies broadly to “persons”, including businesses. *12.

The court found the defendant was a “consumer” of plaintiff’s sales leads which constituted intangible property under the Act. (The Act applies to intangible property.)

The defendants’ claim that plaintiff supplied a high volume of duplicate leads also stated a deceptive act under the Act.   *12.

Afterword:

This case is post-worthy for its application of the consumer fraud statute to a purely business-to-business setting and its discussion of what constitutes “information” in the context of a negligent misrepresentation claim that will beat an economic loss rule challenge.

Franchisor’s Financial Projections Don’t Equal Fraud – Ill. Law

In many fraud cases, defendants reflexively assert some variant of the “forward looking” or “promissory” fraud defense: that the misstatement relates to a future event and is therefore a non-actionable statement of opinion.

Illinois fraud rules require a misrepresentation to be material and present-tense factual  to be actionable.  Statements of future intent – like a forecast or projection (“this company is gonna make millions within its first year!”) are considered opinions and do not equal fraud under the law.

The First District delves into the scope of promissory fraud in Avon Hardware v. Ace Hardware, 2013 IL App (1st) 130750, a franchise dispute between an independent store against a national chain.

The plaintiffs, two hardware store franchisees, sued Ace on various fraud theories after their franchises failed.  Plaintiffs claimed that Ace made false statements of past and future financial performance in several documents supplied by the hardware giant.

The documents all contained cautionary language warning the plaintiffs not to rely on them and said the financial projections were “mere estimates.”  They also contained a non-reliance clause explicitly stating the franchisee was not relying on any sales or profits guarantees.  ¶¶ 5-7.

Despite the rampant warnings, Plaintiffs sued Ace for fraud when the stores failed.  Plaintiffs claimed that in order to entice their investment, Ace painted a too-rosy financial picture of what plaintiffs could expect to earn from the franchises and distorted results of similar Ace franchisees.

Ace moved to dismiss based on the documents’ cautionary language and disclaimers. The trial court granted Ace’s motion to dismiss all complaint counts.

Held: Affirmed.

Rules and Application:

In Illinois, a fraud plaintiff must prove:  (1) a false statement of material fact; (2) knowledge of or belief in the statement’s falsity; (3) intention to induce the plaintiff to act on the statement; (4) reasonable reliance on the statement’s truth by the plaintiff; and (5) damage to the plaintiff resulting from the reliance. ¶ 15.

Negligent misrepresentation has the same elements as fraud except instead of proving defendant’s knowledge of falsity, plaintiff only has to show that defendant was careless or negligent in ascertaining the truth of the challenged statement.  ¶ 15.

Fraud and negligent misrepresentation claim must be based on a present statement of fact.  Financial projections are generally considered statements of opinion, not fact.  And while statements of future income are not actionable, statements of historical income of a business are sufficiently factual for fraud claims. ¶¶ 16-17.

The Court dismissed plaintiffs’ fraud claims because much of the challenged data was forward-looking and contained expansive cautionary language: the documents were “replete with warnings” that defendants shouldn’t rely on them.  Moreover, Ace’s documents contained anti-reliance language that stated that plaintiffs hadn’t received or relied on any Ace guarantees of future sales, profits or success.  ¶¶ 9, 21.

Taken together, the Ace documents’ glaring disclaimers prevented plaintiff from alleging Ace’s material misstatement or reliance – two necessary fraud elements.

Take-aways: Cautionary language or anti-reliance clauses in a contract will be upheld if the terms are textually clear and there’s no disparity in bargaining power between the parties.

The case also reaffirms that statements of future economic prospects are considered opinions; while statements of historical financial performance are factual enough for a fraud claim.