California Cannabis Claims: Fraud

Welcome back to our litigation series on California cannabis claims. Fraud is one of those claims that clients believe will be easy to pursue, but it actually requires a lot of factual development and proof, even just to assert it in a complaint.  Below is a primer.

Introduction

A fraud claim requires six elements: (1) a misrepresentation, (2) knowledge of that representation’s falsity, (3) an intent to induce reliance, (4) reliance, (5) causation, and (6) resulting damages. Even in a complaint, fraud must be pleaded specifically – a plaintiff must plead facts that show the how, when, where, to whom, and by what means the misrepresentations were made. This level of detail is not typically required of a plaintiff’s first filing, which is why we commonly see fraud claims challenged early via a demurrer, which is a defendant’s first chance to challenge a plaintiff’s claim as legally insufficient on its face.

Statute of Limitations

The statute of limitations for fraud is three years. The clock starts ticking when a plaintiff discovers the facts constituting the misrepresentation. So if you wait three years and a day after discovery of facts leading to a fraud claim, your claim will likely be barred.

Elements of a Breach of Fiduciary Duty Claim

1. The misrepresentation. While it’s clear a false representation would qualify, note that a failure to disclose facts or a promise made with no intent to perform also qualify as misrepresentations. Most opinions, puffery (“seller’s talk”), and statements about the future on the other hand, do not qualify. One really important thing to note: the failure to perform a promise is not enough to constitute a misrepresentation in itself. While we understand it’s completely frustrating, we often have clients ask to “throw in” a fraud claim because something they were promised doesn’t end up happening. We need more facts (for example, maybe evidence of the defendant’s behavior after making the promise) that tend to prove the defendant never intended to perform.
2. Knowledge of that representation’s falsity. Also known as “scienter,” the defendant must know that the statement is false or act with “reckless disregard” of its truth or falsity when making the representation.
3. Intent to induce reliance. The defendant must also intend to induce the plaintiff to act in reliance on the misrepresentation. This is different from an intent to deceive the plaintiff, or an intent to cause some particular harm. The standard is much lower.
4. Justifiable reliance. Logically, the next thing a plaintiff must prove is that he/she did, in fact, justifiably rely on the misrepresentation in taking some action. The misrepresentation doesn’t need to be the sole motivating factor. It doesn’t even need to be the predominant factor. As long as the plaintiff truly believed the representation and decided to do (or not do) something, this element is satisfied.
5. Causation. As with most tort claims, the plaintiff must demonstrate that the defendant’s fraud proximately caused the plaintiff’s damages.
6. Damages.  Finally, the plaintiff must prove his/her damages that were proximately caused by defendant’s fraud.

Remedies

Like I wrote above, fraud is hard to plead and prove. If done successfully though, it opens doors to more remedies than most causes of action because it’s considered a more egregious, malicious harm.

• Compensatory damages. Again, this remedy attempts to compensate the plaintiff for all his/her harm caused by the fraud. How this is measured depends on the relationship of the parties and the transaction itself. Perhaps most commonly, we see damages measured by the “out of pocket” rule – the plaintiff will receive the difference in value between what he/she gave to the defendant and what he/she received (in an attempt to restore the plaintiff to the position just before the fraud occurred). Sometimes, damages are measured by the “benefit of the bargain” rule – the plaintiff will receive the value of what he/she was promised.
• Punitive damages. If the plaintiff is able to show that the defendant is guilty of malice, oppression, or fraud, punitive damages are also awarded.
• Damages for physical harm or emotional distress. The contexts in which these types of damages are limited (for example, they’re not recoverable in property transactions) but these should also be considered in every case.
• Statutory damages. Similarly, there are limited situations in which a fraud claim also opens the door to additional remedies provided by statute. For example, if the defendant receives stolen property due to the fraud, Penal Code s. 496 also allows recovery of treble damages (tripling of your damages), costs of suit, and reasonable attorneys’ fees.

Hope this helps clarify this commonly sought claim! We also covered breach of contract here and breach of fiduciary duty here. As always, if there’s a specific claim you have questions about or would like to see covered, don’t hesitate to reach out!

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Author: Jihee Ahn