KF&C California Law Blog

December 19, 2022 | Business Litigation

California Appellate Court Finds the Economic Loss Rule Does Not Bar Fraudulent Concealment Claims; California Supreme Court to Provide Further Guidance

Under current California law, the economic loss rule does not apply to a plaintiff’s claim for fraudulent inducement by concealment. However, the law may change as the California Supreme Court recently granted the Ninth Circuit Court of Appeals’ request for certification of this precise question.

One of the most misunderstood rules in California civil litigation is the “Economic Loss Rule.” The rule provides that generally, there is no recovery in tort for a plaintiff’s negligence claim when there is only pure financial harm alleged, unaccompanied by any physical or property damage.

The recent California Court of Appeal opinion in Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828 addressed the issue of whether the economic loss rule applies to bar a fraudulent concealment claim under Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, a controlling precedent regarding application of the rule.

In Dhital, plaintiffs sued Nissan North America, Inc. (“Nissan”), alleging the transmission in a 2013 Nissan Sentra they purchased was defective. Plaintiffs asserted statutory claims under the Song-Beverly Consumer Warranty Act and a common law fraud claim alleging that Nissan, by fraudulently concealing the defects, induced them to purchase the car. The trial court sustained Nissan’s demurrer to the fraudulent inducement by concealment claim without leave to amend, holding the claim was barred by the economic loss rule as set forth in Robinson. Plaintiffs appealed, contending the court erred by applying the economic loss rule to bar their fraudulent inducement claim.[1]

For reasons explained below, the Court of Appeal in Dhital found that although federal district courts and other states are currently split on whether the economic loss rule bars claims for fraudulent concealment, the California Supreme Court decision in Robinson directs that the rule does not bar inducement claims based on fraud.

Robinson: “The Economic Loss Rule Prevents the Law of Contract and the Law of Tort from Dissolving One into the Other”

The economic loss rule has been applied in various contexts. First, it carries force when courts are concerned about imposing “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922.) Second, “[i]n another recurring set of circumstances, the rule functions to bar claims in negligence for pure economic losses in deference to a contract between litigating parties.” (Id.; see also Rest.3d Torts, Liability for Economic Harm, § 3 (“[T]here is no liability in tort for economic loss caused by negligence in the performance or negotiation of a contract between the parties.”).

In Robinson, the court stated that, “where a purchaser’s expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only ‘economic’ losses.” (34 Cal.4th at p. 988.) As such, the economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. To put it in another way, the economic loss rule “prevent[s] the law of contract and the law of tort from dissolving one into the other.” (Id.)

Robinson: Tort Damages May Be Permitted in Contract Cases

The Robinson court also described instances where tort damages are permitted in contract cases:[2]

– where a breach of duty directly causes physical injury;

– for breach of the covenant of good faith and fair dealing in insurance contracts;

– for wrongful discharge in violation of fundamental public policy; or

– where the contract was fraudulently induced.

“[I]n each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Robinson, 34 Cal.4th at pp. 989–990.)

Recognizing that Robinson allowed tort damages in contract cases where the contract was fraudulently induced, the Court of Appeal in Dhital disagreed with Nissan’s and the trial court’s reading and application of Robinson that fraud claims between contracting parties “can proceed only if they are truly independent of the contract and involve affirmative misrepresentations,” and that plaintiffs’ fraud claim—based on concealment—did not satisfy either condition. The Court stated that:

Robinson did not hold that any claims for fraudulent inducement are barred by the economic loss rule. Quite the contrary, the Robinson court affirmed that tort damages are available in contract cases where the contract was fraudulently induced.

Robinson Left Undecided Whether Concealment-Based Claims are Barred by the Economic Loss Rule

The fraud claims in Robinson involved both affirmative misrepresentations and intentional concealment during the performance of a contract. The defendant supplier in the case (1) provided false certificates of conformance to plaintiff Robinson, stating the parts conformed to contractual requirements; and (2) allegedly concealed information about the parts. (Robinson, at pp. 986–987, 990.)

The Robinson court concluded that the tortious conduct “was separate from” defendant’s breach of contract, which involved its provision of the nonconforming parts. (Id. at p. 991.) In addition, defendant’s provision of faulty helicopter parts exposed Robinson to liability for personal damages if a helicopter crashed. The court thus held that “the economic loss rule does not bar Robinson’s fraud and intentional misrepresentation claims because they were independent of [defendant]’s breach of contract.” (Id.) And “[b]ecause [defendant]’s affirmative intentional misrepresentations of fact (i.e., the issuance of the false certificates of conformance) are dispositive fraudulent conduct related to the performance of the contract,” the court stated that “we need not address the issue of whether [defendant]’s intentional concealment constitutes an independent tort.” (Robinson, at p. 991.)

Finally, the Robinson court also noted its holding was narrow:  “[o]ur holding today is narrow in scope and limited to a defendant’s affirmative misrepresentations on which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” (Robinson, at p. 993.)

The California Supreme Court Is Soon to Decide Whether Fraudulent Concealment Claims Are Exempt from the Economic Loss Rule under California Law

Notably, the California Supreme Court recently granted the Ninth Circuit’s request for certification in Rattagan v. Uber Technologies, Inc. (9th Cir. 2021) 19 F.4th 1188 for the precise question here.

In Rattagan, Uber’s subsidiaries retained Rattagan, a corporate attorney, to serve as the entities’ legal representative in Buenos Aires. Uber later launched its platform in Argentina before its Argentine subsidiary was fully formed or registered with the proper tax authority. Shortly after, Rattagan, as an Uber representative, was charged with illegal use of public space for commercial gain and aggravated tax evasion for his perceived involvement with the Uber launch.

In the operative complaint, Rattagan alleges that Uber concealed its launch plans from him, despite knowing that Rattagan, as the entities’ legal representative, could be subject to personal liability for Uber’s violations of Argentine law. Applying California law, the district court dismissed Rattagan’s complaint, concluding that two of Rattagan’s claims were time barred and the third claim, fraudulent concealment, was foreclosed by the economic loss rule.

On appeal before the United States Court of Appeal for the Ninth Circuit, Rattagan challenges the district court’s conclusion that his fraudulent concealment claims were foreclosed by the economic loss rule. The California Supreme Court granted the Ninth Circuit’s request for certification, and the case is currently pending.

Dhital: “Under California Law, the Economic Loss Rule Does Not Bar Plaintiffs’ Claim Here for Fraudulent Inducement by Concealment”

Applying Robinson and acknowledging that the California Supreme Court may soon provide additional guidance, the Dhital court concluded that plaintiffs’ claim for fraudulent inducement by concealment “is not subject to demurrer on the ground it is barred by the economic loss rule.”

The Dhital court continued, “[i]n our view, that independence is present in the case of fraudulent inducement (whether it is achieved by intentional concealment or by intentional affirmative misrepresentations), because a defendant’s conduct in fraudulently inducing someone to enter a contract is separate from the defendant’s later breach of the contract or warranty provisions that were agreed to.”

To reach this conclusion, the Court cited Anderson v. Ford Motor Company (2022) 74 Cal.App.5th 946. In Anderson, after purchasing a pickup truck that turned out to be defective, the plaintiffs sued Ford and prevailed at trial on both a Song-Beverly Act warranty cause of action and a cause of action for “fraud in the inducement—concealment.” (Id. at p. 950.) On appeal, Ford argued the plaintiffs could not recover both a statutory civil penalty under the Song-Beverly Act and punitive damages because both awards were based on “substantially the same conduct.” (Id. at pp. 950, 961, 966.) The appellate court disagreed, explaining that “the punitive damages and statutory penalties were based on different conduct that took place at different times. The punitive damages were based on conduct underlying the fraud/CLRA causes of action and took place before the sale. The civil penalty was based on defendant’s post sale failure to comply with its Song-Beverly Act obligations to replace the vehicle or make restitution when reasonable attempts to repair had failed.” (Id. at p. 966.)

The Dhital court similarly found that plaintiffs’ fraudulent inducement claim alleging presale conduct by Nissan (concealment) was distinct from Nissan’s alleged subsequent conduct in breaching its warranty obligations.

The Dhital court acknowledged that courts in other states have reached differing conclusions as to the scope of the economic loss rule and the extent to which it precludes fraud claims; and that federal district courts applying California law have also diverged on this point. But for the reasons discussed above, the Court concluded that, “under California law, the economic loss rule does not bar plaintiffs’ claim here for fraudulent inducement by concealment.”

Practice Tips

Until the California Supreme Court provides us with further guidance, future plaintiff’s fraudulent inducement by concealment claim will likely survive a demurrer on the grounds of the economic loss rule under Dhital.

We will provide further guidance in this area once the California Supreme Court answers the question certified by the Ninth Circuit by June next year.

If you have questions or comments on the content of this post, please email Sara Borjigin at [email protected].law.

[1] Nissan contended that plaintiffs did not plead the fraudulent inducement claim with sufficient particularity, which was a separate issue addressed by the Court. For purposes of this blog, we focus on the Court’s decision on the economic loss rule issue.

[2] While plaintiffs’ statutory warranty claims under the Song-Beverly Act were treated as the equivalent of contract claims for purposes of determining whether the economic loss rule would bar their fraud claim, the Court also specifically noted that this was based on the assumption that the economic loss rule may be applied to statutory claims of this kind. This assumption was not a subject of the Court’s opinion and should not be read as such.

John
Matthew J. Cave

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