The California Supreme Court, at the request of the Ninth Circuit, recently considered a question expressly left open in Robinson Helicopter v. Dana Corp. (2004) 34 Cal. 4th 979: whether, under California law, a plaintiff may assert a tort claim for fraudulent concealment arising from or related to the performance of a contract. See Rattagan v. Uber Technologies, Inc. (Cal. 2024) 324 Cal.Rptr.3d 433. The California Supreme Court answered the question with a qualified “yes,” finding that the economic loss rule does not bar fraudulent concealment claims in all cases. The court ruled that a plaintiff may assert a fraudulent concealment claim based on conduct occurring during a contractual relationship if (1) the elements of the claim can be established independently of the parties’ contractual rights and obligations and (2) the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract.
The Rattagan Case
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. Rattagan’s complaint alleged 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 U.S. District Court for the Northern District of California 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 U.S. Court of Appeals for the Ninth Circuit, Rattagan challenged the district court’s conclusion that his fraudulent concealment claims were foreclosed by the economic loss rule. (For more background information on the Rattagan case and the appeal to the Ninth Circuit, see “California Appellate Court Finds the Economic Loss Rule Does Not Bar Fraudulent Concealment Claims; California Supreme Court to Provide Further Guidance” (KF&C California Law Blog, December 19, 2022)). As noted above, the Ninth Circuit, finding no controlling precedent from the California Supreme Court, certified to the California Supreme Court the question of whether fraudulent concealment claims are exempt from the economic loss rule under California law.
The Economic Loss Rule
In considering the question of state law certified by the Ninth Circuit, the California Supreme Court held that an independent fraudulent concealment tort may arise during an ongoing contractual relationship. In its opinion, the court revisited the origins and evolution of California’s economic loss rule as well as a broad set of cases that explore the divide between tort and contract law. The economic loss rule, explained the court, “is deceptively easy to state: In general, there is no recovery in tort for negligently inflicted purely economic losses, meaning financial harm unaccompanied by physical or property damage.” Rattagan, 324 Cal.Rptr.3d at 445. The rule was developed by courts to address and protect the often-elusive boundary line between tort and contract law. As a result of the distinction between contract and tort claims, parties injured solely based on a contractual claim have a narrower set of remedies compared to those available to parties with a tort claim. For example, emotional distress damages or punitive damages may be awarded in tort actions under certain circumstances, but generally are not available in contract actions.
The Robinson Case
The California Supreme Court also considered the previous controlling precedent, Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, which had presented the court with its first opportunity to address whether, and to what extent, the economic loss rule applies to an intentional tort, specifically fraudulent misrepresentation in the performance of a contract. The court’s ruling in Robinson allowed a contractual party to recover for economic loss as long as the party could “demonstrate harm above and beyond a broken contractual promise.” Id. at 988.
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. Id. at 986–987, 990. The court concluded that the tortious conduct “was separate from” defendant’s breach of contract, which involved its provision of the nonconforming parts. Id. at 991. In addition, the 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.” Id.
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.” Id. at 993.
In revisiting the Robinson precedent in the certified question from the Ninth Circuit, the California Supreme Court noted that “it is inaccurate to conclude Robinson announced an exception [fraudulent inducement of contract] to the economic loss rule. The more accurate understanding is that the case clarified the extent of the rule by demonstrating why the doctrine simply did not apply to the case at issue.” Rattagan, 324 Cal.Rptr.3d at 457. The plaintiff in the Robinson case suffered economic losses due to the defendant’s intentionally tortious conduct, beyond those attributable to its breach of contract. Therefore, the plaintiff was also exposed to a risk of harm far more than “the disappointment of its expectancy interest in contract fulfillment.” Id. In short, the court determined that “rather than apply the economic loss rule, Robinson applied the broader independent tort principle.” Id.
Fraudulent Concealment in the Performance of a Contract
In presenting the state law question to the California Supreme Court, the Ninth Circuit asked: “Under California law, are claims for fraudulent concealment [as opposed to affirmative deception] exempted from the economic loss rule?”—the very question left open by the Robinson court. The court answered in the affirmative, explaining that the economic loss rule does not apply to limit recovery for intentional tort claims like fraud, but rather, only applies to bar tort recovery for negligently inflicted economic losses unaccompanied by physical or property damage. However, the Supreme Court acknowledged that this conclusion did not provide the dispositive answer that the Ninth Circuit requested.
The court therefore restated the question to conform to a better understanding of Robinson and the dispositive issue presented in this case: “Under California law, may a plaintiff assert a tort claim for fraudulent concealment arising from or related to the performance of a contract?” Rattagan, 324 Cal.Rptr.3d at 440. The court also answered this question in the affirmative, finding that a plaintiff may assert a tort claim for fraudulent concealment based on conduct occurring in the course of a contractual relationship, if the elements of the cause of action can be established independently of the parties’ contractual rights and obligations, and the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the agreement.
In its analysis, the California Supreme Court noted that the district court misread Robinson—understanding the case to bar the assertion of a fraud claim based on concealment as opposed to affirmative deception, even when the tort arises independently of the parties’ contract. Yet the Robinson majority expressly declined to decide that issue. Moreover, because California law has generally not treated fraud claims differently based on whether they allege affirmative deception or concealment, the Supreme Court saw no principled reason to treat fraudulent concealment claims in the performance of a contract any differently from those based on affirmative misrepresentations, so long as a plaintiff can establish all the required elements of the cause of action independently of the parties’ contractual rights and obligations. Rattagan, 324 Cal.Rptr.3d at 462.
Accordingly, in answering the certified question, the Supreme Court concluded that:
A plaintiff may assert a fraudulent concealment cause of action based on conduct occurring in the course of a contractual relationship if [1] the elements of the claim can be established independently of the parties’ contractual rights and obligations, and [2] the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract.
Id. at 440.
Practice Tips
The California Supreme Court confirmed that under California law, parties will be able to sue counterparties to their contracts for both affirmative deception and fraudulent concealment, even if the resulting harm is an economic loss, so long as the resulting harm was “beyond the reasonable contemplation of the parties when they entered into the contract.” In these cases, the analysis will focus on whether the plaintiff can establish the elements of the cause of action independently of the parties’ contractual rights and obligations, i.e., the nature of the alleged conduct, the provisions of the contract itself, and whether the conduct exposed a party to a risk of harm neither reasonably contemplated nor allocated by the parties before entering their agreement.
When drafting contracts, practitioners may seek to assure greater certainty for their clients by choosing at the outset to contractually guard against certain risks by imposing specific obligations on the other party and allocating agreed-upon remedies should a breach occur. Practitioners may also want to draft contracts that provide for how violations will be treated, provide greater deterrence for some kinds of violations, or that eliminate the need to litigate regardless of whether the breach was intentional or negligent.
If you have questions or comments on the content of this post, please email Matthew Cave at [email protected] and Sara Borjigin at [email protected].
