Dear constituency list members of the Insolvency Law Committee, the following is a case update written by ILC member John W. Kim of Brower Law Group, APC, analyzing a recent case of interest:
In Rattagan v. Uber Techs., Inc., 19 F.4th 1188, 1189 (9th Cir. 2021), the United States Court of Appeals for the Ninth Circuit certified the following question to the California Supreme Court since there is no controlling precedent: Whether claims for fraudulent concealment are exempt from the economic loss rule under California law. On February 9, 2022, the California Supreme Court granted the Ninth Circuit’s request. Rattagan v. Uber Technologies Inc., 2022 Cal. LEXIS 490.
To read the full published decision, click here.
Michael Rattagan (“Rattagan”), a corporate attorney in Argentina, was retained to provide legal services for two subsidiaries owned by Uber Technologies, Inc. (“Uber”) in connection with Uber’s launch of its ridesharing platform in Argentina. Rattagan brought claims against Uber on both contract and tort theories. Rattagan alleged that Uber hid its launch plans from him and as a result, the necessary corporate/tax registrations were not completed before the launch of ridesharing services. Rattagan alleged that despite knowing that he could be subject to personal liability for Uber’s violation of Argentine law, Uber concealed the launch plans from him. Rattagan, 19 F.4th 1188, 1190.
As a result, Argentinian authorities raided his office and homes of his colleagues (among other things) in connection with a charge that he was illegally using public space for commercial gain.
Rattagan alleged claims against Uber for negligence, breach of the implied covenant of good faith and fair dealing, fraudulent concealment, and aiding and abetting fraudulent concealment. Applying California law, and upon granting Uber’s motion to dismiss, the district court held that the fraudulent concealment claims were barred by the economic loss rule. None of the other claims were at issue.
Rattagan challenged the district court’s decision arguing that fraudulent concealment claims are exempt from California’s economic loss rule. The Ninth Circuit found that no California Supreme Court or appellate court decisions were on point, and because federal district courts are divided, certified Rattagan’s question to the California Supreme Court.
The economic loss rule prevents a party to a contract from recovering economic damages resulting from breach of contract under tort theories of liability. California does not have binding precedent on whether claims for fraudulent concealment are exceptions to the economic loss rule. Thus, certification was appropriate.
The Ninth Circuit first analyzed the most recent California Supreme Court case on point—Robinson Helicopter Co. v. Dana Corp., 34 Cal.4th 979 (2004). In Robinson, the California Supreme Court held that fraud claims premised on affirmative misrepresentations – like intentional misrepresentation – were not barred by the economic loss rule because such acts constitute a breach of a duty independent of the duties imposed by contract. In other words, this was an exception to the general rule. The court in Robinson reasoned that “this species of fraud constitutes tortious conduct separate from a breach of the contract.”
However, the Robinson court declined to address whether fraudulent concealment claims (based on omission rather than affirmative misrepresentations) are also excepted from the economic loss rule. That court was careful in stating that the exception was “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. For the sake of context, the fraud claim in Robinson involved allegations of affirmative misrepresentations about certifications for mechanical components used in aviation, which exposed plaintiff to potential safety and regulatory liability independent of its economic losses under the contract between the parties. Id. at 991 & fn.7.
The court in Rattagan confirmed the lack of any binding or persuasive authority under California law excepting claims for fraudulent concealment under the economic loss rule. Rather, the Ninth Circuit’s survey only turned up unpublished appellate cases that applied the Robinson case in inconsistent manners. See In re Ford Motor Co. DPS6 Powershift Transmission Prods. Liab. Litig., No. CV1706656ABFFMX, 2019 WL 3000646 (C.D. Cal. May 22, 2019) (finding economic loss rule did not apply to plaintiffs’ claims for fraudulent concealment or omission); but see In re Ford Motor Co. DPS6 Powershift Transmission Prods. Liab. Litig., 483 F. Supp. 3d 838, 849 (C.D. Cal. 2020) (finding that the Robinson ruling did apply to plaintiff’s other claims).
The Rattagan court concluded by outlining policy concerns involving “freedom of contract and abhorrence of fraud.” Rattagan, at 1192. That is, applying the economic loss rule to fraudulent concealment might support the freedom of contracting parties to allocate risk between them, at the expense of possibly emboldening (and shielding) dishonest parties to contracts. On the other hand, fraud may be deterred by extending the exception in Robinson to fraudulent concealment claims.
Although the economic loss rule can be seen as abstract or academic, the resolution of this certified question by the California Supreme Court will have repercussions for everyday civil litigation practice in the state and strategies for pleadings. While awaiting the California Supreme Court’s resolution of this ripe issue, litigants will continue to argue both sides of the extension of the Robinson fraud exception to the economic loss rule.
It seems that that the “duty independent of contract” element articulated in Robinson might be established by a fraudulent concealment claim and not only affirmative fraud claims. This is because fraudulent concealment is only viable as a claim where a duty to disclose exists in certain limited circumstances (e.g., in fiduciary relationships such as those of business partners). Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1187. Thus, extending fraudulent concealment claims as an exception to the economic loss rule could still be narrow as articulated in Robinson such that the exceptions do not swallow the rule. The California Supreme Court should provide further guidance about this exception given the Ninth’s Circuit’s request and provide practitioners with guidance.
These materials were written by ILC member John W. Kim of Brower Law Group, APC, in Laguna Hills, California (john@BrowerLawGroup.com). Editorial contributions were provided by Jorge A. Gaitan, Government Attorney, California.