An infinite amount of ink has been spilled over the decades regarding the proper boundary between contract and tort law. An important reinforcement to that often-blurry boundary is the economic loss rule, which provides that a party to a contract cannot recover in tort for purely economic damages arising from disappointed expectations. This broad-sounding rule is subject to certain exceptions, including the highly influential ruling established by the California Supreme Court in Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (2004), which provides that a contracting party seeking economic damages by alleging fraud—that is, intentional misrepresentation—may avoid the bar of the economic loss rule. Id. at 991. But what about fraudulent concealment—that is, where a party to a contract doesn’t make an outright false statement, but instead lies by omission?
That question was recently and squarely before the Ninth Circuit in Rattagan v. Uber Technologies, No. 20-16796, 2021 U.S. App. LEXIS 35874 (Dec. 6, 2021). In that case, rather than resolve the question of whether fraudulent concealment is excepted from the economic loss rule itself, the Ninth Circuit instead, seeking guidance on the applicable California law, certified that question to the California Supreme Court. How the California Supreme Court decides this issue will have far-reaching effects on how much parties can inject tort claims into contractual disputes.
In Rattagan, an Argentinian lawyer for two Dutch subsidiaries of Uber that planned to launch a ridesharing service in Buenos Aires brought claims against Uber for both contract and tort claims. Plaintiff Rattagan alleged that Uber hid its launch plans from him and as a result, the necessary corporate and tax formalities had not been carried out at the time the ridesharing service went live. As a result, Argentinian authorities raided his office, leaving him subject to potentially significant liability under Argentinian law. Plaintiff Rattagan brought claims against Uber for among other things, breach of the implied covenant of good faith and fair dealing and fraudulent concealment. On Uber’s motion to dismiss, the district court held that because the relationship between Rattagan and Uber was contractual, Plaintiff’s fraudulent concealment claim was foreclosed by the economic loss rule.
On appeal, the Ninth Circuit first analyzed the most recent California Supreme Court case on point—Robinson Helicopter. In that case, the California Supreme Court held that intentional misrepresentation claims 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 so doing, the Robinson Helicopter court declined to address whether fraudulent, intentional concealment also is excepted from the economic loss rule. The court was careful to circumscribe its holding, stating that it 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.” 34 Cal. 4th at 993. For the sake of context, the fraud in Robinson Helicopter involved defendant making affirmative misrepresentations in the form of fraudulent certifications for mechanical components for aviation (sprag clutches), which exposed plaintiff to potential safety and regulatory liability independent of its economic losses under the contract between the parties. Id. at 991 & n.7.
The Rattagan court went on to note that there had been no authoritative decision on the issue of fraudulent concealment vis-à-vis the economic loss rule in the California Courts of Appeal. Rather, the Ninth Circuit’s survey only turned up unpublished appellate cases pointing in opposite directions. The court concluded by outlining the competing policy concerns—“freedom of contract and abhorrence of fraud.” 2021 U.S. App. LEXIS 35874, at *8 (citations and quotations omitted). 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. The opposite would be true for extending the Robinson Helicopter extension to fraudulent concealment claims.
As for reading the tea leaves, one can make the case that the “duty independent of contract” element articulated in Robinson Helicopter would be just as met by a fraudulent concealment claim as an intentional misrepresentation claim. Indeed, fraudulent concealment is only viable as a claim where the law imposes a duty to disclose, which only occurs in certain limited circumstances. CACI 1901. However, the “duty independent of contract” is but one of the two pillars of the rationale of the Robinson Helicopter exception. The California Supreme Court was careful to say in Robinson Helicopter that it was creating an exception for “affirmative misrepresentations . . . which expose a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” 34 Cal. 4th at 993. In other words, there are two “independence” requirements for the Robinson Helicopter exception to apply: (1) independence of the tort, and (2) independence of damages. See id. at 991 & n.7, 993 (“[Plaintiff’s] claims are based on [Defendant’s] intentional and affirmative misrepresentations that risked physical harm to persons. . . . A properly functioning sprag clutch is vital to the safe performance of the aircraft, and compliance with the certificate requirement is part of an integrated regulatory scheme intended to ensure their safe operation.”). Although the independent duty prong is discussed extensively in Rattagan, the independent damages prong is not. Hopefully, the California Supreme Court will address that strand of Robinson Helicopter’s reasoning in its opinion. At the very least, even if the California Supreme Court finds the “independent tort” prong dispositive of the certified question, it should restate the requirement that damages must be independent as well, to show that opportunistic plaintiffs in contract disputes cannot bring specious fraud claims for the economic damages that are entirely duplicative of breach of contract damages.
Although the economic loss rule can be seen as somewhat of an academic issue, the resolution of this certified question by the California Supreme Court will have repercussions for everyday civil litigation practice in the state. While we eagerly await the California Supreme Court’s resolution of this ripe issue, litigants will continue to argue both sides of the extension of the Robinson Helicopter fraud exception to the economic loss rule.