January 28, 2023

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Naughty But Law & Legal

Fraud Claims and Sales Talk – Learn When a Wrong Opinion Can Be the Basis For a Lawsuit

This article discusses the exception to the rule that any lawsuit for fraud or deceit cannot be based opinion and must be based upon a factual misrepresentation. In California the courts use the terms fraud and deceit interchangeably. Civil Code 1709 states “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.” Generally to establish a claim for fraud, one must show that there was (1) a misrepresentation; (2) the defendant knew that the representation was false and intended the plaintiff to rely on the misrepresentation; (4) the plaintiff reasonably relied on the representation and (5) the plaintiff suffered damages as a result.

In the world of business the old adage–buyer beware–is still true for the most part. Opinions usually cannot be the basis of a lawsuit for fraud. A fraud case has to be based on a misrepresentation of fact. An opinion expresses the belief of the maker without certainty, as to the existence of a fact, or the judgment of the maker as to the quality or value of a product or service. Most sales talk is opinion. “German engineering is the best in the world.” “Nothing is more reliable than our telecopier repair service.” “No dry cleaner in town does a better job on tough stain.” All these statements are opinions.

There is a very important exception. Opinion can be the basis for a fraud claim when the declarant holds himself out to be specially qualified. If a person claims to be an expert or to have special knowledge then his opinion may be the basis for a fraud suit even though it could not be the basis for a suit if stated by person who is not an expert and has not special knowledge..

This situation is not uncommon in the business context. If a person holds himself out as an expert on the authenticity and value of the art of Picasso, his representation as to the value of a piece of art or a collection may be actionable, even if it would be considered sales talk or opinion if made by someone who is not an expert on Picasso.

In a case handled by the author, an individual who held himself out as an expert on a popular surrealist artist sold several copies of the artist’s work to a customer. The expert stated that all the pieces were good investments. Even though the pieces were copies, they had value because only a limited number of the copies were made. Later, the expert offered to purchase a piece in partnership with the customer. The expert told his customer that in his opinion purchasing the piece for $300,000.00–$150,000.00 each– made sense because the piece would continue to appreciate. The expert told the customer that in his opinion the piece could be sold today for approximately $400,000.00. When he made the representation the expert knew he could not sell the piece for $400,000.00. He also knew that he could buy the piece for $150,000.00.

The customer found out about the misrepresentations and sued the expert. The expert tried to avoid the suit by filing a pleading called a demurrer that stated although the facts alleged in the customer’s complaint may be true, they are insufficient for the customer to state a claim because an opinion can not be the basis for a fraud action. The court overruled the demurrer and the allowed the complaint. The court stated that as the expert held himself out as specially qualified to appraise the works of this particular artist his opinions could be the basis for the complaint.

Consumers and businesses deal with sales talk every day. Buyer beware is generally the rule. But when one of the parties possesses, or assumes to possess, superior knowledge or special information regarding the subject matter of the representation, and the other party may reasonably rely upon the superior knowledge or special information, a representation made by the party possessing the knowledge or information, though it might be regarded as but the expression of an opinion if made by any other person, may be the basis for a fraud claim if false.