In Rattagan v. Uber Techs., Inc., the Supreme Court of California held a party can assert a fraudulent concealment cause of action based on conduct occurring in the course of a contractual relationship if the claim: (1) can be established “independently of the parties’ contractual rights and obligations” and (2) the tortious conduct exposes a risk of harm “beyond the reasonable contemplation of the parties” when they entered into the contract.
In this case, Uber’s Dutch subsidiaries retained attorney Rattagan to provide them with formation legal services relating to Uber’s launch in Argentina. The scope of Rattagan’s retention included him registering Uber with local government authorities and acting as the Uber subsidiaries registered legal representative in Argentina. Rattagan expressly advised Uber that he had “full potential personal exposure” if Uber violated Argentinian law. Later, allegedly unbeknownst to Rattagan, Uber held a meeting with Argentine officials who admonished Uber against launching its rideshare platform unless it first complied with certain local laws and city approvals.
Uber then allegedly launched in Argentina, without first informing Rattagan and even though its local formation was not complete. Rattagan alleged Uber intentionally concealed its launch plans even though Uber knew Argentine authorities would consider the launch to be legally non-compliant and would expose Rattagan to “grave personal consequences” given his position as the Uber subsidiaries’ registered legal representative. Ultimately, Rattagan was criminally charged due to his role with the Uber subsidiaries, which Rattagan alleged negatively affected his law practice, and caused him reputational harm.
The District Court overseeing Rattagan’s case granted Uber’s motion to dismiss, finding Rattagan’s fraudulent concealment claim was foreclosed by “the economic loss rule,” which generally provides that there is no recovery in tort for negligently inflicted purely economic losses as between parties to a contract. That federal trial court held “only fraud claims based on “affirmative misrepresentations” are exempted from the economic loss rule, and only when the tortious conduct exposed a plaintiff to risk of liability for “personal damages independent of the plaintiff’s economic losses.”
On appeal, the Ninth Circuit of Appeals certified this issue as a question of state law, asking that the California Supreme Court answer whether “claims for fraudulent concealment, as opposed to affirmative deception” are “exempted from the economic loss rule?” Here, the Supreme Court of California answered that such claims are exempt because “the economic loss rule does not apply to limit recovery for intentional tort claims like fraud. The doctrine only applies to bar tort recovery for negligently inflicted economic losses unaccompanied by physical or property damage.”
The California Supreme Court went a step further and considered whether a plaintiff can “assert an independent claim of fraudulent concealment in the performance of a contract?” In answering “yes” to this question, the Court explained that California public policy strongly supports imposing a tort duty on contractual parties to refrain from fraudulent deceit.
The required elements for fraudulent concealment are (1) concealment of a material fact; (2) by a defendant with a duty to disclose; (3) with the intent to defraud the plaintiff by intentionally concealing the fact; (4) where the plaintiff was unaware of the fact and would have acted differently if the concealed fact was known; and (5) the plaintiff was damaged. Here, the California Supreme Court articulated the framework needed to assert a fraudulent concealment cause of action where the conduct at issue occurred in the course of a contractual relationship.
The analysis focuses on whether the plaintiff can establish the elements of the cause of action independently of the parties’ contractual rights and obligations. This analysis turns “on 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.”
The California Supreme Court explained that in granting Uber’s motion to dismiss, the Federal District Court misunderstood prior California legal authority. The Court explained that California law generally does not treat fraud claims differently based on whether they allege affirmative deception or concealment so that it sees “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 and can demonstrate an exposure to risks of harm beyond those that would be reasonably expected as the result of a contractual breach.”
The key question is therefore whether a potential injury stemming from the alleged nondisclosure arises from a breach of a promise set forth in the contract versus one arising from a breach of duty growing out of the contract. On the one hand, where the potential injury “is determined to have been within the reasonable contemplation of known risks to the parties before entering into their agreement” so the parties did or could have accounted for that risk, the fraudulent concealment claim will fail. This is because, in such a circumstance, public policy considerations tip away from the objective of encouraging a business climate free of fraud and toward the goal of enforcing the contractual obligations that the parties voluntarily assumed. After all the California Supreme Court reasoned, if it were a risk the parties could foresee, they were free to include a contract provision to safeguard from such possible harm.
If, on the other hand, an independent duty to disclose certain material facts arises for a party in the course of a contractual relationship, but the party intentionally conceals or suppresses such facts inducing detrimental reliance and exposing the other party to risks of harm not reasonably contemplated when the contract was formed, the party suffering the injury may assert a tort action for fraudulent concealment. While the Court left the determination of the adequacy of Rattagan’s complaint to the District Court, its ruling made clear that where the alleged deceptive conduct is independent of the contractual breach, it may support an award of tort damages.
The key takeaway is this: you do not need a crystal ball to determine if a fraudulent concealment claim will survive the pleading stage. If the risk of harm was one you could reasonably expect or foresee when negotiating the contract between the parties, you are limited to contractual damages. But if it is not, there may be a viable fraudulent concealment claim.
Viviana Boero Hedrick is counsel in the firm's Los Angeles office, specializing in complex business litigation. Jeff Brown is a partner in the firm’s Los Angeles office, specializing in commercial real estate litigation.