As this Blog chronicles, fraud claims arise in a myriad of circumstances and contexts. In this post, I review a new decision in the U.S. District Court for the Southern District of New York that analyzes attempted fraud claims in an interesting, yet uncommon, scenario. The decision principally addresses the element of misrepresentation of fact, and whether omission of factual information can form the basis of the fraud claim. I wrote about a similar decision in the District Court for the Northern District of New York on this topic, but in a different context. See Concealing or Failing to Disclose Material Information: When is it Actionable in Fraud?
The new decision was rendered by U.S. District Judge Denise Cote, in Harris v. Pfizer, Inc., 21cv6789 (DLC)(S.D.N.Y. Feb. 16, 2022). In Harris, plaintiffs sought to bring a class action on behalf of consumers who purchased the prescription drug Chantix, which is prescribed to help quit smoking. Plaintiffs alleged that Chantix was the subject of a recall because certain lots were discovered to contain a substance called N-nitroso-varenicline, a nitrosamine chemical compound classified as possibly carcinogenic. As part of the recall, Pfizer offered a full rebate for any unused Chantix purchased by consumers, but declined to pay for any used pills.
Plaintiffs brought suit, attempting to allege a class action on behalf of consumers who purchased the recalled drugs, asserting a number of claims. I focus here on the claims attempting to allege common law fraud and negligent misrepresentation.
Plaintiffs did not allege that they sustained any personal injuries from taking the contaminated drugs for the short period in which they were consumed. Thus, no traditional products liability claims were asserted. “Instead, the plaintiffs allege[d] that they did not know that Chantix contained N-nitroso-varenicline, that they did not see it listed as an ingredient on the medication’s box or labeling, and that they would not have purchased the medication if they had known it was contaminated. The plaintiffs complain that the presence of N-nitroso-varenicline rendered the product they paid for worthless. They [therefore sought] damages solely for their economic injury” – since they paid a co-pay when they bought the drugs.
Pfizer moved to dismiss, first the complaint, and then the amended complaint. Judge Cote granted the motion and dismissed the amended complaint in its entirety.
Fraud Claims Dismissed
The Court focused on the procedural context of Federal Rule of Civil Procedure 12(b)(6), which is a motion to dismiss a pleading, under the Twombly “plausibility” standards (see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) and Green v. Dep’t of Educ. of City of New York, 16 F.4th 1070, 1076–77 (2d Cir. 2021)). The Court also noted the particularity required for fraud claims under Federal Rule of Civil Procedure 9(b): “To meet Rule 9(b)’s heightened pleading standard, the complaint must: ‘(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.’ Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 171 (citation omitted).”
The Court analyzed the fraud claims under both New York and New Jersey law apparently since one named plaintiff was a New Jersey resident (for minimum diversity purposes) and one was from New York.
The Court started with the elements required to allege fraud: “A fraud claim under New York law consists of five elements: ‘(1) a material misrepresentation or omission of a fact, (2) knowledge of that fact’s falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.’ Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 170 (2d Cir. 2015).”
Since the Court found that the amended complaint failed to allege that Pfizer made any affirmative fraudulent statement, the Court focused on the element of a material omission of fact. (“At its core, the issue giving rise to the plaintiffs’ claims is not that Pfizer inaccurately labeled its drug as Chantix or varenicline, but that Pfizer failed to disclose any nitrosamine contamination.”)
As I have frequently explained in this Blog, special circumstances are required to base a fraud claim on omissions, as opposed to affirmative misrepresentations of material facts, see, e.g., Fraud Claim Can be Based on Duty to Disclose Even Without Special Relationship. Thus, the Court observed: “A cause of action for fraud may be based on an omission rather than affirmative statement, but ‘only if the non-disclosing party has a duty to disclose.’ Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1483 (2d Cir. 1995) (New York law) … .”
In explaining the circumstances under which an alleged omission can form the basis of fraud and whether a duty exists to disclose information, the Court noted: “Unless the parties have a fiduciary relationship, a duty to disclose will generally arise under New York law only when ‘(1) one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party, or (2) one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge.’” (Citation omitted.)
In analyzing these legal requirements, the Court found plaintiffs’ allegations fell short in all respects:
The plaintiffs have not plausibly alleged a duty to disclose [on the part of Pfizer]. The plaintiffs do not contend that they are in a special or fiduciary relationship with Pfizer. And, as discussed above, the FAC [first amended complaint] has not plausibly alleged that Pfizer had knowledge that their medication was contaminated. Finally, the FAC does not allege that Pfizer understood that its concealment of the contamination was material to the plaintiffs. Nor does the FAC identify a partial statement by Pfizer that was rendered false or misleading by any omission. The plaintiffs suggest that Chantix’s product and active ingredient labels are misleading because they do not disclose the presence of a nitrosamine contaminant. But that omission does not render either the brand name “Chantix” or the active ingredient label “varenicline” false or misleading — those terms correctly identify the product that the plaintiffs actually purchased.
Negligent Misrepresentation Dismissed As Well
Addressing the attempted negligent misrepresentation claim, the Court noted that while the Second Circuit had not determined whether the heightened pleading standard of FRCP 9(b) applies to such claims, the District Courts have indeed applied that higher standard of particularity.
The Court then noted that under New York law, to state a claim for negligent misrepresentation, plaintiffs needed to allege a special relationship between the parties, a duty of care to the plaintiffs and that defendant knew that plaintiffs desired the information to be disclosed by defendant for a “serious purpose.” (Note that the analysis for “constructive fraud” is somewhat different, see my post Third Department Elucidates Requirements for Constructive Fraud Claims and Other Issues of Intentional Fraud.) The Court again found plaintiffs’ pleading lacking.
The Court also found that since plaintiffs did not buy the drug directly from Pfizer and therefore privity was lacking, a claim of “negligence” against a product manufacturer cannot be asserted if there is only economic (as opposed to personal injury or property damage) claimed.
Where fraud claims rely on the defendant’s failure to disclose information as opposed to affirmatively misrepresenting facts, there are a number of hurdles that plaintiffs must clear. Plaintiffs must find one of the available legal hooks, sufficiently to state the claim. While there are a number of ways to do this, care should be taken to consider all angles when crafting the claim. Defendants, on the other hand, are well advised to scrutinize the factual assertions to expose the insufficiencies.