Lyft Not Liable for Representations of Safe Service: No Transaction or Loss Causation
I have written often about the essential element of justifiable or reasonable reliance in alleging and proving a claim of fraud. This critical element presents both a formidable burden for the party attempting to establish fraud and abundant opportunities for the party accused of fraud to defend against such allegations. See.e.g., New York High Court Reinforces Justifiable Reliance and Loss Causation in Fraud; Fraud Claims Must be Dismissed for Lack of Reasonable Reliance. Yet, not to be overlooked, there is another required element of the claim of fraud that also presents challenges for the claimant and opportunities for the accused: Causation.
Fraud “Causation” Concepts
Since the cause of action of fraud is a civil tort, the concepts that apply to any tort are applicable to the claims of fraud. Causation, that is, the requirement that the alleged wrongful conduct must be deemed to have directly and proximately resulted in the alleged injury, is an essential element of fraud. While not often detailed or discussed in court decisions, causation in fraud has multiply requirements.
As I have explained, for example, the concept of “superseding cause” is applied to fraud claims: “To establish a claim for fraud, it is not enough for the plaintiff to show that defendant made factual misrepresentations upon which the plaintiff relied. Even if the plaintiff did in fact reasonably rely on those misrepresentations, and changed its position in such reliance, if the losses plaintiff sustained would have occurred independently and without regard to the fraudulent statements, any such superseding cause of the losses breaks the chain of causation on the fraud claim.” See Tort Concepts of Superseding Cause Apply to Fraud Claims.
Further, on the claim of aiding and abetting fraud, the element of substantial assistance in perpetuating the fraud of another has embedded in it the concept of proximate cause. See.e.g., Claims of Aiding and Abetting Fraud Require Proximate Cause.
In alleging and proving the direct claim of fraud, the causation element actually has two essential requirements. The Appellate Division, First Department, decision in Basis PAC-Rim Opportunity Fund (Master) v TCW Asset Mgt. Co., 149 A.D.3d 146 (1st Dep’t 2017) succinctly laid out the two concepts as follows:
A fraud claim requires “proof by clear and convincing evidence” as to each element of the claim (Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330, 350 [1999]). One such element is causation, and to establish causation, plaintiffs must prove both that “defendant’s misrepresentation induced plaintiff[s] to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff[s] complain (loss causation)” (Laub v Faessel, 297 AD2d 28, 31 [1st Dept 2002]). “Transaction causation is akin to reliance, and requires only an allegation that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction’” (Lentell v Merrill Lynch & Co., 396 F3d 161, 172 [2d Cir 2005], cert denied 546 US 935 [2005]).
“Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff’” (id. at 172). To establish loss causation a plaintiff must prove that the “subject of the fraudulent statement or omission was the cause of the actual loss suffered’”(id. at 173). Moreover, “when the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases’, and a plaintiff’s claim fails when it has not . . . proven . . . that its loss was caused by the alleged misstatements as opposed to intervening events’” (id. at 174 quoting First National Bank v Gelt Funding Corp., 27 F3d 763, 772 [2d Cir 1994]). Indeed, when an investor suffers an investment loss due to a “market crash [] of such dramatic proportions that [the] losses would have occurred at the same time and to the same extent regardless of the alleged fraud,” loss causation is lacking (see Loreley Fin. [Jersey] No. 3 Ltd. v Wells Fargo Sec., LLC, 797 F3d 160, 186-187 [2d Cir 2015]).
New Second Department Decision
A new Second Department decision in Browne v. Lyft, Inc., 2023 NY Slip Op 04102 (2d Dep’t Decided on Aug. 2, 2023), relied upon these dual-layered requirements embedded in the causation element to reverse the lower court and grant the defendant’s motion to dismiss the fraud claim attempted to be asserted. The underlying facts of the case were a bit atypical in the fraud arena.
Plaintiffs in Browne were suing on behalf of an underage (“infant”) passenger who used the car service Lyft for a hired ride. Plaintiffs alleged that during the ride, the Lyft driver unbuckled his pants and started to masturbate while continuing to steer the car with his knees. Plaintiffs further alleged that the driver only stopped this offensive act when he saw the passenger videotaping him.
Plaintiffs brought suit against Lyft, attempting to allege a number of tort claims. While the lower court denied Lyft’s motion on all claims except the cause of action for intentional infliction of emotional harm and in seeking punitive damages, the Second Department reversed and dismissed the claims for vicarious liability under the doctrine of respondeat superior and fraud.
On the fraud claim, plaintiffs alleged that Lyft published a number of statements on its website concerning its efforts to address safety and in particular how it investigates and vets its drivers before allowing them to serve. Plaintiffs alleged that the passenger relied upon these statements in using the Lyft app to book the ride.
In denying Lyft’s motion to dismiss the fraud claim, the lower court gave short shrift to the issues and rather superficially rejected the motion:
The Amended Complaint alleges that plaintiffs “relied on Lyft’s calculated, targeted marketing, including Lyft’s representations that its service was safe”. The Amended Complaint goes on to set forth the statements from Lyft’s website. The Amended Complaint further alleges that plaintiffs’ reasonably relied on the false statements and representations, which resulted in damages to plaintiffs.
This Court finds that plaintiffs have given adequate notice to Lyft as to the circumstances giving rise to the fraud claim. To the extent that Lyft contends that the statements on the website may not have been the statements on the website prior to or at the time of the subject incident, such contention is unsupported by any evidence. Moreover, the Court must accord plaintiffs the benefit of every possible inference at this stage (see Leon v Martinez, 84 NY2d 83 [1994]).
On appeal, the Second Department scrutinized the plaintiffs’ allegations, finding they were far too sparse to meet the demanding requirements of a claim for fraud, including, specifically, the multi-layered causation element:
As to the fraud cause of action, the complaint alleges that Lyft engaged in a calculated, targeted marketing campaign representing that its service was safe, and by doing so, lulled customers into a false sense of security. These marketing materials included statements on the Lyft website that Lyft drivers were given background checks and were properly screened. The plaintiffs allege that such statements were false and intended to defraud the public, and that, as a result of these false statements, the plaintiffs sustained damages.
“The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages” (Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559; see Ross v Louise Wise Servs., Inc., 8 NY3d 478, 488). “Each of the foregoing elements must be supported by factual allegations containing the details constituting the wrong sufficient to satisfy CPLR 3016(b)” (Stortini v Pollis, 138 AD3d 977, 978). “To establish causation, the plaintiff must show that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation)” (Laub v Faessel, 297 AD2d 28, 31; see Ambac Assur. Corp. v Countrywide Home Loans, Inc., 31 NY3d 569, 580; Connaughton v Chipotle Mexican Grill, Inc., 29 NY3d 137; Small v Lorillard Tobacco Co., 94 NY2d 43, 56-57; P & HR Solutions, LLC v Ram Capital Funding, LLC, 195 AD3d 473, 474).
Here, although the complaint alleges that the plaintiffs were aware of alleged representations on Lyft’s website that the Lyft service was safe to use, it fails to sufficiently specify which statements on Lyft’s website were false, and when those representations were made or accessed by the plaintiffs (see CPLR 3016[b]). Moreover, the complaint fails to set forth any facts sufficient to show that any alleged misrepresentations on Lyft’s website regarding the safety of Lyft rides directly and proximately caused the plaintiffs’ alleged damages, which were otherwise alleged [*3]to have been caused directly by Singh’s sexual misconduct while operating the vehicle (see Laub v Faessel, 297 AD2d at 31; Minzer v Barga, 2020 NY Slip Op 31458[U] [Sup Ct, NY County]). It is not sufficient to merely allege that the infant plaintiff would not have used the Lyft app but for Lyft’s alleged misrepresentations regarding safety (see Laub v Faessel, 297 AD2d at 31; Minzer v Barga, 2020 NY Slip Op 31458[U]). Accordingly, the Supreme Court should have granted that branch of Lyft’s motion which was to dismiss the cause of action alleging fraud.
Commentary
The element of causation on a cause of action for fraud can be a formidable obstacle if it is not adequately addressed in the pleadings and proof. Not only must a plaintiff allege that it justifiably relied upon the claimed false statements, but also that those statements actually caused the damage sought to be compensated. This is known as “transaction” causation (the reliance) and “loss” causation (the source of the damage actually sustained).