On June 30, 2016, the New York Court of Appeals decided in Pasternack v. Laboratory Corporation of America Holdings, 2016 N.Y.Slip.Op. 05179 (June 30, 2016) that a plaintiff cannot establish the reliance element of a fraud claim under New York law by showing that a third party relied on a defendant’s false statements resulting in injury to the plaintiff.

In Pasternack, the plaintiff was an airline pilot and medical examiner who was required to submit to random drug testing.  The defendants were the administrator of the drug program and the laboratory that performed the services.  When the plaintiff was being tested, he produced an insufficient urine sample, referred to as a “shy bladder” situation.  At the time of the testing, the Department of Transportation Regulations (DOT) provided that “[t]he collector must specifically tell the employee that he or she is not permitted to leave the collection site and if they do so, that it will be considered a refusal to test.”  The DOT Regulations also provided for a procedure for “shy bladder” requiring the facility to urge the tested employee to drink fluids to provide a sufficient urine specimen.  The defendant laboratory allegedly did not advise the plaintiff of the procedure, nor did it explain that if plaintiff left the lab at that time, it would be considered a refusal to test.

The defendant administrator then reported to the FAA that the plaintiff had left the collection site and there had been a “refusal to test” under the DOT regulations.  The FAA then interviewed the lab employee who was involved in plaintiff’s testing who, as alleged by plaintiff, did not tell the FAA investigators that plaintiff had told her during the initial collection that he planned to return to complete his collection.  Based upon these facts, the FAA revoked plaintiff’s airman’s certificates, finding he had engaged in a refusal to test.  Thus, he was unable to pilot any flights or function as an aviation medical examiner.  Plaintiff’s administrative appeals were denied.

Plaintiff appealed to the D.C. Circuit Court of Appeals and ultimately won a reversal of the revocation of his license.  The D.C. Circuit held that “substantial evidence does not support the … determination that the collector did not impliedly give [plaintiff] permission to leave.”

Nevertheless, before the administrative appeal was decided, plaintiff commenced a lawsuit in New York against the administrator and laboratory claiming negligence and fraud in administering the test.  In the federal district court, where plaintiff brought his claims, his entire case was dismissed, including his amended complaint.  On appeal to the Second Circuit, the Court certified questions for the New York Court of Appeals regarding whether the defendants owed a legal duty to plaintiff to give rise to a cause of action in negligence, and whether plaintiff had alleged a viable fraud claim.

After determining that the urine testing process did not create a legal duty of care to plaintiff under New York negligence law, the Court of Appeals addressed the fraud question.

The Court started with the basic elements of a fraud cause of action:  “A misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentations or material omission, and injury.”  The Court then had to focus on the element of justifiable reliance on the misrepresentations.  The Court of Appeals noted that there was a split of decisions “as to whether a plaintiff may state a fraud claim, despite the absence of reliance by the plaintiff on the alleged misrepresentations, where a non-plaintiff third-party is alleged to have relied upon the misrepresentations in a manner that caused injury to the plaintiff.”  The Court of Appeals then noted that “indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it.”

Plaintiff attempted to rely on very old decisions that did not require reliance on false representations.  The Court rejected those early decisions rendered before all of the elements currently required for fraud were established.  The Court concluded: “The tort of fraud is intended to protect a party from being induced to act or refrain from acting based on false representations – a situation which does not occur where, as here, the misrepresentations were not communicated to or relied on, by plaintiff.  We, therefore, decline to extend the reliance element of fraud to include a claim based on the reliance of a third party, rather than the plaintiff.”

The Court of Appeals in Pasternack reminds us that it is not just any old lie that can form the basis of a cause of action for fraud.  The misrepresentation must have in some way been communicated to the plaintiff, either directly or indirectly, to influence and thereby dupe the plaintiff into acting or not acting, resulting in plaintiff’s injury.