Courts are scrutinizing the damages alleged in fraud-based claims.  Even where misrepresentations have been made, courts will not allow fraud claims to survive if recognized fraud damages are not adequately alleged.

In Electron Trading LLC v Morgan Stanley & Co. LLC, 2017 NY Slip Op 30845(U), April 25, 2017 (Supreme Court, N.Y Co.), Justice Saliann Scarpulla of the New York County Commercial Division recently dismissed fraud and negligent misrepresentation claims solely because the plaintiff had not adequately alleged sufficient pecuniary fraud damages.

The plaintiff invented a trading system for institutional investors to use as an alternative forum for trading securities, generally known as an alternative trading system (“ATS”).  Plaintiff entered into a license agreement with defendant Morgan Stanley (“Morgan”).  Under the agreement, Morgan agreed to actively use and promote the ATS and provide support and back-up for its use.  The parties also entered into a consulting agreement under which plaintiff’s principals agreed to assist in developing the licensed ATS.

Shortly after the agreements were signed, plaintiff discovered that Morgan had not allocated sufficient resources to develop and implement the licensed ATS as required by their agreement.  Plaintiff alleged that Morgan essentially conceded that it had not abided by its contractual obligation to devote the necessary resources but demanded an additional concession from plaintiff regarding expanded use of the ATS in order to proceed.  Plaintiff objected and sued Morgan, alleging breach of contract, unfair competition and fraud and negligent misrepresentation claims.  Plaintiff alleged that Morgan represented to plaintiff that it would not seek to use the ATS as it subsequently demanded. Although the contracts were silent about this separate form of trading, plaintiff alleged that it was part of Morgan’s representations.

As to the fraud and misrepresentation claims, Justice Scarpulla granted Morgan’s motion to dismiss, finding that plaintiff had not adequately alleged fraud-based pecuniary damages.  The Court applied the following analysis:

New York law requires that a party demonstrate actual pecuniary loss sustained as the direct result of the wrong, i.e., actual out of pocket losses, on a claim of fraud. See Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413 ( 1996). Here, [plaintiff] has not pled any out-of- pocket damages, its damages theory relies on the supposition that the licensed ATS would eventually become a valuable trading tool to Morgan Stanley.

[Plaintiff] argues that damages were sufficiently alleged because it seeks the difference between the licensed ATS before entering into the [license agreement] and the value of the licensed ATS after entering into the [license agreement], i.e., projected future value of the licensed ATS. In actuality, [plaintiff] seeks the value of the licensed ATS using the trading forums Morgan Stanley represented. However, that damages calculation assumes that had Morgan Stanley provided [plaintiff] with the trading forums as allegedly represented, the licensed ATS would have done as projected, or would have done as well with another institutional investor using trading forums as represented. This proposed measure of damages is legally insufficient. See Geary v Hunton & Williams, 257 A.D.2d 482, 482 (1st Dep’t 1999) (explaining that “[p ]laintiff’s fraudulent inducement cause of action, which seeks recovery for the loss of enhanced earning potential that plaintiff allegedly would have realized had defendant’s banking litigation practice been as substantial as allegedly represented, or if he had accepted a job with a different employer, is legally insufficient”); see also Starr Found. v Am. Intern. Group, Inc. 76 A.D.3d 25, 28 (1st Dep’t 2010) (“the loss of an alternative contractual bargain … cannot serve as a basis for fraud or misrepresentation damages because the loss of the bargain was ‘undeterminable and speculative”‘).

As [plaintiff] fails to allege recoverable damages resulting from Morgan Stanley’s alleged misrepresentation that it would not use the licensed ATS for [a different form of trading], the fraud cause of action is dismissed. I also dismiss [plaintiff]’s negligent misrepresentation claim on the same ground, which equally applies in the context of negligent misrepresentation as in fraud.

The analysis applied by Justice Scarpulla reflects the reoccurring trend of courts to scrutinize the particular damages claimed as a result of fraud.  It is not sufficient for a plaintiff to allege all of the other elements of fraud if the type of damages are not recoverable on a fraud-based cause of action.  As Justice Scarpulla held, only pecuniary, actual out-of-pocket damages directly attributable to the alleged fraud are recognized, and not what would be recoverable in a contract-based claim.