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Posted: May 17, 2015

Decision Analyzes Elements of Claim for Fraud

On March 16, 2015, Justice Bransten of the New York County Commercial Division issued a decision in Shareholder Representative Services LLC v. Sandoz Inc., 2015 NY Slip Op. 50326(U), analyzing the elements of a claim for fraud.

In Shareholder Representative Services, the plaintiff brought an action on multiple theories relating the the merger of Oriel Therapeutics, Inc. with Sandoz Inc. The defendants moved to dismiss. The court analyzed the motion as it applied to the plaintiff’s fraud claim as follows:

To plead a claim for fraud under New York law, [the plaintiff] must allege: a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. The pleading requirements of CPLR 3016(b) are a matter of procedure, governed by the law of the forum.

. . .

Turning to the first element of fraud, Plaintiff points to two purported misrepresentations in the Complaint — that Aeropharm was a “state of the art” facility and that Aeropharm was able to receive the equipment necessary to begin production of the Product immediately. The first statement originally was made in the offer letter and then in-person by a representative of Sandoz AG to Oriel’s “Principal Shareholders,” while the second was a “false impression” created by Defendants’ “state of the art” representation. Neither statement suffices to state a material misrepresentation.

Defendants’ purported misrepresentation that the Aeropharm facility was “state of the art” is a nonactionable statement of opinion, which cannot provide the basis for a fraud claim.

Next, Plaintiff does not plead in its Complaint that any individual actually stated that Aeropharm was able to receive the equipment necessary to begin production of the Product immediately. Neither the offer letter nor the near-identical oral statement alleged to have been made during merger negotiations by Daniel Salvadori contains the statement that Aeropharm was “ready to receive equipment necessary” for the manufacture of the drug.

Instead, Plaintiff contends that Defendants’ failure to disclose Aeropharm’s readiness was a fraudulent omission. However, an omission is only actionable as fraud where there is something akin to a fiduciary duty between the parties. No such relationship is alleged here. Instead, the Complaint alleges facts consistent with an arm’s length business relationship between the former shareholders and Defendants.

Nonetheless, Plaintiff asserts that Defendants had a duty to disclose the operational status of Aeropharm under New York’s “special facts” doctrine. The “special facts” doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge of the defendant, and that the information was not such that could have been discovered by the plaintiff through the exercise of ordinary intelligence. The Jana L. Court further noted that if the other party has the means available to him of knowing he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

Even assuming for the sake of argument that the readiness of Aeropharm was peculiarly within Defendants’ knowledge, the status of the plant could have been discovered through the use of ordinary intelligence. Plaintiff alleges that the former shareholders were told that they could not inspect the plant during the due diligence process due to the production of another drug at the time. However, Plaintiff does not allege that the former shareholders asked any questions to assess the readiness of the plant or that it requested another inspection after it purportedly was denied access. Therefore, Plaintiff has not alleged that the former shareholders made use of the means available to them to discover Aeropharm’s readiness.

. . .

Next, to satisfy the scienter element of its fraud claim, [the plaintiff] alleges that the purported misrepresentations cited above were false when made and that Sandoz AG and its agents intended to induce the former shareholders to enter into the Merger Agreement based upon their misrepresentations and omissions. While Plaintiff makes this broad statement, [the plaintiff] does not plead any facts from which to infer that Defendants knew at the time that the statements were false or made with the intent to deceive.

Moreover, [the plaintiff’s] allegations are made collectively as to all Defendants. Under CPLR 3016(b), a fraud claim must be pleaded with particularity, and the circumstances constituting the alleged wrong must be stated in detail. [The plaintiff’s] group pleading falls far short of this mark.

. . .

Likewise, [the plaintiff] fails to plead reliance with the requisite particularity. The Complaint does not allege that the offer letter was sent to the former shareholders, nor does it assert that the alleged oral misrepresentations were made to any of the former shareholders, aside from the two “Principal Shareholders” identified. As a result, [the plaintiff] has not pleaded facts sufficient to set forth reliance on these alleged misrepresentations by the former shareholders, as the shareholders not present for the alleged oral misrepresentations and not in receipt of the offer letter cannot be alleged to have relied on representations they never received.

(Internal quotations and citations omitted) (emphasis added). You can use this decision as a road map of common pitfalls in pleading fraud.

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