Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 3, 2017

Fraud Claim Cannot be Based on Statement Contradicted by Unambiguous Term of Contract

On August 25, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in MPEG LA, L.L.C. v. Samsung Electronics Co., Ltd., 2017 NY Slip Op. 31799(U), dismissing a fraud claim based on a misrepresentation that contradicted an unambiguous term of the parties’ contract, explaining:

Samsung’s fraudulent inducement claim is based on MPEG’s allegedly false representation that section 7.2 of the AAL permits termination in year 6. As noted earlier and in the court’s prior decisions, that representation is demonstrably false. More than two months elapsed between July 7, 2007, when this representation was made, and September 20, 2007, when Samsung executed the AAL and the LAA. It is beyond cavil that this was more than enough time for Samsung and its sophisticated lawyers to review the contracts to ensure they were drafted to Samsung’s satisfaction. It borders on the frivolous for Samsung to aver that it justifiably relied on MPEG’s July 7 email. It is well established that justifiable reliance is an essential element of fraudulent inducement and negligent misrepresentation claims, and must be pleaded with particularity pursuant to CPLR 3016(b). To be sure, the question of whether a plaintiff’s reliance was reasonable often implicates inherently fact intensive disputes not amenable to resolution on a motion to dismiss.

However, if, as here, the proffered basis for relying on the alleged misrepresentation or omission is, as a matter of law, clearly unreasonable, the fraud claim is subject to dismissal at the pleading stage. This is a sensible rule, as no amount of discovery can possibly transform a legally impermissible species of reliance into one a finder of fact may deem reasonable. Here, the inquiry starts and ends with the well settled proposition under New York law that a party claiming fraudulent inducement cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract. As discussed, Samsung alleges that it relied on MPEG’s principal’s interpretation of section 7 .2 of the AAL to mean that Samsung could terminate that contract after 5 years, despite that interpretation conflicting with: (1) the third prong of section 7.2 of the AAL requiring simultaneous termination of the LAA; and (2) section 11.2.1 of the LAA clearly prohibiting termination prior to January 1, 2017 (i.e., year 10). Nonetheless, Samsung contends that it, an ultra sophisticated party, may, during contract negotiations carried on by the counseled parties, rely on its counterparty to interpret the contract for it. Samsung, unsurprisingly, cites no controlling authority in support of that absurd proposition. It had its own sophisticated transactional counsel, and should have ensured that its understanding of the contracts came from its counsel, not its counterparty. A careful review of the relevant contracts’ termination provisions (i.e., section 7.2 of the AAL and section 11.2.1 of the LAA) would have clearly put Samsung on notice that MPEG’s contention that the AAL could be terminated in year 6 was demonstrably false, and that termination could not occur until year 10. A party, especially one as sophisticated as Samsung, is almost always presumed to have read a contract before signing it. Faced with similar facts – i.e., where the ordinary diligence of reading the contract would reveal the falsity of the subject representation – this court dismissed a fraudulent inducement claim, and that dismissal was affirmed by the Appellate Division.

The same outcome is warranted here. Samsung had the means to discover the falsity of MPEG’s misrepresentation (i.e., by carefully reading the contracts), but did not employ those means, and, instead, alleges that it blindly relied on MPEG’s misrepresentation. That fact would defeat an unsophisticated party’s fraud claim; it is without question an absolute bar to Samsung’s claim. Since Samsung would have become aware of the falsity of MPEG’ s alleged misrepresentation by reviewing the contracts, which it had in its possession for more than two months before deciding to execute them, Samsung’s fraud claim fails. Its reliance was not justified.

(Internal quotations and citations omitted).

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