The Failure to Plead Fraud with Particularity Results in the Dismissal of a Fraudulent Inducement Claim

• Posted on: Mar 18 2019

Stephen King is quoted as saying that “the truth is in the details. No matter how you see the world …, the truth is in the details.” This quote fairly sums up the pleading requirement that all plaintiffs must satisfy when alleging a fraud. They must provide sufficient details of the alleged misconduct to support a reasonable inference that the allegations of fraud are true.

In Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC, 2019 N.Y. Slip Op. 30603(U) (Sup. Ct., N.Y. County Mar. 12, 2019) (here), Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, dismissed a fraudulent inducement claim because the plaintiff, Q Semiconductor Inc. (“Q”), failed to provide the details necessary to support a reasonable inference that a fraud occurred. In other words, Q failed to plead fraud with particularity as required by CPLR § 3016(b).

Pleading Fraud with Particularity

To state a claim for fraud, a plaintiff must allege a material misrepresentation of 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 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id. Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”).

Although, CPLR 3016 (b) provides that “the circumstances constituting the [fraud] shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc., 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286 (1987).

Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC

Background

Q designed a semiconductor chip which, it believed, could be manufactured in a more cost-effective process than those in use. To bring its design to market, Q sought a manufacturer with the capability to fabricate the chip as intended.  One manufacturer that was interested in working with Q was Defendant, GlobalFoundries US 2 LLC (“GF2”).

GF2 represented it had a mature, “qualified”, “130 nm RF SOI EDMOS” manufacturing process on 300mm wafers that was in use for other large customers (the “EDMOS Process”) and was capable of meeting Q’s manufacturing needs in the specified time frame. GF2 also represented that it did not receive any complaints from its other customers about the EDMOS Process.

Q entered into an agreement with GF2 on October 31, 2016, for the manufacture of Q’s chips (the “Agreement”). The Agreement was later amended on November 15, 2016 (the “Amendment”).

As it turned out, the EDMOS Process was not capable of manufacturing the chips. As a result, GF2 had to continually tweak the process to resolve the problems. At the same time, however, GF2 allegedly attempted to create a new manufacturing process. As alleged, GF2 failed to disclose the foregoing. Slip Op. at **1-2. Notwithstanding, Q alleged that throughout the relationship, Defendants represented that the EDMOS Process was qualified and tested. Id. at *2. However, alleged Q, “[i]t was not.” Id.

Q placed an order and sent payment to defendant, GlobalFoundries Singapore PTE LTD (“GFS”), which was responsible for doing the actual manufacturing.

GF2 shipped the chips on March 30, 2017. However, because the chips had to be cut, Q did not immediately test the chips. According to the complaint, when Q did test the chips, “[n]one of the chips worked.” Id. at *2.

On April 9, 2017, GF2 allegedly admitted that it learned the chips did not work. Plaintiff contended that GF2 knew earlier. On April 26, 2017, GF2 informed Q that the chips would not work, “admitting it had skipped a step in the testing process which would have revealed the problem.” Id.

In September 2017, GF2 announced a new manufacturing process. The announcement indicated that the EDMOS Process used for the Q chips had not been qualified and caused Q to believe that GF2 had used the Agreement with Q to improve its new process, so it could get bigger jobs from Q’s competitors. Id.

As a result of the failure of the manufacturing process, Q allegedly missed the window to sell itself for millions of dollars, “instead having to have a fire sale of its Intellectual Property.” Id. As Q was unable to fill its orders with the non-working chips, it was unable to close a pending M&A deal or obtain more investment funding. Id.

Q brought suit, asserting three causes of action: fraud, breach of contract and breach of express warranty. Id.

Defendants moved to dismiss the complaint. With regard to the fraud claim, GF2 argued, among other things, that Q failed to allege facts supporting the claim with the specificity required under the CPLR. To that end, GF2 argued that Q failed to allege with particularity the “date, time or place, or” the identity of the speaker of the alleged false statements. Id. at *7.

The Court’s Decision

The Court agreed with Defendants and dismissed the fraudulent inducement claim for failure to plead fraud with particularity.

The Court held that the allegations concerning the EDMOS Process were vague, noting that Q failed to identify the specific statements alleged to be false and the speaker of those representations:

Plaintiff states only generally that the representations about the maturity of the manufacturing process were made in August of 2016 by GF2. While plaintiff names two individuals with whom it had discussions about the process to be used for manufacturing, it does not claim either of those individuals made representations as to the EDMOS Process’s maturity.

Id. at *9.

The Court went on to say that:

The person making the representation, where, how, and when are not alleged, only that GF2 made representations about the maturity of the Process. It is not specifically alleged that the representations were made in August of 2016, but instead that Q approached GF2 and began discussions at about that time. The fact that Q does business in California does not make an allegation that the representation was made in any particular place, and the fact that the Agreement was signed in Laguna Hills, CA, is irrelevant to the details of when and how the misrepresentations were made.

Id. at *10.

Accordingly, the Court dismissed the fraud claim “for failure to state a claim with sufficient specificity, as required by CPLR 3016.” Id.

Takeaway

As noted above, “the truth is in the details.” In Q Semiconductor, the Court made it clear that the details of an alleged fraud matter. Although the particularity standard is not as rigorous under the CPLR as it is under the Federal Rules of Civil Procedure, a plaintiff pleading fraud must, nevertheless, provide sufficient details of the alleged misconduct to support a reasonable inference that a fraud occurred. [This Blog wrote about the difference here.] This means that the plaintiff should describe the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). In the absence of such detail, as in Q Semiconductor, even under the reasonable inference standard of the CPLR, a plaintiff cannot maintain a fraud claim.

Tagged with: Business Litigation, Commercial Litigation, CPLR 3016(B), Fraud, Fraudulent Inducement, Pleading Fraud with Particularity