Fraudulent Inducement: Materiality, Scienter and Justifiable Reliance

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Posted on: Aug 19 2024

In DirecTV, LLC v. Nexstar Broadcasting, Inc., 2024 N.Y. Slip Op. 04225 (1st Dept. Aug. 15, 2024) (here), the Appellate Division, First Department considered the viability of a fraudulent inducement claim and whether the plaintiff satisfied the elements of the claim. As discussed below, the Court held that the motion court “should have granted summary judgment in plaintiff’s favor on” this claim.[1]

DirecTV arose out of a retransmission consent agreement (“Agreement”) between DirecTV and Nexstar Broadcasting, Inc., whereby DirecTV would retransmit television signals of numerous television broadcast stations (“Stations”) owned by Nexstar for a three-year term, with an option to renew for a fourth year, and pay fees to Nexstar to do so. The Agreement was a renewal of a previous retransmission consent agreement between DirecTV, Nexstar, and two nonparties.

During the negotiations leading up to the Agreement, the parties agreed that DirecTV would pay an “Unlaunched Station Fee” for station WHAG, then an NBC affiliate. Under the Unlaunched Station Fee provision, DirecTV was not required to carry WHAG, but agreed to consider doing so in “good faith” and to pay license fees for WHAG based on a fixed number of subscribers. DirecTV maintained that it only agreed to include the Unlaunched Station Fee Provision in the Agreement because of Nexstar’s repeated assurances that WHAG was an NBC-affiliated station.

On June 30, 2016, WHAG lost its NBC affiliation and was not affiliated with any Big-6 Network after that date. Discovery showed that Nexstar first learned NBC would not extend the affiliation agreement for WHAG at least one year before the term expired. NBC did not want to extend or renew WHAG’s affiliation because NBC owned its own station in the Washington, D.C. market and wanted to eliminate duplicate affiliates operating in the same market.

On January 30, 2017, DirecTV exercised its option to extend the term of the Agreement to a fourth year. On July 1, 2017, Nexstar changed WHAG’s call letters to WDVM. In 2018, DirecTV was informed that WHAG had lost its NBC affiliation.

On June 26, 2019, DirecTV commenced the action, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and a judgment declaring that DirecTV had no obligation to pay the Unlaunched Station Fee after WHAG lost its Network affiliation and that Nexstar is not entitled to retain the Overpayment or continue receiving the Unlaunched Station Fee.[2] DirecTV amended its complaint to plead a cause of action for fraudulent inducement based on Nexstar’s fraudulent misrepresentations or omissions with respect to WHAG.[3]

Nexstar alleged two counterclaims in its amended answer for breach of contract predicated on DirecTV’s failure to pay the Unlaunched Station Fees and for a judgment declaring that DirecTV has no claim to the return of the Overpayment.

DirecTV moved for summary judgment on its first cause of action for fraudulent inducement, the second cause of action for breach of contract, and the fourth cause of action for a declaratory judgment. DirecTV also moved for summary judgment dismissing Nexstar’s counterclaims. Nexstar also moved for summary judgment on its counterclaims and for summary judgment dismissing the amended complaint.

DIRECTV’s First Cause of Action for Fraudulent Inducement

1. Material Misrepresentation or Omission

DirecTV alleged that Nexstar failed to disclose a material fact, namely WHAG’s loss of its NBC affiliation.[4]

The motion court found that any misrepresentation or omission as to station affiliation was material based on the terms of the Agreement. In that regard, the motion court cited to Section 7 of the Agreement, which stated that the “Stations’ affiliations as identified on Exhibit A are the essence of this Agreement.” Accordingly, the motion court found that Nexstar failed to raise an issue of fact as to materiality.

2. The Duty to Disclose

DirecTV maintained that Nexstar had a duty to disclose that WHAG would lose its NBC affiliation on two grounds. First, DirecTV characterized Nexstar’s repeated flaunting of WHAG’s NBC affiliation as an actionable half-truth, and that Nexstar had a duty to disclose the full facts of that affiliation. Second, DirecTV contended that Nexstar’s possession of superior knowledge regarding WHAG’s NBC affiliation triggered a duty to disclose.[5] Nexstar argued that it had no duty of disclosure under either the special facts doctrine or the misleading partial disclosure doctrine.[6]

The motion court found that Nexstar had a duty to disclose based on a misleading partial disclosure. The motion court found that Nexstar represented that WHAG was an NBC affiliate but withheld the fact that the affiliation with NBC would terminate on June 30, 2016, and would not be renewed. The motion court noted that despite Nexstar’s hope that NBC would reconsider its decision to end its affiliation with WHAG, the NBC Agreement definitively stated that Nexstar and NBC agreed the affiliation would not be extended, and Nexstar was aware of this fact. The motion court held that Nexstar never disclosed this fact even though it repeatedly represented that WHAG was an NBC affiliate in a top market. This representation, said the motion court, could conceivably give rise to a false impression that WHAG would remain an NBC affiliate throughout the Agreement’s term.

Moreover, the motion court held that the special facts doctrine was applicable, as information about WHAG was material to the transaction, and the end date for WHAG’s affiliation was not information that was easily or readily ascertainable with reasonable diligence.[7] The motion court found that information pertaining to the expiration date on the NBC Agreement was within Nexstar’s superior knowledge, and such information could not have been obtained from the publicly filed documents.

3. Scienter

DirecTV asserted that Nexstar intentionally omitted the fact that WHAG was losing its NBC affiliation to induce DirecTV to agree to the Unlaunched Station Fee. Nexstar argued that DirecTV could not demonstrate a fraudulent intent to deceive because the NBC Agreement contained a provision prohibiting its disclosure and because Nexstar had no notice that the duration of WHAG’s affiliation was important to DirecTV.

The motion court found that DirecTV’s proof on this element fell short of the clear and convincing evidence standard. The motion court found that deposition testimony had shown that Nexstar did not feel it was required to disclose that WHAG would no longer be affiliated with NBC after June 2016.

At the same time, said the motion court, Nexstar did not demonstrate its entitlement to summary judgment. The motion court pointed to Section 7 of the Agreement, which provided that the essence of the Agreement was the Stations’ affiliations – language that Nexstar had agreed to include in the Agreement. Thus, held the motion court, it could not be said that Nexstar was unaware that WHAG’s NBC affiliation was important to DirecTV. Nexstar’s failure to disclose when WHAG’s NBC affiliation would end, concluded the motion court, gave rise to a reasonable inference of an intent to defraud.

4. Justifiable Reliance

The motion court held that triable issues of fact existed as to the justifiable reliance element. First, said the motion court, it was unclear whether DIRECTV could have learned of the expiration date through the exercise of ordinary diligence. Contrary to Nexstar’s contention, said the motion court, Nexstar’s 2014 Form 10-k did not publicly disclose the identity of which of its stations would lose its affiliation with NBC in June 2016. Also, noted the motion court, Nexstar admitted that the expiration dates were redacted on the affiliation agreements filed with the FCC. The motion court explained that NBC would not have disclosed when WHAG’s affiliation with it would have ended. Nor was it clear, said the motion court, that had DIRECTV directly asked, Nexstar would have disclosed the termination date. Thus, concluded the motion court, the exercise of ordinary diligence would not have disclosed that fact.

DirectTV’s Second Cause of Action and Nexstar’s First Counterclaim for Breach of Contract

In its second cause of action, DirecTV alleged that Nexstar breached the Agreement by collecting the Overpayment to which it was not entitled; failing to inform DirectTV that WHAG had lost its Network affiliation and had changed its call letters to WVDM; withholding the Overpayment; and demanding additional amounts for the Unlaunched License Fee. In its first counterclaim, Nexstar alleged that DirecTV breached the Agreement by failing to pay Unlaunched Station Fees owed to Nexstar.

Reading the Agreement as a whole, the motion court concluded that the parties contemplated charging license fees only for those Stations that were affiliated with a Network or with CW or MNT, and that the Unlaunched Station Fee provision did not require DirecTV to pay license fees for an unaffiliated, independent WHAG. The motion court found support in Section 7 of the Agreement, which provided that a Station that changed network affiliations would be subject to license fees based on its new network affiliation. The motion court explained that Section 7 did not call for payment of license fees for Stations that lost their network affiliations during the term of the Agreement. The motion court noted that WHAG was an NBC affiliate when the Agreement was executed, and its term as an NBC affiliate ended on June 30, 2016. As such, WHAG was not affiliated with a Network, CW or MNT as of July 1, 2016. Thus, concluded the motion court, the Agreement did not require DirecTV to pay the Unlaunched Station Fee after July 1, 2016.

Accordingly, the motion court denied Nexstar’s motion for summary judgment on its counterclaims and summary judgment dismissing the complaint, granted DirecTV’s motion for summary judgment on its breach of contract cause of action and summary judgment dismissing the counterclaims, and denied DirecTV’s motion for summary judgment on its cause of action for fraudulent inducement.

The First Department’s Decision

On appeal, the First Department unanimously modified the motion court’s order to grant DirecTV’s motion for summary judgment on its fraudulent inducement cause of action and Nexstar’s motion for summary judgment dismissing DirecTV’s causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing, and otherwise affirmed the order.

Regarding the breach of contract claims, the Court held that the motion “properly granted summary judgment to plaintiff on its breach of contract claim and denied summary judgment to defendant on its breach of contract counterclaim based on a straightforward interpretation of the unambiguous terms of the parties’ agreement.”[8] The Court found that the motion court “simply interpreted the contract — as it must — in accordance with the document as an integrated whole.”[9]

Regarding DirecTV’s fraudulent inducement cause of action, the Court held that the fraud claim and breach of contract claims were not duplicative, noting that the fraudulent inducement cause of action “could provide a separate basis for recovery of Unlaunched Station Fees.”[10] The Court found that the damages sought by the fraudulent inducement claim did not overlap with the breach of contract claim:

The fraudulent inducement cause of action alleges that the Unlaunched Station Fee Provision was fraudulently induced and seeks all Unlaunched Station Fees that plaintiff made to defendant throughout the entire agreement, as well as attorneys’ fees and punitive damages. The breach of contract claim, by contrast, seeks only the Unlaunched Station Fee payments that plaintiff made after WHAG lost its NBC affiliation.[11]

The Court held that the motion court “should have granted summary judgment in plaintiff’s favor on its fraudulent inducement cause of action.”[12]

The Court found that DirecTv adequately alleged scienter and justifiable reliance, noting that there was “simply no issue of fact as to either defendant’s intent to defraud or plaintiff’s justifiable reliance on the material misrepresentation.”[13]

The Court found that “there was unrebutted testimony from two NBC employees who testified that NBC advised defendant that there would be no further extensions to WHAG’s NBC affiliation beyond its June 30, 2016 termination, and that NBC never suggested to defendant that it might reconsider this decision.”[14] “Thus,” concluded the Court, “defendant knew that the termination of the NBC affiliation was a fait accompli and intentionally concealed this information from plaintiff.”[15]

Further, the Court held that DirecTV reasonably relied on Nexstar’s representations about WHAG becoming an NBC affiliate.[16] The Court explained that

defendant’s 2014 Form 10-K, while publicly filed on February 27, 2015 and available to plaintiff at the time the 2015 agreement was being negotiated, did not identify the specific stations that would lose their NBC affiliations. Rather, defendant misrepresented in these documents that defendant expected the network affiliations of its stations to be renewed. As plaintiff did not have access to the relevant information, it reasonably relied on the fraudulent representations of defendant to its detriment.[17]

___________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Slip Op at *2.

[2] DirecTV had overpaid a non-carriage fee, which was calculated from the date that WHAG lost its Network affiliation to August 2018 (“Overpayment”).

[3] Plaintiff alleged that Nexstar represented WHAG was an NBC-affiliated Station on multiple occasions; the representations were materially incomplete or were misleading partial disclosures, as Nexstar was aware WHAG would lose its affiliation with NBC on July 1, 2016; Nexstar was aware that NBC was unwilling to renew WHAG’s affiliation; Nexstar leveraged WHAG’s affiliation with NBC to induce DirecTV to agree to the Unlaunched Station Fee provision based on a misleading or materially incomplete representation that WHAG would continue its affiliation; Nextstar was aware DirecTV was acting on the basis of these misleading statements; DirecTV justifiably relied on Nexstar’s representations, even though Nexstar knew DirecTV did not have the capacity to launch or carry that Station; and DirecTV was damaged as a result.

[4] A material fact is one that goes to the “very essence of the bargain” (Junius Const. Corp. v. Cohen, 257 N.Y. 393, 400 (1931)), and is one that is likely to influence a plaintiff’s decision-making (Gulf Ins. Co. v. Transatlantic Reins. Co., 69 A.D.3d 71, 96 (1st Dept. 2009); 2 Fifth Ave. Tenants Assn. v. Abrams, 183 A.D.2d 577, 578 (1st Dept. 1992) (stating that omitted material is important if the person viewing it would have seen it as significantly altering the total mix of available facts)). “A fact may not be dismissed as immaterial unless it is ‘so obviously unimportant … that reasonable minds could not differ on the question of [its] importance.” Swersky v. Dreyer & Traub, 219 A.D.2d 321, 328 (1st Dept. 1996), rearg denied, 232 A.D.2d 968 (1st Dept. 1996), appeal withdrawn, 89 N.Y.2d 983 (1997) (quoting Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 45 (2d Cir. 1991)). Materiality is normally an issue for the jury to determine. See Brunetti v. Musallam, 11 A.D.3d 280, 281 (1st Dept. 2004).

[5] When a claim for fraud is predicated upon an act of concealment or an omission, the plaintiff must establish the same elements for fraud and also show that the defendant had a duty to disclose material information but failed to do so. Gansett One, LLC v. Husch Blackwell, LLP, 168 AD3d 579, 579 (1st Dept. 2019) (citing Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 179 (2011). An affirmative duty of disclosure arises when the parties are in a confidential or fiduciary relationship. See Dembeck v. 220 Cent. Park S., LLC, 33 A.D.3d 491, 492 (1st Dept. 2006). Therefore, “[a]bsent a confidential or fiduciary relationship, there is no duty to disclose, and [a defendant’s] mere silence, without identifying some act of deception, does not constitute a concealment actionable as fraud.” FNF Touring LLC v. Transform Am. Corp., 111 A.D.3d 401, 402 (1st Dept. 2013) (internal quotation marks and citation omitted).

[6] A misleading partial disclosure gives rise to a claim for fraud when a party is dependent upon the defendant for relevant facts, and “if the withheld facts are proven to have been material.” Juman v. Louise Wise Servs., 254 A.D.2d 72, 74 [1st Dept 1998].) Indeed, “once a party has undertaken to mention a relevant fact to the other party it cannot only give half of the truth,” particularly where only a partial or ambiguous statement has been made. Brass v. American Film Tech., Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citing Junius, 257 N.Y. at 400; see also Restatement (Second) of Torts, § 529 (“[a] representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation”).

[7] “Under the special facts doctrine, a duty to disclose arises where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky, 219 A.D.2d at 327 (internal quotation marks and citations omitted). The party invoking the doctrine must demonstrate that “the material fact was information peculiarly within [the] knowledge of [the other party],” and “the information was not such that could have been discovered by [the party invoking the doctrine] through the exercise of ordinary intelligence.” Jana L. v. West 129th St. Realty Corp., 22 A.D.3d 274, 278 (1st Dept. 2005) (internal quotation marks and citation omitted).

[8] Slip Op. at *2.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id. at *2-*3.

[15] Id. at *3.

[16] Id.

[17] Id.