Omission Case Dismissed Because Defendants Had No Duty to Disclose

• Posted on: Jan 23 2023

By: Jeffrey M. Haber

Typically, when a plaintiff claims to have been defrauded, he/she typically argues that the defendant made an affirmative misrepresentation of fact. Fraud does not, however, always concern an affirmative statement. Sometimes a person can perpetrate a fraud through the omission of a material fact. 

Where fraud by omission is claimed, the plaintiff must allege that the defendant had a duty to disclose the omitted fact. A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter;¹ (2) there is a fiduciary relationship between the plaintiff and defendant;² or (3) the defendant possesses “special facts” about the matter not known by the plaintiff.³

A fraud by omission claim is not sustainable where information allegedly withheld is ascertainable through publicly available sources.⁴ Nor is an omission case sustainable where the omitted information could have been discovered by the plaintiff through the exercise of ordinary intelligence.⁵ Both of the foregoing circumstances will negate application of the special facts doctrine.

Finally, as in a fraud by misrepresentation case, the plaintiff must satisfy the other elements of the claim – namely, intent to defraud, justifiable reliance and injury. And the plaintiff must do so with particularity.⁶ 

[Ed. Note: we previously wrote about fraud by omission, or fraudulent concealment, e.g., here and here.]

The foregoing principles were examined by the Appellate Division, First Department in HOV Servs., Inc. v. ASG Tech. Grp., Inc., 2023 N.Y. Slip Op. 00237 (1st Dept. Jan. 19, 2023) (here). 

[Ed. Note: the factual discussion below comes from the motion court’s decision and the parties’ briefing on appeal.]

HOV involved a software license dispute between two companies, Defendant ASG Technologies Group, Inc. (“ASG”) and Plaintiff HOV Services, Inc. (“HOV”). In 2005, the parties entered into a master Software License Agreement (the “2005 SLA”), which granted HOV a license to use ASG’s software to provide Application Service Provider (“ASP”) services to its customers, pursuant to the license terms set forth in the 2005 SLA and in any amendments thereto (each such amendment was designated an “Exhibit”). The parties subsequently amended the 2005 SLA in 2015 and 2018, by “Exhibit D” and “Exhibit E”, respectively. Pursuant to Exhibit D, HOV licensed the ASG software for a three-year term (e.g., September 30, 2015 through September 29, 2018). Pursuant to Exhibit E, HOV licensed the ASG software for a five-year term (e.g., September 30, 2018 through September 29, 2023). Each Exhibit included an express, ongoing contractual obligation for HOV to refrain from using ASG’s software to provide ASP services to ASG’s current customers (the parties referred to these provisions as the “Overlapping Customer Prohibitions”).

Several months before the Exhibit D license term was set to expire, ASG contacted HOV to initiate discussions about entering a new software license agreement – what would later become Exhibit E. HOV did not respond to ASG. As alleged, at the time of ASG’s overtures, and unknown to ASG at the time, HOV was in the process of developing competing software and migrating off of ASG’s software, including efforts that were accelerated by HOV’s reverse-engineering of the software. HOV allegedly hoped to complete its migration before the Exhibit D license expired, which would have obviated its need to renew the licenses.

In late August and early September 2018, HOV contacted ASG to discuss a renewed license agreement – as alleged, HOV did not complete its migration. Following negotiations among the parties’ executives, HOV ultimately agreed to the terms of Exhibit E. In reliance on HOV’s execution of Exhibit E and promise to both pay for and abide by the stated license rights, ASG allegedly provided HOV with license keys to enable use of the software during the Exhibit E license term. HOV allegedly used the license keys and continued using the software during the Exhibit E license term.

Following litigation in the Southern District of New York, HOV filed a complaint in the Supreme Court, New York County, asserting breach of contract, breach of the implied covenant of good faith and fair dealing in connection with the negotiation of the Exhibit E renewal, fraudulent inducement, violation of New York General Business Law (GBL) § 349, and a declaratory judgment. 

ASG moved to dismiss certain of HOV’s causes of actions and affirmative defenses. Thereafter, the parties each filed a motion for partial summary judgment. On January 27, 2022, the motion court granted in part and denied in part each motion. With respect to ASG’s motions, the motion court dismissed HOV’s causes of action for fraudulent inducement and violation of GBL § 349; dismissed HOV’s defense of waiver and HOV’s defense of equitable estoppel as to Exhibit D; and excluded HOV’s purported reverse-engineering expert. 

The First Department affirmed the dismissal of the fraudulent inducement claim, among others. We address the fraudulent inducement claim and its dismissal.

The Court held that “Plaintiff’s fraudulent inducement claim and fraud defense to enforcement of the overlapping customer restrictions were properly dismissed”.⁷ The Court found that HOV failed to allege a duty to disclose the existence of overlapping customers.⁸ The Court explained that “[a]lthough issues of fact exist regarding defendant’s knowledge of the existence of overlapping customers, plaintiff’s claim must nonetheless fail because it is premised on an alleged omission and the parties were not in a fiduciary relationship” requiring disclosure of same.⁹ The Court also found that in addition to the absence of a fiduciary relationship, there was no ”contractual duty to provide a customer list” to HOV.¹⁰ 

The Court also rejected HOV’s “reliance on the ‘special facts’ doctrine”, finding that “plaintiff was equally capable of discovering the existence of overlapping customers”.¹¹ 

Takeaway

Where a party alleges fraud (or fraudulent inducement) based on an omission of information, rather than an affirmative misrepresentation, a special relationship (e.g., a fiduciary relationship) is required to state a claim. However, in the absence of a special relationship, a party may still allege fraud where there are special facts such that one party had superior knowledge of certain information, not readily available to the other party. In HOV, there no was fiduciary relationship between HOV and ASG, as the parties dealt with each other at arm’s length in a commercial transaction. The special facts doctrine was also unavailable to HOV because the information alleged to be withheld (i.e., the existence of overlapping customers) could be discovered by HOV with reasonable diligence. With no duty to disclose, HOV could not withstand the challenge to its fraudulent inducement claim. 

Footnotes

1. Bank of Am., N.A. v. Bear Stearns Asset Mgmt., 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013).
2. Balanced Return Fund Ltd. v. Royal Bank of Canada, 138 A.D.3d 542, 542 (1st Dept. 2016).
3. Pramer S.C.A. v. Abaplus Int’l Corp., 76 A.D.3d 89, 99 (1st Dept. 2010). “The ‘special facts’ doctrine holds that ‘absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’” Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc., 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied, 29 N.Y.3d 913 (2017) (quoting, Pramer, 76 A.D.3d at 99).
4. Northern Group Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 135 A.D.3d 414 (1st Dept. 2016).
5. Black v. Chittenden, 69 N.Y.2d 665, 669 (1986); Schumaker v. Mather, 133 N.Y. 590, 596 (1892).
6. CPLR § 3016(b).
7. Slip Op. at *2.
8. Id.
9. Id. (citing, Cobalt Partners, L.P. v. GSC Capital Corp., 97 A.D.3d 35, 42 (1st Dept. 2012)).
10. Id.
11. Id. (citing, Silver Point Capital Fund, L.P. v. Riviera Resources, Inc., 198 A.D.3d 432, 433 (1st Dept. 2021); Jana L. v. W. 129th St. Realty Corp., 22 A.D.3d 274, 277-278 (1st Dept. 2005)).

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.