X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
In the wake of layoffs in various sectors of the economy, terminated employees — who are generally employed “at-will” and without recourse against their employers — are increasingly looking at statements made to them at the time of their hire to determine whether they have been victims of fraud. In general, statements of what an employer will do in the future give rise only to a breach of contract claim when those promises aren’t honored. An employer’s false representation of present fact to an employment applicant, however, may give rise to a separate claim in tort for fraudulent inducement. Employees can recover for fraudulent statements that induce them to accept employment with a new employer by showing that: (1) the employer made a material false representation, (2) the employer intended to defraud the plaintiff thereby, (3) the employee reasonably relied on the representation, and (4) the employee suffered damage as a result of such reliance. Bridgestone/Firestone Inc. v. Recovery Credit Servs., 98 F.3d 13, 19-20 (2d Cir. 1996) (citations omitted). In light of the possibility that an employee may bring an action like this, it would be wise for the legal practitioner to review the recent evolution of the tort of fraudulent inducement. THE ‘JACKSON’ CASE The breakthrough case that cemented fraudulent inducement as a viable claim in the employment context was Stewart v. Jackson & Nash, 976 F.2d 86 (2d Cir. 1992). In that case, plaintiff, an attorney in the environmental law department of a prominent New York law firm, was recruited to the Jackson & Nash law firm. In reliance on Jackson & Nash’s promise that plaintiff would head its new environmental law department and serve the firm’s existing large environmental law client, plaintiff joined Jackson & Nash. Once plaintiff got to Jackson & Nash, however, she was given general litigation assignments. She also discovered there was never a large environmental law client and that there was no developing environmental case work. She was terminated just over two years after her hire. Plaintiff sued Jackson & Nash for both negligent misrepresentation and fraudulent inducement. The district court granted Jackson & Nash’s motion to dismiss both claims. The court reasoned that plaintiff’s fraud claim arose from her termination from the firm and dismissed the claim on the basis of New York’s seminal case on employment at-will, Murphy v. American Home Prod. Corp., 58 N.Y.2d 293 (1983) (holding that because at-will employees may be freely terminated “at any time for any reason or even for no reason,” they can neither challenge their termination in a contract action nor bootstrap themselves around the employment-at-will rule bar by alleging that the firing was in some way tortious). The district court also dismissed plaintiff’s negligent misrepresentation claim because she had not shown that Jackson & Nash owed her a fiduciary duty, the prerequisite to a negligent misrepresentation claim. On appeal, the 2nd U.S. Circuit Court of Appeals affirmed the district court’s dismissal of the negligent misrepresentation claim but reversed as to the fraud claim. The 2nd Circuit rejected the district court’s characterization of the fraud claim as “based on facts arising out of her termination,” but rather found that plaintiff’s injuries commenced well before she was terminated and were, in several important respects, unrelated to it. Noting that the misrepresentations caused plaintiff to leave a firm with an environmental practice and spend two years at one in which she was largely unable to work in her chosen specialty, the resulting damage to her career development as an environmental lawyer was independent of her later termination. Because plaintiff’s career objective — continuing to specialize in environmental law — was thwarted and grossly undermined during her employment with Jackson & Nash, her cause of action was distinguished from the fact of her termination. The 2nd Circuit reasoned that “although Murphy precludes an award of damages for injuries caused by [plaintiff's] termination, it does not prevent her from recovering for injuries that resulted from her reliance on the defendants’ false statements.” The Stewartcourt concluded that to the extent the misrepresentations were of present fact, they were actionable under a theory of fraudulent inducement. Moreover, the court explained that representations of present fact include promises of future action if the declarant had no intention of fulfilling the promise at the time it was made. RECENT DEVELOPMENTS In Kissner v. Inter-Continental Hotels Corp., 1998 U.S. Dist. LEXIS 9248 (S.D.N.Y. June 24, 1998), Inter-Continental Hotels hired Mark Kissner as a general manager of a luxury resort facility under construction in Bali, Indonesia. Three months after he was hired, however, Kissner was transferred by Inter-Continental to Manama, Bahrain, to manage a hotel. Kissner preferred an assignment in a different part of the world, and he expressed concern with the Bahrain transfer. Nonetheless, he accepted the reassignment to Bahrain with the understanding that he was receiving a promotion that would be a step toward becoming a Regional Vice President. Four months after his transfer to Bahrain, Kissner was fired. The judge denied Inter-Continental’s motion to dismiss his fraudulent inducement claim, finding that Kissner sufficiently alleged that the representation regarding the opportunity for promotion was known to be false at the time it was made and that Inter-Continental had no intention of performing on its promise. In Hyman v. International Business Machines Corp., 2000 U.S. Dist. LEXIS 15136 (S.D.N.Y. Oct. 17, 2000), IBM created a wholly owned subsidiary, ESC, to perform its staff recruitment. Plaintiffs Richard Hyman and Philip Palece, who had each been recruiters with IBM for over 30 years, were told by ESC that the company had signed a five-year contract with IBM. Relying on that representation, plaintiffs left IBM to work for ESC, performing substantially the same functions that they had performed at IBM. After two years, however, IBM reversed course, dissolved ESC and returned the recruiting function — but not plaintiffs — to IBM. Plaintiffs alleged that they were fraudulently induced to leave their jobs at IBM based on ESC’s false representation of the existence of a five-year contract between the two companies. The judge held that plaintiffs had successfully pleaded a cause of action for fraudulent inducement. Plaintiffs were not seeking to recover for their termination from ESC and its consequent impact on their careers and pocketbooks, but rather alleged that they were induced to leave secure positions at IBM by false representations, and that this inducement led to injuries. The judge noted that plaintiffs made a viable claim for injuries from the loss of security and other benefits attendant to continued employment at IBM. In Doehla v. Wathne Limited Inc., 2000 U.S. Dist. LEXIS 9913 (S.D.N.Y. July 17, 2000), the judge denied a motion to dismiss Henry Doehla’s claim against a company that hired him as its president. Doehla claimed that his new employer — a company that fired him after only three months — fraudulently misrepresented and concealed its financial health and profitability as well as the scope of what his duties would be as president. In reliance on the misrepresentations and concealments, Doehla had resigned from his position as president of another manufacturer, forgoing a lucrative long-term contract. The judge found that Doehla’s claim was actionable because the representations of the company’s then-present financial conditions were representations of present fact. Moreover, the judge rejected the company’s defense that Doehla’s claim was not compensable under New York’s “out of pocket” rule. That rule provides that damages are to be calculated to compensate for what is lost because of the fraud, not to recover profits that would have been realized in the absence of fraud. The judge reasoned that Doehla might be able to demonstrate an actual pecuniary loss caused by the fraud in the inducement since he passed on a long-term employment contract with his former employer to take the new position. In Jelks v. Citibank, N.A., 2001 U.S. Dist. LEXIS 381 (S.D.N.Y. Jan. 22, 2001), Gloria Jelks claimed that she was hired by Citibank as a technical specialist. Her job duties were eliminated when the company decided to freeze the data warehouse that she was hired to modify. Jelks claimed that Citibank had already decided to discontinue use of the data system when it hired plaintiff and purposely concealed this fact during her employment so that she would stay. The judge rejected Jelks’ fraudulent inducement claim, noting that she did not allege that any specific misrepresentations were made to her prior to her commencing employment. Jelks’ claim that she was hired for a job that didn’t exist was insufficient to state a cause of action according to the judge, since “a job offer is by definition central, not collateral, to the employment agreement itself, and accordingly a hidden intention not to perform gives rise to a breach of contract claim, not a fraud claim.” Moreover, as an at-will employee, Jelks was not promised employment for any specific period of time and could not reasonably rely on a mere promise of employment. In any event, the judge concluded that Jelks could not avail herself of the fraudulent inducement cause of action because she failed to specifically allege any damages separate from damages arising out of the termination of her job, such as damage to career growth, loss of reputation, or loss of benefits and security. In Butvin v. DoubleClick Inc., 2001 U.S. Dist. LEXIS 2318 (S.D.N.Y. March 7, 2001), Nikolay Butvin was offered employment as a computer software engineer at DoubleClick, with the promise of a $46,000 salary and stock options for 13,000 shares. Butvin claimed DoubleClick told him that his interest in the stock options was indefeasible and that he would not have accepted the job absent such promise. One day before DoubleClick’s stock began trading on NASDAQ, Butvin was fired. When he later attempted to exercise his options, he was denied because the options were not vested at the time of his termination. Butvin alleged that DoubleClick promised stock options and purposefully concealed the Stock Option Plan (which explained the vesting procedure), and thus fraudulently induced him to work for DoubleClick. Butvin asserted that he worked long, intensive and irregular hours and had forgone other lucrative employment opportunities in reliance on DoubleClick’s promise. The judge dismissed the fraud claim, finding that Butvin was not justified in relying on DoubleClick’s allegedly fraudulent representations. Plaintiff’s employment letter specifically referenced the fact that stock options would be granted in accordance with the stock option plan. Plaintiff was therefore on notice from the time he began employment that the stock option plan controlled his interests. Furthermore, the option agreement and amendment agreement, which Butvin acknowledged receiving, both refer to and incorporate the stock option plan. The judge explained, “The law simply does not protect someone who willingly signs an agreement which references and incorporates other controlling documents which he or she has not seen.” LESSONS LEARNED George Bernard Shaw once remarked that “the liar’s punishment is, not in the least that he cannot be believed, but that he cannot believe anyone else.” In the context of employment offers, you can add the tort of fraudulent inducement to that punishment. The pre-employment negotiations between employers and potential employees are particularly susceptible to hyperbole. In an economic climate of belt tightening and layoffs, terminated employees will be eager to uncover any cause of action that may support a claim for damages. Given the increasing exposure to fraudulent inducement claims, employers must be vigilant that their pre-offer employment discussions do not misrepresent existing facts and create unintended liability. Laurie Berke-Weiss is a partner in Berke-Weiss & Pechmanin New York.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.