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Reasonable Reliance: From a Punchline to a Legal Defense

National Lampoon’s Animal House is, by most measures, one of the most-appreciated comedy films ever. Even accounting for later thoughtful criticism, it routinely shows up at or near the top of all-time movie lists. Its screenplay is so well known and oft-quoted that when John Belushi shows up on the Jumbotron during a baseball game, exhorting the losing team’s home crowd with“Nothing is over until we decide it is!”, not only does it feel right, but you can hear large swaths of the crowd follow up with the next line on their own.

Later in the movie, Pledge Flounder breaks down in tears following the inevitable (and near-total) destruction of his brother’s car. In what must stand as one of the worst attempts at empathetic consolation ever committed to film, Otter (one of the car’s primary tormentors) responds to Flounder with “You f*cked up… you trusted us!”

It is a testament to the ingenuity of lawyers that this quote has gone from a punchline to a legal defense.

Reasonable Reliance on Misrepresentations

In fraud litigation, the plaintiff typically must prove that he or she reasonably relied on the defendant’s misrepresentations in order to prevail. Defendants, not surprisingly, ask judges and juries to pay particular emphasis to the precise mechanics of the alleged reliance.

Often, this defense involves the defendant arguing that everything he ever said to the plaintiff was worthless sales patter and that the plaintiff was out of his mind if he took any of the defendants’ representations seriously.

That prospectus? All puffery.

The last six months of sales reports we gave you? Not predictive of future results.

What the sales rep told you? He was speaking generally.  In short: “You f*cked up, plaintiff! You trusted us!”

Does the Reasonable Reliance Defense Work?

Sure. The law on reasonable reliance is well established, and the burden is on the plaintiff to prove the reasonableness of his or her reliance. When the plaintiffs fails, the fraud claim iwill be dismissed. In Brown v. Louisiana Pacific Corp., for example, decided this past April, the Eighth Circuit affirmed dismissal of a class action complaint that alleged fraud against a siding-and-trim manufacturer, holding that the plaintiff failed to show reasonable reliance. The plaintiff’s reliance argument was based on the manufacturer’s advertising, which the plaintiff alleged contained misrepresentations about the quality of the materials used in his house.

In particular, the plaintiff argued that his contractor relied on those advertisements, but the contractor could not identify any particular ad on which he relied, and the plaintiff’s lawyer at oral argument admitted that the contractor had no memory of any particular ad.

The contractor may have relied on the manufacturer’s ads generally in forming his opinion about the product, and he may have known the product generally from his years of experience, but that sort of reliance was not enough to support a fraud claim. Or, if you like, the contractor screwed up; he trusted the manufacturer.

The Eighth Circuit’s logic here was solid. After all, Flounder was a moron for trusting the older guys with his car. Otter’s rejoinder to him is funny not because Otter was wrong but because he was right. With good reason, litigation requires a precision not often present in the day-to-day, and a generalized reliance on a corporation’s public image created by advertising typically does not support a claim for common law fraud.

 Sadly, Otter’s next bit of advice was not so insightful. He tells Flounder that they can make up a complete fabrication about what happened to the car and then commit insurance fraud in order to have the car replaced. Flounder listens intently, then asks, “Will that work?” Otter replies, “Hey, it’s gotta work better than the truth.”

Turns out there is a difference between pre-med and pre-law after all.

 

About Adam Hirsch

Adam represents a wide variety of clients, ranging from individuals to small business owners to large corporations. He has a particular focus on business and investment disputes, and has experience litigating such disputes in numerous state and federal courts. He has also represented business clients in arbitration and mediation proceedings. Adam also represents employees in…

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