THE BLOG

Literal Truth and Claims of Fraud

08/01/2013 02:03 pm ET | Updated Oct 01, 2013
  • Brad Reid Senior Scholar, Dean Institute for Corporate Governance and Integrity, Lipscomb University

The U.S. Court of Appeals for the Sixth Circuit on July 30, 2013, dismissed a suit by twelve law school graduates against their law school (MacDonald v. Thomas M. Cooley Law School). The graduates alleged that the school provided misleading employment statistics when it truthfully reported "percentage of graduates employed" but did not distinguish between legal and non-legal employment. The Court decided that literal truth prevented a claim based upon the subjective belief that the statistic only referred to legal employment.

Common law fraud requires proof of an intentionally false statement of a material fact that produces justifiable reliance and injury. The Court declined to find a false statement. Additionally the graduates' failure to inquire concerning the precise meaning of the statement precluded a claim for "silent fraud." Nor could the graduates prove reasonable and justifiable reliance to support a claim for fraudulent misrepresentation.

There are many judicial decisions stating that "literal truth" may be fraudulent within the context of a transaction. While few decisions apply the logic of the Sixth Circuit, one must not assume anything when contemplating a transaction. The Sixth Circuit's decision additionally illustrates how seldom assertions of unfairness prevail in Court. There is strong judicial support for freedom of contract and judicial reluctance to rewrite transactions, especially when no literal falsehood occurred. Assertions of implied falsehood are weaker than proof of an affirmatively stated falsehood.

"Unconscionable" provides infrequent legal relief from grossly unfair and harshly one-sided agreements. The judiciary is reluctant to find unconscionable conduct when an agreement is made by an educated individual. Courts frequently impose a duty of due diligence and inquiry in these circumstances. Another problem in many lawsuits involves "puffery," a general subjective statement incapable of proof and consequently not considered fraudulent. Thus, statements such as "best value" and a "good place to raise children" were held to be puffery (Slack v. Suburban Propane and Bonnieview Homeowners Ass'n. v. Woodmont Builders).

As a footnote, it is noteworthy that the American Bar Association, an accrediting agency for law schools, recently tightened the standards for statistical reporting. Nevertheless, in the absence of a specific stature or regulation, one should carefully inquire about facts, assuming nothing, in order to reliably assert a claim of fraud.