False advertising, though broader than fraudulent inducement, requires damages

Persaud Companies, Inc. v. The IBCS Group, Inc., 2011 WL 1542298 (4th Cir.)

The court of appeals reversed and remanded a grant of summary judgment in favor of Persaud on Persaud’s fraudulent inducement and false advertising claims.

Persaud signed a $3.5 million subcontract for work on a Texas border fence, which required Persaud to post payment and performance bonds. Its bond brokers recommended that the company obtain bonds from Edmund Scarborough, an individual surety, and his risk management company, IBCS Group. During negotiations, Persaud's brokers suggested that Persaud have the general contractor pre-qualify the bonds, ensuring that the bonds would be accepted. Persaud's brokers also asked IBCS how it would respond if the general contractor rejected the bonds. IBCS referred them to its brochure about Scarborough's bonds, which said, “We intend to pre-qualify all bonding requests to minimize the possibility of bond rejection. However, we will reverse a transaction if a bond is promptly rejected.”

Persaud’s agreement with Scarborough stated that the full initial fee was earned on execution of the bond and wouldn’t be refunded, waived, or cancelled for any reason. The agreement also stated that it couldn’t be modified orally.

The general contractor rejected the bonds, concerned over Scarborough’s assets, but waived the bond requirement for Persaud (with apparently some penalty for Persaud). Persaud timely requested a refund, and IBCS refused, relying on the agreement. “Scarborough later indicated that, although he had granted more than twenty refunds in the past, he did not grant Persaud a refund because (1) he was led to believe the bonds would be accepted; (2) Persaud retained the subcontract; and (3) Persaud did not have to purchase replacement bonds.”

Persaud sued. The district court dismissed its breach of contract and fraud claims, but found in favor of Persaud on fraudulent inducement and false advertising, awarding damages of $121,557, the total amount of the bond premium.

A false representation of a material fact that induces a contract, on which a purchaser has a right to rely, is ground for recission. The plaintiff must prove by clear and convincing evidence: (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled. However, because Persaud had access to the agreement prior to signing it, and thus could read the refund provisions, the marketing brochure’s refund promise couldn’t have reasonably induced Persaud into signing. “Given the unequivocal contract language, Persaud's reliance on the statements in the brochure was unreasonable.” When both parties have equal access to the truth, if one relies on the other who has an interest in misleading it, the law will not help.

Even though Scarborough had given more than twenty refunds over the past several years, he was legally free to enforce or waive the contractual provision. The district court was ordered to enter summary judgment for IBCS on this claim on remand.

Virginia law also bars false advertising: "any promise, assertion, representation or statement of fact which is untrue, deceptive or misleading" if the advertisement is made with the "intent to sell" or "to induce the public" to enter into an obligation. Unlike fraud, a false advertising claim can target a statement as to future events or other promise. A plaintiff must suffer loss in order to recover damages. The district court found that the brochure was an ad and was misleading, but didn’t find that Persaud had suffered loss. The court of appeals agreed that the brochure was, at a minimum, a misleading or deceptive ad, but remanded for an assessment of whether the ad caused actual injury.