A Wrong Turn in the Law of Deceit
Citation: 106 Geo L.J. (2018)
This Article discusses how the requirement of justifiable reliance in the law of deceit came to be turned into a requirement of reasonable reliance. Courts can and do use the reasonable reliance requirement to dismiss on the pleadings deceit claims involving what the court considers to be unreasonable reliance by a plaintiff. This was the fate of most of the claims against lower-tier law schools for publishing misleading employment statistics. I argue that the equation of justifiable reliance with reasonable reliance was an unintended consequence of a loosening of the tort’s scienter rule in the middle of the twentieth century to eliminate a requirement of intended reliance. The goal of the change was to make the law tougher on fraudsters by making a fraudster liable to a predictable but unintended victim of a fraud. The proponents of the change did not realize that the rules of justifiable reliance flowed from the old intended reliance rule. A later generation of judges and legal scholars made sense of the rules of justifiable reliance by equating justifiable reliance with reasonable reliance, creating a worse injustice than that which was created by the old intended reliance rule. The reasonable reliance rule allows a fraudster to escape liability if he can persuade a court that a reasonable person would not have fallen for his fraud. Under the old rule, a claim involving unreasonable reliance ordinarily could not be dismissed on the pleadings, affording the plaintiff an opportunity to establish culpable intent by proving that the defendant purposefully exploited the plaintiff’s unreasonable disposition and beliefs.
I identify the functions served by the rules of justifiable reliance and argue that the intended reliance rule serves these functions as well as the reasonable reliance rule, while allowing fewer frauds to escape punishment. I conclude that courts should restore the intended reliance rule and eliminate the reasonable reliance rule in the law of deceit. The rules of justifiable reliance can be kept as they are, but they will return to being presumptions that a plaintiff can overcome by showing that a defendant had culpable intent.