Note: Particulars of Particularity: Alleging Scienter and the Proper Application of Rule 9(b) to Duty-Based Misrepresentations
By Morwenna Borden. Full text here.
Claims of negligent misrepresentation and fraud by omission are generally held to be derivatives of fraud. The appropriate pleading standard for fraud is clearly governed by Federal Rule of Civil Procedure 9(b)—fraud claims must be alleged with particularity. However, the circuits are divided when it comes to the proper pleading standard for negligent misrepresentation and fraud by omission claims. As a result, duty-based misrepresentation claims are routinely dismissed for failure to satisfy Rule 9(b)’s particularity requirements. There is an underlying rationale for this circuit split that has not been fleshed out by the courts—claims that sound in fraud should be held to Rule 9(b), while claims that are based in negligence need only meet Rule 8(a). Although courts have bandied the phrase ‘sounds in fraud’ about, none have laid out a coherent definition.
This Note proposes a logical, concise definition for this phrase that resolves the Circuit split and is both internally consistent and harmonious with a common sense approach to what this phrase implies—a claim sounds in fraud when it alleges scienter. The advantages of this solution are plentiful. It does not call for drastic changes to either court procedure or the analysis of misrepresentation claims. Instead, it illuminates the critical elements of misrepresentation claims and allows more plaintiffs to have their case heard on the merits rather than being dismissed through motion practice. The analysis also harmonizes with the historical justification of the particularity requirement for fraud claims and creates a rationally consistent framework for courts to use in their analyses of misrepresentation claims generally, and situates duty-based misrepresentation claims within that context.