Federal Rule of Civil Procedure 9(b) asserts that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). However, that same rule states that “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). But especially since the Supreme Court adopted the “plausibility” standard for pleadings in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), plaintiffs have generally had to plead specific facts showing that it is plausible that they could prevail on their allegations, especially claims of fraud. Indeed, numerous circuits now seem to require fraud plaintiffs to plead sufficient facts to render plausible even allegations regarding the defendant’s conditions of mind. See, e.g., Ibe v. Jones, 836 F.3d 516, 525 (5th Cir. 2016); Biro v. Condé Nast, 807 F.3d 541, 544–45 (2d Cir. 2015); Pippen v. NBCUniversal Media, LLC, 734 F.3d 610, 614 (7th Cir. 2013); Mayfield v. Nat’l Ass’n for Stock Car Auto Racing, Inc., 674 F.3d 369, 377 (4th Cir. 2012); Schatz v. Republican State Leadership Comm., 669 F.3d 50, 58 (1st Cir. 2012).
The common law generally identifies nine elements needed to establish fraud:
See Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197, 1210 n.3 (9th Cir. 2012).
But Rule 9(b)’s particularity requirement is not limited just to claims denominated as “fraud.” Numerous courts have applied Rule 9(b)’s requirements to other types of claims involving allegations of false or misleading conduct. See, e.g., Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106–08 (9th Cir. 2003) (applying Rule 9(b) to claims under California’s Consumer Legal Remedies Act); Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001) (finding that Rule 9(b) applies to claims under the False Claims Act); A. H. Lundberg Assocs., Inc. v. TSI, Inc., No. C14-1160, 2014 5365514, at *7 (W.D. Wash. Oct. 21, 2014) (surveying cases to conclude that Rule 9(b) applies to false advertising claims under the Lanham Act).
With respect to claims to which Rule 9(b) may apply, it was the case even before Twombly/Iqbal that generalized and conclusory allegations of fraud would not suffice. Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 361 (6th Cir. 2001). The requirement of pleading fraud “with particularity” carried over from English common-law requirements and was in part meant to protect against the reputational injury arising from spurious allegations of fraudulent conduct. E.g., Campaniello Imps., Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 633 (2d Cir. 1997); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996). Post-Twombly/Iqbal, courts are now even more inclined to dismiss, before discovery occurs, poorly pleaded claims alleging some type of fraud or misleading conduct. United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185–86 (5th Cir. 2009). That is because it is unfair to require the opposing party to be subjected to the expense of discovery and continued litigation unless the plaintiff’s complaint plausibly shows a basis for the broad-ranging discovery allowed by a fraud claim. Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).
So, when a potential claim involves allegedly false or misleading conduct, it is important for the pleading party to set forth in detail the facts known (or the basis for the facts believed to be true) that demonstrate a plausible basis for the claims. To satisfy Rule 9(b)’s particularity requirements, a party must identify “the who, what, when, where, and how of the misconduct charged,” as well as “what is false or misleading about [the purportedly fraudulent] statement, and why it is false.” Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010) (citations omitted). For plaintiffs whose claims may rely on allegations of false or misleading conduct, it is important to be precise in identifying specifically who made a false or misleading statement, why those statements were important, how the defendant owed the plaintiff a duty to act otherwise, and what was false or misleading about the statements or conduct.
When a plaintiff is trying to plead fraud by omission, it is especially important that the plaintiff establish clearly and plausibly that the plaintiff’s relationship to the defendant was one that gave rise to a duty to speak, what information was withheld and how the plaintiff discovered the withheld information, why the plaintiff was entitled to rely on the defendant to disclose that information, and what the defendant gained by its silence. Only certain special relationships—such as when the defendant owes the plaintiff a fiduciary duty—will normally give rise to a positive duty to disclose information, which means that a plaintiff alleging fraud by omission must plead specific facts that make it plausible that such a special relationship existed and that therefore the defendant was under a legal duty to disclose.
To complicate matters, the “particularity” required to plead plausibly matters of “malice, intent, knowledge, and other conditions of a person’s mind” can vary by circuit. Fed. R. Civ. P. 9(b).
Even prior to Twombly/Iqbal, the U.S. Court of Appeals for the Second Circuit held that Rule 9(b) requires fraud plaintiffs to allege facts that lead to a “strong inference” that the defendant has the requisite state of mind. E.g., IKB Int’l S.A. v. Bank of Am. Corp., 584 F. App’x 26, 27 (2d Cir. 2014) (“We have repeatedly required plaintiffs to plead the factual basis which gives rise to a strong inference of fraudulent intent.”). Pre-Twombly/Iqbal, other circuits seem to have rejected that “strong inference” standard for at least common-law fraud claims. Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997); In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1546–47 (9th Cir. 1994) (superseded on other grounds).
However, certain federal statutes, such as the Private Securities Litigation Reform Act, have expressly adopted the Second Circuit’s “strong inference” requirement for fraud claims, which the Supreme Court has held requires that “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). And post-Twombly/Iqbal, most circuits seem to agree that a fraud plaintiff must lay out at least enough facts from which a defendant’s state of mind reasonably may be inferred. E.g., Heinrich v. Waiting Angels Adoption Servs., Inc., 668 F.3d 393, 406 (6th Cir. 2012); Schatz v. Republican State Leadership Comm., 669 F.3d 50, 58 (1st Cir. 2012); Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 213 (5th Cir. 2009); Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1327 (Fed. Cir. 2009); Tricont’l Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 833 (7th Cir. 2007).
Although the trend of the case law seems to be that Twombly/Iqbal requires substituting “plausibly” for Rule 9(b)’s requirement that conditions of mind need only be pleaded “generally,” it is worth noting that the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States (Rules Committee) currently has under consideration a proposal to amend Rule 9(b) as follows:
FRAUD OR MISTAKE; CONDITIONS OF MIND. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged without setting forth the facts or circumstances from which the condition may be inferred.
However, until and unless the Supreme Court enacts such a revision to Rule 9(b), practitioners should take extra care to substantiate their fraud pleadings with not only voluminous facts showing the who, what, when, where, and how of the fraudulent conduct but also as many details as can be gathered without the aid of discovery to support such claims. Absent that particularity, a fraud claim is likely to be, and should be, dismissed.
