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Damages for Deceit: a Case Study in the Making of American Common Law

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Damages for Deceit: a Case Study in the Making of American Common Law \\jciprod01\productn\N\NYS\71-3\NYS302.txt unknown Seq: 1 3-JAN-17 15:23 DAMAGES FOR DECEIT: A CASE STUDY IN THE MAKING OF AMERICAN COMMON LAW EDWARD J. NORMAND* “We reach the land of mystery when constitution and statute are silent, and the judge must look to the common law for the rule that fits the case.” BENJAMIN N. CARDOZO, THE NATURE OF THE JUDICIAL PROCESS INTRODUCTION .......................................... 334 R I. GROUNDS FOR THIS CASE STUDY . 338 R II. THE INCIPIENT NEW YORK COMMON LAW . 341 R A. The Adoption of English Common Law . 341 R B. The Cases of the Diseased Sheep . 344 R 1. Jeffrey v. Bigelow & Tracy . 344 R 2. Crain v. Petrie ............................... 345 R III. POTENTIAL RECOVERIES—EXAMPLES . 346 R IV. THE BUDDING NEW YORK LAW: 1845–1918 . 348 R V. THE PIVOTAL DECADE: 1919–1928 . 350 R A. Ritzwoller v. Lurie ............................... 350 R B. Wood v. Dudley ................................. 351 R C. Reno v. Bull ..................................... 352 R D. Questions After Reno v. Bull. 353 R VI. THE GROWING UNCERTAINTY: 1930–1982. 356 R A. Forgone Legal Claims . 356 R B. The Nature of Pecuniary Loss . 358 R C. Fading Indignation with Fraud . 360 R 1. Consequential Damages . 360 R 2. Punitive Damages ............................ 361 R 3. The Wrongdoer Rule . 363 R VII. THE CONTINUING QUANDARY: 1980–PRESENT . 365 R * The author is a partner at Boies, Schiller & Flexner LLP in New York. J.D., University of Pennsylvania, 1995; A.B., College of William & Mary, 1992. Law clerk to the Honorable Joseph M. McLaughlin, United States Court of Appeals for the Second Circuit, 1997–98, and the Honorable Marjorie O. Rendell, United States District Court for the Eastern District of Pennsylvania, 1995–96. Thanks to Eric Posner for his early feedback and to Tony Kronman for his encouragement. Thanks to my family for everything. This Article does not necessarily represent my firm’s views and does not propose changes in the law to benefit firm clients. 333 \\jciprod01\productn\N\NYS\71-3\NYS302.txt unknown Seq: 2 3-JAN-17 15:23 334 NYU ANNUAL SURVEY OF AMERICAN LAW [Vol. 71:333 A. The Case of the Lost Harvest . 365 R B. The Current “Rule in the Federal Courts” . 367 R C. The More Recent Controlling Precedent . 369 R D. Conflicting Precedent in the State Courts . 371 R 1. Consequential Damages . 372 R 2. Forgone Business Opportunities . 373 R 3. Forgone Legal Claims . 376 R E. Conflicting Precedent in the Federal Courts . 377 R F. Disgorgement of Profits for Fraud . 379 R VIII. POTENTIAL RECOVERIES—THE PRECEDENT . 381 R IX. THE CASE FOR STRONGER COMMON LAW . 384 R A. Accurate Interpretation of Relevant Precedent? . 385 R B. Clear Rules of Decision? . 388 R C. Coherent Rules of Decision? . 391 R 1. Consequential Damages . 392 R 2. Punitive Damages ............................ 393 R 3. The Wrongdoer Rule . 395 R 4. The Question of the Majority Rule . 396 R 5. State and Federal Court Agreement . 397 R D. Similar Cases Resolved the Same Way? . 398 R E. The Best Policy? ................................. 400 R 1. Consequential Damages . 405 R 2. Forgone Business Opportunities . 407 R 3. Forgone Legal Claims . 408 R 4. Disgorgement of Profits . 410 R 5. Punitive Damages ............................ 412 R 6. The Wrongdoer Rule . 424 R X. BACK WHERE WE STARTED . 425 R CONCLUSION ............................................. 427 R INTRODUCTION The courts in this country have spent decade after decade— sometimes hundreds of years—setting out rules of decision in resolving common law claims.1 Considering both process and pol- icy, can we say from state to state whether the courts have made 1. Rules of decision concern rules and principles. Rules are norms that apply mechanically and categorically; principles are norms that are applied and bal- anced against each other based on evaluative judgment. Mark P. Gergen, The Jury’s Role in Deciding Normative Issues in the American Common Law, 68 FORDHAM L. REV. 407, 407 n.1 (1999). The use of this distinction has grown more common since Ronald Dworkin addressed it, see RONALD DWORKIN, TAKING RIGHTS SERIOUSLY 22–30 (1978), but it existed before then, see, e.g., infra note 7 & accompanying text R (addressing the nature of “a principle or rule of law”). \\jciprod01\productn\N\NYS\71-3\NYS302.txt unknown Seq: 3 3-JAN-17 15:23 2016] DAMAGES FOR DECEIT 335 good common law? The question implicates such broad disciplines as legal history, legal reasoning, law and economics, and the philos- ophy of law. None seems to answer both parts of the inquiry, how- ever, or to work out how the parts might relate to one another. Some scholars and judges might even regard the question as imper- tinent. Where common law is longstanding and inertial, what basis is there for asking if the courts have followed the right “process” or made sound “policy”? This Article seeks to reconcile such perspec- tives in evaluating a given area of common law jurisprudence under distinct, model criteria. A case study makes sense here where “there is a kind of com- petitive process at work—the same issues arise under the common law of each of the states, and while resolutions often diverge at first, gradually consensus emerges as the uncommitted judges compare the different resolutions on offer.”2 This Article takes the common law of damages for fraud on offer in one state and pores over it, exploring the precept that American common law is based on “a common way of thinking about law,” a “shared process for deciding cases and resolving disputes.”3 The question of the qualities of good common law resonates today in light of literature such as the recent commentary that re- considers whether common law or statutes constituted the favored rule of law as America was founded and its law expanded.4 The best law, simple to say, is both “settled” and “right.”5 The first quality speaks to the custom and certainty in decision-making that explain the very advent of English common law.6 Oliver Wendell Holmes even concluded that the law is the “prophecies of what the courts 2. Richard A. Posner, The Role of the Judge in the Twenty-First Century, 86 B.U. L. REV. 1049, 1054–55 (2006). 3. Morris L. Cohen, The Common Law in the American Legal System: The Challenge of Conceptual Research, 81 L. LIBR. J. 13, 29 (1989); accord Arthur L. Corbin, What Is the Common Law?, 3 AM. L. SCH. REV. 73, 75 (1912). 4. See James R. Maxeiner, A Government of Laws Not of Precedents 1776–1876: The Google Challenge to Common Law Myth, 4 BRIT. J. AM. LEGAL STUD. 137 (2015) (concluding that, contrary to the author’s view of the conventional wisdom, stat- utes were the favored basis of early American law). 5. Cf. Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting) (opining that the doctrine of stare decisis “is usually the wise policy, because, in most matters, it is more important that the applicable rule of law be settled than that it be settled right”). 6. See THEODORE F. T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW 342 (Liberty Fund ed. 2010). For a summary of such classical accounts of the ori- gin of English common law, see Matthew Steilen, The Democratic Common Law, 10 J. JURIS. 437, 449–53 (2011). \\jciprod01\productn\N\NYS\71-3\NYS302.txt unknown Seq: 4 3-JAN-17 15:23 336 NYU ANNUAL SURVEY OF AMERICAN LAW [Vol. 71:333 will do in fact, and nothing more pretentious.”7 The second quality, however, concerns evolving questions of justice and social welfare that must bear on the common law if it is to meet our ideals. The common law of fraud damages is a sturdy basis for a case study under such benchmarks. The typical elements of fraud are satisfied where for personal gain the defendant made an inten- tional and material misrepresentation of fact that reasonably in- duced the plaintiff to rely on the misrepresentation and thereby suffer damage.8 Such “deceit” is a quintessential common law doc- trine whose application in commercial matters is inveterate and whose development is relevant to scholars and practitioners alike.9 Rooted in the essential self-interest most types of lying, “fraud seem- ingly touches every American industry and commercial en- deavor.”10 By one recent estimate, “combined public- and private- sector fraud costs every household in the United States probably around $5,000 a year.”11 Common law fraud is a core feature of the “law of deception” emerging as a “genus” comprising claims presenting “similar problems of design, function, and justification throughout the cate- gory.”12 Commentators recognize common law fraud as the ful- crum for increasingly frequent claims under consumer protection 7. Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 461 (1897). Benjamin N. Cardozo more specifically concluded that a “principle or rule of conduct” amounts to “a principle or rule of law” if a court will probably accept it as authoritative when new situations arise in litigation. BENJAMIN N. CARDOZO, THE GROWTH OF THE LAW 52 (1924); accord Edwin W. Patterson, Cardozo’s Philosophy of Law, 72 U. PA. L. REV. 71, 85 (1939). 8. See, e.g., Eurycleia Partners, LP v. Seward & Kissel, LLP, 910 N.E.2d 976, 979 (N.Y. 2009); see also 2 DAN B. DOBBS, LAW OF REMEDIES 544 (2d ed. 1993) (explain- ing that “in the common law of tort, fraud requires a misrepresentation of fact (not mere opinion and not a prediction or promise about the future)”).
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