Opinion ID: 2982211
Heading Depth: 2
Heading Rank: 3

Heading: Fraudulent Inducement and False Advertising

Text: On appeal, Ram alleges that ADT fraudulently induced Ram to enter into the sales agreement, and engaged in false advertising, by misrepresenting the efficacy of its equipment and services. Because fraud “makes a contract voidable” by the innocent party, if Ram can prove fraud, it may be able to pursue damages, in tort, beyond the liquidated amount specified in its contract with ADT. See UAW-GM Human Res. Cntr v. KLS Recreation Corp., 579 N.W.2d 411, 418 (Mich. Ct. App. 1998). We address the fraud and the false advertising claims in turn, but begin with a threshold -7- No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. question—whether Ram has pleaded fraud with particularity, as required by the Federal Rules of Civil Procedure.
Parties litigating in federal court due to diversity must comply with the Federal Rules of Civil Procedure, including Rule 9, which requires a party pleading fraud to “state with particularity the circumstances constituting fraud.” F.R.C.P. 9(b). Therefore, although Michigan law governs with respect to the substantive elements of fraud, we first consider whether Ram has met the pleading requirement. See Minger v. Green, 239 F.3d 793, 800 (6th Cir. 2001). To comply with Rule 9(b), “a plaintiff must at a minimum allege the time, place and contents of the misrepresentation(s) upon which he relied.” Bender v. Southland Corp., 749 F.2d 1205, 1216 (6th Cir. 1984). Three paragraphs of Ram’s amended complaint—filed after ADT moved for Rule 12(b)(6) dismissal—miss the mark, as they convey the general content of ADT’s alleged representations, but not the particular time or place that they were made. Paragraph 56 reads, “Defendant through its agent made material representations regarding the reliability of its monitoring services when it first solicited Plaintiffs’ business,” but the complaint does not state here, or anywhere else, the actual content of those “material representations.” Paragraph 57 is similarly vague, stating, “Defendant made several misrepresentations through its advertisements and through statements made to Plaintiffs.” Paragraph 60 is specific as to the content of ADT’s alleged representations, but fails to explain when and where such representations were made—whether in an agreement exchanged between the parties, orally, or by some other means. Although we may consider the sales agreement attached as an exhibit to Ram’s amended complaint, see Bassett, 528 -8- No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. F.3d at 430, these particular representations do not appear in the agreement. Thus, the allegations addressed above do not comply with Rule 9(b). In contrast, a separate allegation in the complaint does contain sufficient information to meet the pleading requirement. In paragraph 58, Ram alleges that ADT “made representation about its UL Central Station Burglar Alarm System” in the UL Certificate, “which ADT knew or should have reasonably known . . . were [sic] blatantly false.” Paragraph 59 identifies the content of the alleged misrepresentation: that ADT was able to comply with UL standards. This information arguably fulfills Rule 9’s requirement that the plaintiff identify the time, place, and content of the misrepresentations, since the complaint supplies additional information pertaining to the UL Certificate. Furthermore, in subsequent paragraphs, Ram properly alleges that the fraudulent statements were false, that ADT knew they were false and intended to induce reliance, and that Ram indeed relied on the statements and suffered damages. See Bennett v. MIS Corp., 607 F.3d 1076, 1100–1101 (6th Cir. 2011) (setting forth requirements for pleading Michigan law fraud claim with particularity). Ram argues on appeal that if indeed its allegations of fraud are not stated with sufficient particularity, it should be given permission to amend its complaint. The record from the district court shows that Ram had already submitted an amended complaint, and that it did so after ADT had moved for judgment on the pleadings, in part on the argument that Ram had failed to plead fraud with sufficient particularity. Given that Ram had notice, before appealing to this Court, that its pleadings may have been deficient, we are not inclined at this point to give Ram an additional opportunity to amend. Cf. Roskam Baking Co. v. Lanham Machinery Co., 288 F.3d 895, 906 (6th -9- No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. Cir. 2002) (holding that district court had not abused its discretion in denying plaintiff’s motion to amend complaint). Therefore, Ram’s only allegation of fraud that survives Rule 9(b) pertains to ADT’s allegedly fraudulent statements in the UL Certificate, which, according to paragraph 59 of the complaint, represented that ADT was able to comply with UL standards.
To bring a successful fraud claim in Michigan, a plaintiff must demonstrate that he or she reasonably relied on the defendant’s representations. See Novak v. Nationwide Mut. Ins. Co., 599 N.W.2d 546, 554 (Mich. Ct. App. 1999); see also MacDonald v. Thomas M. Cooley Law Sch., 724 F.3d 654, 663 (6th Cir. 2013) (adopting as the “best authority” Novak’s holding that “reliance must indeed be reasonable”). Michigan law further establishes that when a “written contract, with [an] integration clause, expressly contradict[s]” a defendant’s allegedly fraudulent representations not contained in the contract, a plaintiff’s reliance on such representations cannot be reasonable. Id. at 553–54. However, a distinction must be drawn between fraud claims based on “collateral agreements” not expressed in the contract—which a merger clause invalidates—and claims stemming from “representations of fact made by one party to another to induce that party to enter into the contract”—which a merger clause does not invalidate. See Barclae v. Zarb, 834 N.W.2d 100, 118 (Mich. Ct. App. 2013) (citing and discussing UAW-GM, 579 N.W.2d 411). Ram argues that the merger clause is not a complete defense because “a contracting party’s fraud may invalidate the contents of a merger clause” if that party has engaged in “fraud relating to the merger clause or fraud that invalidates the entire contract underlying the merger clause.” This - 10 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. is an accurate statement of the law. See UAW-GM, 579 N.W.2d at 419–20; see also Star Ins. Co. v. United Commercial Ins. Agency, Inc., 392 F. Supp. 2d 927, 929–30 (E.D. Mich. 2005) (stating that, although parties “would not be justified in relying on [additional agreements or contractual terms] where there is a merger clause . . . . a party could still justifiably rely upon representations made by another party regarding things outside the scope of the contractual terms, such as the other party’s solvency, indebtedness . . . etc.”). However, Ram’s allegation of fraud in the inducement cannot succeed for three reasons. First, as addressed above, Ram has failed to plead with particularity its fraudulent inducement claims relating to the sales agreement or to ADT’s solicitation of Ram’s business before the agreement was signed. Only Ram’s fraud claims pertaining to the UL Certificate survive Rule 9(b). Second, Ram’s complaint does not contend that ADT’s fraudulent misrepresentations pertained to the merger clause itself. And finally, Ram does not claim that any of ADT’s fraudulent statements pertained to matters beyond the scope of the sales agreement. See id. The district court, in its order dismissing Ram’s fraud claims, held that the UL Certificate was not a “new contract between the parties, but rather carrie[d] out the contract that they already agreed to in the [a]greement.” By the court’s logic, the Certificate is “merely the written expression of the terms contemplated by the parties when they [included the phrase] ‘Upgrade UL Certificate to Include Line Security’ in the original [a]greement.” Ram does not challenge this holding on appeal, so any argument to the contrary is waived. See Kuhn v. Washtenaw Cnty, 709 F.3d 612, 624–25 (6th Cir. 2013). As a result, the merger clause encompasses any representations ADT made - 11 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. regarding the UL Certificate, which is explicitly mentioned in the agreement as part of the services ADT was to provide to Ram. In light of the merger clause, Ram cannot successfully argue that it reasonably relied upon oral statements about the UL Certificate in choosing to enter into the agreement. See Novak, 599 N.W.2d at 553–54. Nor can Ram claim that the representations contained in the text of the UL Certificate induced it to contract with ADT. Ram did not receive a copy of the UL Certificate until April 2009—several months after it entered into the sales agreement. Moreover, although the sales agreement represented that ADT would install the line security feature to which the UL Certificate pertained, under Michigan law, Ram cannot bring a fraud in the inducement claim for breach of the agreement’s terms. See Uhl v. Komatsu Forklift Co., 512 F.3d 294, 304 (6th Cir. 2008) (“fraud in the inducement is not available for a breach of a contract’s terms, lest fraud in the inducement claims swallow all breach-of-contract claims . . .”) (citing Huron Tool and Eng’g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541, 546 (Mich. Ct. App. 1995)). For all of the reasons above, we affirm the district court’s dismissal of Ram’s fraudulent inducement claim.
Ram alleges that ADT violated Michigan’s false advertising statute, which states, “A person shall not knowingly make, publish, disseminate, circulate, or place before the public an advertisement that contains a statement that is untrue, deceptive, or misleading.”1 M.C.L. § 1 As of September 1, 2011, when the Shopping Reform and Modernization Act took effect, the relevant provision is now located at M.C.L § 445.315(5)(1). See 2011 Mich. Legis. Serv. P.A. 15 (H.B. 4145) (West). - 12 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. 445.356(6)(1) (2002). The question of whether an advertisement is deceptive or misleading under the Michigan statute “is to be construed with reference to the common-law tort of fraud.” Overton v. Anheuser-Busch Co., 517 N.W.2d 308, 309 (Mich. Ct. App. 1994). Thus, in false advertising claims, as in fraud claims, statements of opinion or puffery are not actionable. Id.; see also Van Tassel v. McDonald Corp., 407 N.W.2d 6, 8 (Mich. Ct. App. 1987). Additionally, to prevail on a false advertising claim, the plaintiff’s reliance on the deceptive representations must have been reasonable. See In re Jackson Nat. Life Ins. Co. Premium Litig., 107 F. Supp. 2d 841, 865 (W.D. Mich. 2000) (citing Novak, 599 N.W.2d 546, and Overton, 517 N.W.2d 308). Opinion and puffery encompass a “sales[person’s] talk in promoting a sale” and statements that serve “to ‘hype’ [a] product beyond objective proof.” Van Tassel, 407 N.W.2d at 7–8; see also Scott v. Harper Recreation, Inc. 506 N.W.2d 857, 860 (Mich. 1993). In Van Tassel, a fraud case, the purchaser of an ice cream store franchise alleged that the seller of the franchise had induced the purchase through fraudulent misrepresentations. Among those statements that the court of appeals categorized as opinion or puffery included, “[y]ou won’t regret becoming a [franchise] owner” and “there [is] a lot of money to be made,” as well as the defendant’s repeated characterization of the franchise as a “gold mine.” 407 N.W.2d at 8–9. Some of the alleged representations made by ADT are vague or aspirational in ways similar to the statements addressed in Van Tassel, specifically, ADT’s boast that it offers “Rapid Alarm response” and its advertisements that, to cite Ram’s complaint, “creat[e] an image that translates that their system is reliable and never fails.” Other representations, however, are not so easily dismissed. Ram also alleges that ADT represented that it would “be there for its clients ‘24 hours a day, 7 days a week’” and that ADT offers “24 hour - 13 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. monitoring by ADT trained professionals.” In light of ADT’s position as a provider of security services—necessitating constant, uninterrupted monitoring of its customers’ property—we decline to dismiss these allegations as puffery or opinion. However, even when a defendant’s representations are sufficiently concrete to survive the Van Tassel standard, a plaintiff must demonstrate that its reliance on the representations was reasonable. See In re Jackson, 107 F. Supp. 2d at 865 (citing Novak, 599 N.W.2d 546, and Overton, 517 N.W.2d 308, in concluding that false advertising claim requires reasonable reliance). This requirement takes us back to a point raised above: Michigan law maintains that reliance on an allegedly fraudulent representation is not reasonable if the representation is expressly contradicted in a valid merger clause contained in a contract between the parties, unless the plaintiff can make out a claim of fraud in the inducement or fraud pertaining to the merger clause itself. See Novak, 599 N.W.2d at 553–54; UAW-GM, 579 N.W.2d at 418–19. While there is no precedent in Michigan directly establishing that a merger clause such as the one present here precludes a false advertising claim, Michigan courts have consistently held that merger clauses preclude fraud claims, with some exceptions, as addressed above. See, e.g., Barclae, 834 N.W.2d at 118–19; UAW-GM, 579 N.W.2d at 418–19. From the vantage point of a federal court sitting in diversity, we see little evidence to indicate that Michigan courts would deviate from this approach in the context of false advertising. Cf. In re Jackson, 107 F. Supp. 2d at 865 (plaintiffs cannot have reasonably relied on advertising material bearing conspicuous disclaimer); see also Kim v. Kia Motors America, No. 260071, 2005 WL 839635, at  (Mich. Ct. App. Apr. 12, 2005). The merger clause in the parties’ sales agreement states explicitly, “Customer is not relying on any - 14 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. advice or advertisement of ADT” (emphasis added). Accordingly, we affirm the district court’s dismissal of Ram’s false advertising claim. D. Breach of Contract and Limited-Liability Clause Turning finally to contract law, Ram alleges that ADT breached the parties’ agreement on the night of the burglary by failing to report the incident to the store’s owners or police and by failing to investigate or send its own representative to the premises. The district court did not dismiss the breach of contract claim, finding that a provision in the agreement purporting that Ram would waive all claims against ADT was ambiguous. However, the court also found a limitedliability clause in the agreement valid, capping Ram’s damages at $1,000. On appeal, Ram argues that the limited-liability clause does not apply because ADT had engaged in gross negligence. The sales agreement includes the following language: It is understood that ADT is not an insurer . . . . Customer agrees to look exclusively to customer’s insurer to recover for injuries or damage in the event of any loss or injury and releases and waives all right of recovery against ADT arising by way of subrogation. . . . The customer does not desire this contract to provide for full liability of ADT and agrees that ADT shall be exempt from liability for loss, damage, or injury due directly or indirectly to occurrences, or consequence therefrom, which the service or system is designed to detect or avert, that if ADT should be found liable for loss, damage, or injury due to a failure of service or equipment in any respect, its liability shall be limited to a sum equal to 10% of the annual service charge or $1,000, whichever is greater, as the agreed upon damages and not as a penalty, as the exclusive remedy. . . . We look first to the validity of the waiver clause, and then to the limitation-of-liability clause. i. Waiver Clause ADT moved to dismiss Ram’s claim for breach of contract on the grounds that the agreement contained a binding risk-allocation clause. The district court denied ADT’s motion, reasoning that - 15 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. the relevant contractual clause was ambiguous because it could be read only to “preclud[e] the right of recovery an insurance company would gain through subrogation.” The court also cited the agreement’s limited-liability clause as support for its interpretation that the agreement does not bar all damages. Reviewing Ram’s contract claim de novo, we agree with the district court’s determination that the sales agreement is ambiguous as to ADT’s liability for a breach of contract claim. The agreement purports to shield ADT from all rights arising by means of subrogation, and indeed from all damages for loss and injury; however, in the next phrase, it goes on to note that “if ADT shall be found liable for loss,” its liability will be limited to $1,000 or 10% of the annual service charge. “[I]f two provisions of the same contract irreconcilably conflict with each other, the language of the contract is ambiguous.” See Klapp v. United Ins. Grp. Agency, Inc., 663 N.W.2d 447, 453 (Mich. 2003). When a contract term is ambiguous, its construction is an issue of fact that should be determined by a jury. Id. at 453–54. Because we find the contract ambiguous as to ADT’s liability, we affirm the denial of Rule 12(b)(6) dismissal of the breach of contract claim. ii. Limited-Liability Clause and Gross Negligence Defense The sole challenge that Ram raises on appeal to the limited-liability clause is a claim that ADT’s actions were grossly negligent and that the damages clause therefore does not apply. Michigan cases clearly establish that, “although a party may contract against liability for harm caused by ordinary negligence, a party may not insulate himself against liability for gross negligence or wilful and wanton misconduct.” See, e.g., Lamp v. Reynolds, 645 N.W.2d 311, 314 (Mich. Ct. App. 2002). Gross negligence is defined as “conduct . . . so reckless as to demonstrate a substantial - 16 - No. 12-2023 Ram Int’l, Inc. v. ADT Sec. Serv’s, Inc. lack of concern for whether an injury result[s].” Xu v. Gay, 668 N.W.2d 166, 170 (Mich. Ct. App. 2003). As discussed above, Michigan law does not recognize a negligence cause of action when a defendant fails to perform its contractual obligations. To bring a negligence claim under these circumstances, a plaintiff must show that the defendant owed the plaintiff a separate and distinct duty not arising solely from the contract, or that the defendant created a “new hazard” through actions other than a mere failure to perform. See Fultz, 683 N.W.2d at 592–93. Ram’s gross negligence defense to the limitation-of-liability clause thus founders for the same reasons that defeat its ordinary negligence claim. The district court properly dismissed Ram’s gross negligence claim and properly applied the limitation-of-liability clause.