Opinion ID: 1154737
Heading Depth: 4
Heading Rank: 3

Heading: Indirect Communication Cases.

Text: Plaintiffs next argue that they need not, in order to state a cause of action for deceit, plead that the alleged misrepresentations were communicated to them directly by defendants. Instead, according to plaintiffs, indirect communication suffices. While the principle is valid, it does not help these plaintiffs, who cannot plead that the alleged misrepresentations ever came to their attention. (6a) The Restatement Second of Torts section 533, articulates the relevant principle in this way: The maker of a fraudulent misrepresentation is subject to liability for pecuniary loss to another who acts in justifiable reliance upon it if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other, and that it will influence his conduct in the transaction or type of transactions involved. A few cases in this state expressly apply section 533 ( Varwig v. Anderson-Behel Porsche/Audi, Inc. (1977) 74 Cal. App.3d 578, 581 [141 Cal. Rptr. 539]; Barnhouse v. City of Pinole (1982) 133 Cal. App.3d 171, 191 [183 Cal. Rptr. 881]), and several cases that predate section 533 apply the principle that the section restates ( American T. Co. v. California etc. Ins. Co. (1940) 15 Cal.2d 42, 67 [98 P.2d 497]; Crystal Pier Amusement Co. v. Cannan (1933) 219 Cal. 184, 188 [25 P.2d 839, 91 A.L.R. 1357]; Hunter v. McKenzie (1925) 197 Cal. 176, 185 [239 P. 1090]; Massei v. Lettunich (1967) 248 Cal. App.2d 68, 73 [56 Cal. Rptr. 232]; Harold v. Pugh (1959) 174 Cal. App.2d 603, 608-609 [345 P.2d 112]; Simone v. McKee (1956) 142 Cal. App.2d 307, 313-314 [298 P.2d 667]; Nathanson v. Murphy, supra, 132 Cal. App.2d 363, 368; Wice v. Schilling (1954) 124 Cal. App.2d 735, 745 [269 P.2d 231]; Strutzel v. Williams (1952) 109 Cal. App.2d 512, 515 [240 P.2d 988].) These cases offer plaintiffs no assistance. As the language of the Restatement indicates, a plaintiff who hears an alleged misrepresentation indirectly must still show justifiable reliance upon it.... (Rest.2d Torts, ง 533.) [5] The need to show reliance is confirmed by the opinions in this state addressing claims for deceit based on indirect communications. The plaintiff in Varwig v. Anderson-Behel Porsche/Audi, Inc., supra, 74 Cal. App.3d 578 ( Varwig ), purchased an automobile from a used car dealer who claimed to have clear title. The claim proved to be erroneous when a lienholder repossessed the car. Plaintiff sued both the seller and the seller's seller, who was also an automobile dealer. The trial court granted the latter's motion for summary judgment, but the Court of Appeal reversed. Based on the circumstances of the transaction between the two dealers, which contemplated the car's eventual resale to a consumer, the court found an implicit, and fraudulent, representation by the selling dealer that the buying dealer was receiving a transferable title. Because it was foreseeable that the buying dealer would repeat the misrepresentation, the court held that the false claim of title was in law an indirect misrepresentation to plaintiff, who purchased the car in reliance upon [the seller's] repetition of the representation. ( Id. at p. 581.) The facts of Barnhouse v. City of Pinole, supra, 133 Cal. App.3d 171 ( Barnhouse ), are similar. The defendant, a property developer, built houses on landfill in the bed of a diverted stream. The buyers knew that the houses stood on fill but were told that the developer had taken remedial measures recommended by an engineer. The buyers did not know that the developer had not followed the engineer's plan or that there were other soil and drainage problems. One buyer resold his house to the plaintiff, who sued the developer for deceit. The trial court granted the developer's motion for a nonsuit. The Court of Appeal reversed. Following Varwig, supra, 74 Cal. App.3d 578, and the Restatement Second of Torts, section 533, the court reasoned that the plaintiff had indirectly relied on the developer's incomplete representations to the original buyers. As in Varwig, the defendant had reason to expect that there would be subsequent purchasers and that the original buyers would repeat the defendant's fraudulently incomplete representations about the property. ( Barnhouse, supra, 133 Cal. App.3d at pp. 191-193.) (2d) These decisions do not support plaintiffs' position in this case. To say that a plaintiff who relies on secondhand misrepresentations can state a cause of action for deceit is not to say that reliance may be presumed, as plaintiffs contend. Certainly one finds no support for a presumption of reliance in Varwig and Barnhouse, in which the plaintiffs received the same misleading communications that the original purchasers had received from the defendants. (6b) Nor do the decisions that preceded section 533 of the Restatement Second of Torts suggest that reliance can be presumed. Indeed, each decision expressly holds that actual reliance is required. The rule is typically stated in such language as this: `A representation made to one person with the intention that it shall reach the ears of another, and be acted upon by him, and which does reach him, and is acted upon by him to his injury, gives the person so acting upon it the same right to relief or redress as if it had been made to him directly.' ( Crystal Pier Amusement Co. v. Cannan, supra, 219 Cal. at p. 188, quoting Henry v. Dennis (1901) 95 Me. 24 [49 A. 58, 60] [italics added]; see also American T. Co. v. California etc. Ins. Co., supra, 15 Cal.2d at p. 67; Hunter v. McKenzie, supra, 197 Cal. at p. 185; Massei v. Lettunich, supra, 248 Cal. App.2d at p. 73; Harold v. Pugh, supra, 174 Cal. App.2d at pp. 608-609; Simone v. McKee, supra, 142 Cal. App.2d at pp. 313-314; Nathanson v. Murphy, supra, 132 Cal. App.2d at p. 368; Wice v. Schilling, supra, 124 Cal. App.2d at p. 745; Strutzel v. Williams, supra, 109 Cal. App.2d at p. 515.) In a few cases, courts in this state have found liability under the common law for misrepresentations not actually communicated to the plaintiff. These cases do not assist these plaintiffs, however, because the courts that decided the cases expressly relied on agency principles rather than the concept of a fraud on the market. ( Grinnell v. Charles Pfizer & Co. (1969) 274 Cal. App.2d 424, 441 [79 Cal. Rptr. 369] [ Grinnell ]; Toole v. Richardson-Merrell Inc. (1967) 251 Cal. App.2d 689, 707 [60 Cal. Rptr. 398, 29 A.L.R.3d 988] [ Toole ]; Roberts v. Salot (1958) 166 Cal. App.2d 294, 301 [333 P.2d 232] [ Roberts ].) Grinnell and Toole were suits against pharmaceutical manufacturers brought by plaintiffs who had suffered product-related injuries. The court in each case held that the plaintiffs, who had not read or heard the manufacturers' representations, could nevertheless sue for breach of express warranty because the physicians who administered the pharmaceuticals did rely on the representations and, in doing so, had acted as the plaintiffs' agents. ( Grinnell, supra, 274 Cal. App.2d at p. 441; Toole, supra, 706 Cal. App.2d at p. 707.) Similarly, the court in Roberts, supra, 166 Cal. App.2d 294, a case in which a lender made misrepresentations to a property owner's agent, simply held that [a] fraud worked upon [the agent] by misrepresentation or by silence was worked upon her principal and he has a right of action for redress. ( Id. at p. 300.) (2e) Plaintiffs also rely on the opinion in Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197 [197 Cal. Rptr. 783, 673 P.2d 660] ( Children's Television ). The case involved a complaint against entities involved in the manufacturing and advertising of sugared breakfast cereals intended for children. The plaintiffs alleged, among other things, that the defendants fraudulently represented that consumption of their products benefited a child's health. The trial court sustained defendants' demurrers to the complaint. On appeal, the defendants argued that the plaintiffs had not adequately pled reliance on the alleged misrepresentations because one group, children, [had] receive[d] the misrepresentations and a different group, parents, [had] purchase[d] the product. ( Id. at p. 219.) The court disposed of defendants' objection in a single, enigmatic sentence whose interpretation has spawned considerable debate. To avoid paraphrasing the language in a way that might unintentionally fuel the debate, we shall quote the sentence, as well as the paragraph it concludes, in full: Restatement Second of Torts section 533, states that `[t]he maker of a fraudulent misrepresentation is subject to liability ... to another who acts in justifiable reliance upon it if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other, and that it will influence his conduct.' This proposition was [e]ndorsed as California law in Varwig [ supra, 74 Cal. App.3d at p. 581]. We recognize that it does not quite cover the present case โ plaintiffs do not allege the children repeated the representations to their parents, and we would imagine that in most cases they did not, but simply expressed their desire for the product. Repetition, however, should not be a prerequisite to liability; it should be sufficient that defendant makes a misrepresentation to one group intending to influence the behavior of the ultimate purchaser, and that he succeeds in this plan.  ( Children's Television, supra, 35 Cal.3d at p. 219, italics added.) Plaintiffs read Children's Television as adopting, albeit not in so many words, the fraud-on-the-market doctrine. According to plaintiffs,  Children's Television recognizes that reliance is sufficiently pled if it is alleged that the defendant made misrepresentations to the marketplace, or a segment of it, `intending to influence the behavior of the ultimate purchaser, and that he succeeds in this plan.' We do not believe, however, that Children's Television supports such a proposition. If the court had actually intended to announce such a drastic change to settled law on a point as important as the nature of reliance in an action for deceit, one would expect to see the announcement of the new rule to be supported with reasons and the citation of authority. Instead, one finds only a single sentence, unsupported by reasoning or authority and phrased in tentative language: Repetition ... should not be a prerequisite to liability.... (35 Cal.3d at p. 219.) Under these circumstances, we cannot responsibly read Children's Television the way plaintiffs would have us read it if there is a narrower interpretation that is consistent with the holding of the case. Indeed, there is such an interpretation. The court's reference to section 533 of the Restatement Second of Torts and Varwig, supra, 74 Cal. App.3d 578, even though the court noted that the principle stated in those authorities d[id] not quite cover the present case (35 Cal.3d at p. 219), strongly indicates that the holding was based on the idea of an indirect representation. Rather than speculate that the court intended to adopt the fraud-on-the-market doctrine sub silentio, one stays closer to the actual language of the opinion by reading it as recognizing, simply, that children cannot be expected to convey representations about products with precision. Indeed, the opinion says exactly this in explaining why the plaintiffs did not need to set out in their complaint the precise language of each allegedly false advertisement: Children in particular are unlikely to recall the specific advertisements which led them to desire a product.... ( Ibid. ) Nor do plaintiffs derive much support from another decision on which they heavily rely, In re Equity Funding Corp. of Amer. Sec. Litigation (C.D.Cal. 1976) 416 F. Supp. 161 (opn. by Lucas, J.) ( Equity Funding ). It is true that the federal court in that case denied defendants' motion to dismiss a claim for common law deceit in a securities fraud action and that the complaint, judging from its description in the opinion, did not appear to allege actual reliance by each plaintiff. Instead, plaintiffs alleged that defendants had disseminated false statements `for the purpose and effect of influencing and manipulating the price of Equity Funding securities and for the purpose and with the effect of influencing open market purchasers of [the] securities to purchase such securities.' ( Id. at p. 182.) We do not read the opinion in Equity Funding as purporting to adopt the fraud-on-the-market theory as a matter of state law, for several reasons. First, in discussing the adequacy of the plaintiffs' claim for deceit the court did not even mention the theory, let alone suggest an intent to adopt it. The court said only that the plaintiffs' allegation of `purpose and effect,' coupled with the clear materiality of the misrepresentations alleged, satisfies the reliance and causation requirements imposed on pleadings that assert fraud claims in California. ( Equity Funding, supra, 416 F. Supp. at p. 183.) Second, the fraud-on-the-market doctrine was not well established in the federal system at the time. The opinion generally cited as introducing the doctrine, Blackie v. Barrack, supra, 524 F.2d 891, preceded the Equity Funding decision by only four months and was not cited in the latter. Indeed, it has been observed that widespread acceptance of the doctrine in the lower federal courts cannot be placed any earlier than 1982 or 1983. ( Basic Inc. v. Levinson, supra, 485 U.S. at pp. 250-251, fn. 1 [99 L.Ed.2d at p. 220] (conc. & dis. opn. of White, J.).) Third, and most importantly, it was not the federal court's role to effect changes in state law. ( Erie R. Co. v. Tompkins (1938) 304 U.S. 64 [82 L.Ed. 1188, 58 S.Ct. 817].) It is, thus, unrealistic to construe the court's opinion as purporting or intending to do so. [6]