United States: RSI Defeats Oracle Motion To Dismiss Its Fraud Based Claims Including California Penal Code Section 496

In a significant legal victory for Tactical Law Group's client River Supply, Inc. ("RSI"), a federal district court in California has rejected Oracle's argument that the Economic Loss Rule bars RSI's fraud based claims, including a claim under Penal Code Section 496 for theft of money. In her ruling, Judge Beeler granted in part and denied in part Oracle's motion to dismiss RSI's Second Amended Complaint ("SAC"). A copy of the Court's Order can be found here. RSI will be allowed to proceed with its claims against Oracle for fraud in the inducement, negligent misrepresentation, breach of contract, breach of warranty, negligence and for violation of California Penal Code Section 496.

Like a dog on a bone and citing a number of products liability cases, Oracle had argued vehemently in both its first and second motion to dismiss that because RSI had not suffered personal injury or damages to property, the Economic Loss Rule precluded its claims. The Court soundly rejected this argument. According to the Court, "Again citing product-liability cases, Oracle contends that there must be personal injury or property damage for extracontractual recovery. That makes sense in product-liability cases: what other damage is there. See Yarber v. Kia Am. Inc. No. 22-CV-03411-HSG, 2023 WL 2654186, at *2 N.D. Cal. Mar. 27, 2023) (automobile-defect case that claimed fraudulent concealment, not fraudulent inducement; the economic-loss doctrine barred the claim because the plaintiff alleged only economic loss, not personal injury or damage to property); Barela v. FCA US, LLC, No. EDCV-22-01444 (JGB), 2022 WL 19333334, at *2 (C.D. Cal. Oct. 11, 2022) (automobile defect); Sum v. FAC US, LLC, No. 2:22-cv-00213-RGK-RAO, 2022 WL 2189628, at *2–3 (C.D. Cal. Apr. 25, 2022) (automobile defect). But it does not follow that that extracontractual recovery allows recovery only in cases involving injury to person or property because the economic-loss doctrine does not bar claims for fraud in the inducement."

In her ruling the Court further reasoned that: "In concluding that the economic-loss doctrine did not preclude the misrepresentation claims here, the court rejected Oracle's argument that courts apply the fraud exception only in product- liability cases. The fraud exception does make sense in product-liability cases: as a matter of policy, it allows recovery for extra-contractual injury (injury to person or property) and allocates the duty to the party most able to identify the risk of that injury (the manufacturer).15 See Erlich, 21 Cal. 4th at 550–51 (contract law enforces the intentions of the parties to the agreement, and "tort law is primarily designed to vindicate 'social policy.'"). But no binding authority categorically limits the doctrine to product-liability cases."

And this part of the Court's ruling is key and important for Oracle/NetSuite customers who believe that they have been defrauded by an aggressive Oracle's sales team who promised them that Oracle could deliver all the functionality they required, and only after contract execution learned that the functionality did not exist and the expensive system they had invested in to run their business was a bust and not a boon. "The economic-loss rule exists because the parties to a contract have agreed to allocate risk. A party that is the victim of fraud has not assumed contract risk voluntarily. Here, River Supply relied on Oracle's misrepresentations, exposing it to a loss that exceeded its contract damages (given the limitation of liability), at least somewhat analogously to a customer who does not assume the risk of personal injury from a defective product. And it is bad policy if a party can induce a contract that limits its liability by lying about its product's capabilities."

If you are an Oracle or NetSuite customer who believes that Oracle misrepresented the capabilities of its product in pre-contract discussions, we would be happy to talk to you about your case.

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