Litigation: Dismissing a Fraud Case Before it Turns Costly  

Inside Counsel

Defendants accused of civil fraud have at their disposal two powerful tools to dismiss a case even before it reaches the discovery stage. The first is Federal Rule of Civil Procedure 8(a), which, as clarified by two recent Supreme Court decisions, requires a plaintiff in every case (not just those involving fraud) to plead enough facts to render the claim "plausible." The second is Federal Rule of Civil Procedure 9(b), which requires that allegations of fraud be pled with "particularity." For defendants hoping to dismiss a civil fraud complaint before a time-consuming and costly litigation battle ensues, it is essential to understand these two seemingly overlapping but distinct procedural rules.

Ever since the Supreme Court's 1957 decision in Conley v. Gibson, plaintiffs have been held to a relatively low pleading standard to satisfy Rule 8: Courts would dismiss a complaint only if it appeared beyond doubt that plaintiffs could prove "no set of facts" in support of their claim that would entitle them to relief. A plaintiff could satisfy this standard without pleading any facts at all. Instead, a plaintiff could rely on conclusory allegations, so long as there was at least the possibility that the plaintiff could later establish some set of undisclosed facts to support a claim for relief. Under this standard, dismissals were rare.

But with its 2007 decision in Bell Atlantic v. Twombly, the Supreme Court put an end to the "no set of facts" standard. A complaint, the High Court ruled, must plead "enough facts to state a claim to relief that is plausible on its face." Two years later, in Ashcroft v. Iqbal, the Supreme Court explained that this standard involved a two-part inquiry. First, courts must ignore all conclusory allegations in a complaint. Second, courts must assess whether the remaining factual allegations are plausible. In a nutshell, not only must a plaintiff now plead specific facts in support of its claims – a requirement that makes it harder for a plaintiff with a tenuous claim to embark on a fishing expedition – but those facts must make it at least "plausible" that the plaintiff could ultimately prevail.

When it comes to allegations of fraud, plaintiffs have long had to plead specific facts in support of their claims. Rule 9(b) requires that allegations of fraud be plead with "particularity," which courts have usually interpreted to mean the "who, what, when, and where" of the fraud. After the Supreme Court's Twombly and Iqbal decisions, Rule 9(b) has as much vitality as ever, if not more. In particular, Twombly and Iqbal make clear that the mere presence in a complaint of the alleged particulars of a fraud is not enough; those facts must also render the plaintiff's claim for relief "plausible." Accordingly, a defendant seeking to dismiss a fraud complaint should not only assess whether the complaint adequately pleads Rule 9(b)'s requisite facts, but also whether those facts are sufficient to satisfy Twombly's and Iqbal's plausibility standard.

Despite the heightened pleading requirements in a fraud case, courts do not expect plaintiffs to have a fully developed case at the pleading stage, and in some instances permit plaintiffs to plead few, if any, facts. For example, where information essential to a fraud claim lies within the exclusive possession of the defendant, a plaintiff can rely on so-called "information and belief" allegations. And where a complaint alleges a complex scheme to defraud, the plaintiff may be permitted to plead facts related only to one particular example or transaction in the fraud scheme.

But these are narrow exceptions. Rule 9(b) remains a formidable obstacle for a plaintiff to overcome – and together with the newly fortified Rule 8 as interpreted by Twombly and Iqbal – provides defendants with important protections against unsubstantiated fraud complaints.

This article appeared in the January 6, 2011 edition of Inside Counsel.

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