Consumer Fraud, Misrepresentation and Reliance

Alon Klement, Zvika Neeman, Yuval Procaccia

Research output: Contribution to journalArticlepeer-review

Abstract

It is a deeply-entrenched principle in the law of misrepresentation that a false statement can be actionable only upon a showing of reliance. In order to prevail, plaintiffs must establish not only that a misstatement was wrongly conveyed, but also that they were exposed to the information, acted upon it, and suffered harm as a consequence. A mere potential for deception is not enough; plaintiffs must show that they were actually deceived. Yet, despite the reliance requirement's intuitive appeal, this paper argues that it should be abandoned. It shows that conditioning recovery on reliance leads to inadequate deterrence of misrepresentations, which in turn results in a host of inefficient effects: from allocative inefficiency to wasteful investments and rent-seeking activities. Instead of reliance, recovery should depend on a showing of a ‘price impact’, namely that the statement triggered an increase in market price. Once an effect on price is established, liability should extend to all representees—relying and non-relying alike.

Original languageEnglish
Pages (from-to)95-105
Number of pages11
JournalInternational Review of Law and Economics
Volume54
DOIs
StatePublished - Jun 2018

Keywords

  • Class actions
  • Damages
  • Fraud
  • Misrepresentation
  • Price impact
  • Reliance
  • Restitution

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