Randy M. Mastro, Andrea E. Neuman, Scott A. Edelman, William E. Thompson, GIBSON, DUNN & CRUTCHER, LLP, Attorneys for Plaintiff.
Steven R. Donziger, DONZIGER & ASSOCIATES, Attorney for the Donziger Defendants.
LEWIS A. KALPAN, District Judge.
Defendants Steven Donziger, The Law Offices of Steven R. Donziger, and Donziger & Associates, PLLC (the "Donziger Defendants") have filed counterclaims against plaintiff Chevron Corporation ("Chevron") for attempted extortion and fraud. Chevron moves to dismiss for failure to state a claim upon which relief may be granted.
In a report and recommendation dated April 15, 2013,  Magistrate Judge James C. Francis IV recommended that the motion be granted. He concluded that the attempted extortion claim is governed by New York law and that New York recognizes no such cause of action. He recommended dismissal of the fraud claim on the ground that the Donziger Defendants have not sufficiently alleged reasonable reliance or a misrepresentation or omission of material fact. The Donziger Defendants object.
As for the first point, the parties agree that either New York or California substantive law controls with respect to the availability of a cause of action for attempted extortion. Chevron contends that it is New York law; the Donziger Defendants that it is the law of California.
Magistrate Judge Francis plainly is correct as to New York substantive law, assuming that New York law controls. But there is no need to engage in a choice of law analysis unless the substantive law of California is different.
The California Supreme Court has not yet determined the issue. But there are intermediate California appellate court decisions on the point which indicate that no such cause of action is available under California law.
"In determining California law, this Court is obliged to follow the judgment of a California intermediate appellate court "unless it is convinced by other persuasive data that the highest court of the state would decide otherwise."'" In re Lehman Bros. Secur. & ERISA Litig., 903 F.Supp.2d 152, 194 (S.D.N.Y. 2012) (quoting Comm'r of Internal Rev. v. Estate of Bosch, 387 U.S. 456, 465(1967) (judgment of intermediate appellate state court "is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.'") (in turn quoting West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237 (1940)); see also West v. AT&T, 311 U.S. 223, 236 (1940) (federal court sitting in diversity "is not free to reject the state rule merely because it has not received the sanction of the highest state court"). There is no persuasive data indicating that the California Supreme Court would reach a different conclusion. Accordingly, the attempted extortion claim is insufficient as a matter of law regardless of whether the issue is controlled by the law of California or New York. This Court therefore need not decide the choice of law issue. Were it to reach that question, however, it would resolve it as recommended by Magistrate Judge Francis and apply the substantive law of New York.
The Donziger Defendants allege that Chevron knowingly misrepresented or concealed material facts in various statements to courts, government officials in this country and in Ecuador, Mr. Donziger, the media, supporters, and potential supporters of the LAPs, and the public at large. These alleged misrepresentations allegedly were "reasonably and justifiably relied upon by United States courts, the Lago Agrio Court by means of its decision to recuse Judge Nuñez and not to consider or rely upon the Cabrera report" and in other respects. In consequence, Donziger allegedly has suffered "pecuniary, reputational, and other damages, " including "damage to Donziger's reputation and goodwill, impairment of his professional relationship with the Ecuadorian Plaintiffs, and attorneys' fees and costs."
1. Reliance By Donziger
The R&R recommends dismissal of the fraud claim on the ground, inter alia, that Mr. Donziger fails to allege that he relied, let alone relied reasonably, on the alleged misrepresentations. Mr. Donziger admits that this is correct, stating that "the actionable representations are to third parties, not to Donziger." Accordingly, the recommendation of the R&R that the fraud claim be dismissed to the extent it rests on any assertion of reliance by Mr. Donziger on the alleged misrepresentations and omissions, is adopted.
2. Third Party Reliance
This Court previously held, on the defendants' motions to dismiss Chevron's fraud claim, that New York recognizes a cause of action for fraud based on third party reliance. That indeed is Mr. Donziger's claim. But the R&R nevertheless recommended dismissal of the third party reliance fraud claim. It began from the proposition that Mr. Donziger alleges only two types of harm - (1) reputational injury, and (2) legal fees and costs allegedly incurred in defending himself against Chevron's allegedly fraudulent claims. The claim for damage to reputation, it concluded, ran afoul of the principle that New York does not permit recovery on a fraud theory for reputational injury, leaving Mr. Donziger with legal fees and costs as the only potentially compensable injury. The R&R then recommended dismissal of that claim on the grounds that (a) there could have been no reasonable reliance by third parties on the alleged fraudulent misrepresentations and omissions because "the allegedly omitted information was publicly available, " and (b) "Chevron did not have a duty to disclose all public information that would shed a negative light on its arguments" and the Donziger Defendants therefore failed adequately to allege a misrepresentation of fact.
Alleged Reputational and Similar Injury
"New York law awards only out-of-pocket' expenses in fraud cases, entitling plaintiffs to damages solely for their actual pecuniary losses." Accordingly, Chevron contends, Mr. Donziger's allegations of reputational injury and "impairment of his professional relationship with the Ecuadorian Plaintiffs' are not properly pleaded cognizable fraud damages."
As a general proposition, Chevron is correct that recovery in a fraud action is limited to out of pocket expenses and that reputational injury is not compensable in such a case. Mr. Donziger nevertheless argues that Stewart v. Jackson &Nash  and Hyman v. IBM Corp.  stand for the contrary proposition. The Court disagrees.
Insofar as is relevant, Jackson was a suit by a lawyer against a law firm claiming that the law firm fraudulently induced her to become and remain its employee by false statements and promises. The Court of Appeals reversed the district court's dismissal of the fraud claim - which had been based upon the premise that employees at will may not "challenge their termination nor bootstrap' themselves around this bar by alleging that the firing was in some way tortious" - where plaintiffs' alleged injuries "commenced well before her termination and were, in several important respects, unrelated to it." While the appellate opinion mentioned that the complaint alleged reputational injury among other kinds of damage, it said nothing about whether reputational ...