As readers to this blog are probably aware, New York is an employment at will state which means that a private sector employer can terminate an employee for any reason so long as it is not an unlawful reason, i.e., employment discrimination.
The plaintiff here, probably aware of this doctrine, sought to challenge his termination on the basis of fraud. Plaintiff claimed that he was fraudulently induced to be employed to work on a certain restaurant concept even though his employer knew he could not work on that concept because of a prior non-compete agreement.
The court strictly construed the elements of a cause of action for fraud and dismissed plaintiff's claim because he could not prove damages, reasoning:
This case is very unusual because the defendant employer contracted with the plaintiff to develop a certain restaurant concept which included hiring plaintiff as an employee.To allege a cause of action based on fraud, plaintiff must assert "a representation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission and injury" (Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 421 [1996] [internal citation omitted]). Critically, "[a] false representation does not, without more, give rise to a right of action, either at law or in equity, in favor of the person to whom it is addressed. To give rise, under any circumstances, to a cause of action, either in law or equity, reliance on the false representation must result in injury . . . . If the fraud causes no loss, then the plaintiff has suffered no damages" (Sager v Friedman, 270 NY 472, 480-481 [1936]).In New York, as in multiple other states, "'[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong' or what is known as the 'out-of-pocket' rule" (Lama Holding, 88 NY2d at 421, quoting Reno v Bull, 226 NY 546, 553 [1919]). Under that rule, "[d]amages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained . . . . [T]here can be no recovery of profits which would have been realized in the absence of fraud" (id. at 421, citing Foster v Di Paolo, 236 NY 132 [1923], AFA Protective Sys. v American Tel. & Tel. Co., 57 NY2d 912 [1982], and Cayuga Harvester, Inc. v Allis-Chalmers Corp., 95 AD2d 5 [4th Dept 1983]). Moreover, this Court has "consistent[ly] refus[ed] to allow damages for fraud based on the loss of a contractual bargain, the extent, and indeed . . . the very existence of which is completely undeterminable and speculative" (Dress Shirt Sales v Hotel Martinique Assocs., 12 NY2d 339, 344 [1963]). (emphasis added).