March 13, 2012

"Buyer beware" is an age-old principle that prevents purchasers of property from seeking a legal remedy for post-sale disappointments. Although courts sometimes relax this principle to protect unwitting consumers who enter into bad deals, a recent Illinois case reminds us that there are still pitfalls for the unwary, especially when buying securities.

On January 31, 2012, the Illinois Appellate Court ruled that a simple boilerplate clause found in many contracts can effectively insulate sellers of securities from common law fraud based on oral misrepresentations. In Greer v. Advanced Equities, Inc., the court made it clear that as long as a securities subscription agreement includes form language indicating that the buyer has not relied on any oral representations when purchasing the securities (a so-called "non-reliance clause"), he or she will be barred under Illinois law from basing a subsequent common law fraud action on any alleged oral misrepresentations made in connection with the sale.

According to the court, logic essentially compels this result. After all, a claim for fraud requires the victim to prove that he or she "justifiably relied" on the purported fraudulent representations. A plaintiff cannot reasonably claim to have justifiably relied on an oral misstatement when that fact is explicitly negated by a non-reliance clause in a securities subscription agreement.

This reasoning is nothing new. The Illinois Appellate Court has held this view since it decided Adler v. William Blair & Co. in 1995. But what was left open for discussion by Adler and its progeny (or so the Greer plaintiffs thought) was (1) whether the existence of a non-reliance clause is just one factor (as opposed to the only factor) to consider when analyzing justifiable reliance, and (2) whether a non-reliance provision will preclude the plaintiffs from basing their fraud claim on oral statements that do not contradict the representations made (or incorporated) within the subscription agreement.

The Greer court was decisive in its treatment of these two questions. Following this decision, there can be little doubt: when a non-reliance clause disclaims reliance on oral representations, it bars any fraud claim premised on any oral misrepresentation, regardless of whether the statement contradicts (or confirms) the written representations.

This approach may—or may not—be more strict than the Seventh Circuit's treatment of comparable claims under federal standards (as opposed to Illinois common law). Although the United States Court of Appeals for the Seventh Circuit has also held that non-reliance clauses preclude any claim of deceit by prior representation, the concurrence in that Circuit's decision in Rissman v. Rissman suggests there may still be room to argue that the existence of such a clause will not automatically preclude a federal securities claim based on prior oral statements.

Importantly, at least for now, the strict rule reaffirmed by Greer appears to apply only to securities cases. On this point, the court was explicit. It remains to be seen whether the same rationale will be later applied to non-reliance clauses contained in other types of contracts. But the impact on securities fraud is clear. In the wake of Greer, both seller and purchaser alike should think carefully before they sign on the dotted line.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.