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Limited warranty defeats fraud claim, not consumer protection claim

By Rebecca Tushnet

Koch v. Greenberg, 2008 WL 4450273 (S.D.N.Y.)

Koch sued Zachys Wine & Liquor Stores and other defendants for fraud, negligent misrepresentation and violations of New York consumer protection law. Koch bought nineteen bottles of wine from Zachys for a total of $3.7 million at two auctions in 2005 and 2004. He discovered that they were counterfeit in 2007 when he hired a noted wine expert to review his cellar.

Koch received auction catalogues describing the bottles and argued that the catalogues represented that the wine being auctioned was genuine and was accurately described. The catalogues contained a provision labeled ?Conditions of Sales & Limited Warranty.? This explicitly disclaimed any warranty and said all sales were ?as is.? In addition, the catalogues invited prospective buyers to examine the wine before bidding. Koch chose not to do so.

Reasonable reliance is required for both fraud and misrepresentation claims. A general, boilerplate disclaimer of representations can?t defeat a fraud claim. At the same time, a party can?t justifiably rely on a representation that has been explicitly and specifically disclaimed. Here, the disclaimer covered ?correctness? of the catalog description, as well as the ?description, size, quality, condition, rarity, importance, provenance, exhibition history, literature, previous storage conditions or historical relevance of any property.? Such disclaimers have been held sufficient to protect auctioneers in New York against similar claims.

There is an exception to the rule if the allegedly misrepresented facts are peculiarly within the defendant?s knowledge. Courts consider the buyer?s sophistication and the accessibility of the underlying information. Here, Koch is a serious collector of rare wines with access to noted wine experts. Moreover, he made no effort to examine the wine before bidding nearly $4 million. He argued that he was at a comparative disadvantage because he couldn?t taste the wine, but then neither could Zachys. He also argued that there was no evidence that a mere visual inspection would have sufficed, because it wouldn?t have revealed a key fact: that the collection from which it came had counterfeit wine. But there was no evidence Zachys knew about the previous inspections finding such counterfeits. Whatever observations led Koch to his present conclusions were equally available to him before the auction.

Under New York General Business Law Sections 349 and 350, however, the analysis was different. Those sections ban ?deceptive acts or practices? and ?false advertising.? Explicit disclaimers don?t protect sellers against liability. Zachys argued that this case turned on a private contract dispute and didn?t involve conduct directed at consumers at large. GBL claims must involve ?consumer-oriented? deceptive conduct; the acts need not be repetitive or recurring, but they must threaten a broad impact on consumers at large, which means they must have the potential to affect similarly situated consumers. Here, the auction wasn?t a private contract for a single-shot transaction. Instead, Koch alleged that Zachys offered counterfeit wine to the public at two separate auctions and widely disseminated catalogs making false claims. If the allegations of the complaint are true, then other people may well have been harmed.

Zachys also argued that Section 349 shouldn?t apply to a complex transaction involving knowledgeable and experienced parties and large sums. But just because he?s wealthy and sophisticated doesn?t deprive Koch of legal protection. Further, Zachys argued that the wine here was like securities?an investment product, which courts have excluded from Section 349?s coverage. But even very expensive wine is a consumable ?good.?

Full post as published by 43(B)log on October 11, 2008 (boomark / email).