Lori S. Smith

Anti-Reliance Language in Purchase Agreements: In Trifecta, the founder of Trifecta Multimedia Holdings Inc., a healthcare technology business, sold his firm to WCG. As part of the transaction, the seller stood to receive an earnout payment equivalent to roughly one-third of the purchase price. Following the earnout period, WCG claimed that the threshold for an earnout was not met, and therefore, the seller stood to receive nothing. The seller then sued WCG, claiming that, among other claims, WCG made material misrepresentations and omissions during the negotiation process.

Among the seller’s allegations was the claim that WCG made numerous promises to him regarding the post-closing operation of Trifecta. According to the seller, these promises induced him to select WCG as the buyer. Importantly, these promises were not contained in the purchase agreement. On a motion to dismiss, WCG argued that such statements were mere “puffery” and not actionable as a basis for fraud. The court disagreed.

The court first noted that some of the statements made by WCG were actionable, although the line between “puffery” and actionable statements remains quite blurred. Significantly though, in examining the element of justifiable reliance, the court found that an integration clause in the purchase agreement, on its own, was insufficient to defeat a claim for fraud. Specifically, the court ruled that an “agreement must also contain explicit anti-reliance language.” Because the subject purchase agreement did not contain one, and finding that the seller’s reliance on WCG’s representations was reasonable, the court concluded that he had sufficiently alleged a claim for common law fraud.

Following Trifecta, buyers must ensure that they include specific anti-reliance language in their agreements, especially when subject to an earnout requirement. This is especially true where the distinction between statements that are actionable for fraud and/or misrepresentation continues to get muddled.