When “Fake it till You Make it” is Fraud
Fake it till you make it. People invoke this cliché all the time when . . . well . . . faking it. The saying actually has honest, well-intentioned roots in accepted psychology and methods for boosting self-confidence. But when this approach is re-purposed for use in business pitches — as self-starters across innumerable industries do every day — “faking it” can result in a fraud lawsuit, notwithstanding that no harm is intended. Indeed, civil liability for fraud may arise from a New York legal doctrine dating back to a 1931 decision by Judge Cardozo. Entrepreneurs looking to avoid the risk of an early, business-killing lawsuit should take heed.
Psychologists have long observed that a person lacking a desired character trait — confidence, for example — can simply pretend to possess that quality and, in time, actually develop it. As the American philosopher and psychologist William James wrote in his 1922 work The Gospel of Relaxation: “the sovereign voluntary path to cheerfulness, if our spontaneous cheerfulness be lost, is to sit up cheerfully, to look round cheerfully, and to act and speak as if cheerfulness were already there. . . . So to feel brave, act as if we were brave, use all our will to that end, and a courage-fit will very likely replace the fit of fear.”
Status-enhancement theory posits that people may attain influence — in business and the workplace, for example — by acting confident and assertive, since we tend to equate those traits with competence. Whether trying to get a dream job, a great freelance contract, or a new customer or client, conveying confidence is key. As one academic observed: “Needless to say, this way of communicating is the bread and butter of salespeople, politicians, and other presumed experts who tout products, ideas, and themselves. Supreme belief in your product is the foundation of successful sales.”
Courts generally see no problem with this, and lawsuits based on unfulfilled sales-pitch claims of being the “greatest” or “world class” are routinely dismissed. Judges see such “boastful,” “optimistic,” or “hopeful” statements as mere “puffery” or “sales talk.” [i] As the Second Circuit Court of Appeals has noted: “It can be expected that any professional will convey to potential clients a healthy self-estimation.” [ii] Indeed, the law recognizes that self-promoting statements like this are just part of our competitive economy. In many ways, putting on a confident show while getting your business up and running — faking it till you make it — is as American as apple pie.
But some aggressive self-starters have abused this benign concept, taking it as license to convey not just an aura of general confidence, but something troubling: an ability to do a specific job that, in reality, they’re not really sure how to do. Of course, they may mean no harm, and they may really believe they’ll deliver in the end. But unbeknownst to the potential client during the sales pitch, the plan is to “figure it out on the fly.” The problem is, if the deal goes south, liability in fraud may result.
As relevant here, common law fraud in New York generally involves a false representation of material fact, made with the intent to deceive and to induce another person to act in reliance on it, that causes damages. To be fraudulent, the misrepresentation must be more than mere puffery or an expression of optimism or hope for the future — it must be a statement of present fact, meaning that its misleading nature can be verified at the time it is made. [iii]
Can “fake it till you make it” entrepreneurs — even while aiming to deliver as promised — really have the fraudulent intent necessary to give rise to a fraud claim? Can their exaggerated claims of know-how and skill really be considered statements of concrete, then-present fact, as opposed to mere optimism or puffery? The short answer is yes.
The starting point is a 1931 holding by Judge Cardozo (then on the New York Court of Appeals) in Ultramares Corp. v. Touche: “Fraud includes the pretense of knowledge when knowledge there is none.” [iv] The idea is that one can make a fraudulent misrepresentation without even knowing the statement to be false if, uncertain as to its truth or falsity, he pretends to know for certain it’s true. [v] Such a statement “is equally fraudulent as though intentionally falsely made.” [vi] When a statement made with the “pretense of knowledge” is intended to deceive another person into acting in reliance on it, the required fraudulent intent is present.
A 2004 Southern District case demonstrates that, even where a service-provider desperately wants to deliver as promised and please the client, fraudulent intent may be found if, when he pitched for the business, he gained the client’s trust via pretense. In EED Holdings v. Palmer Johnson Acquisition Corp., Judge Sweet upheld fraud claims against the owner of a struggling yacht-building company who sought to save his business by convincing a potential buyer to put in a $10 million order. During the sales pitch, he stated not only that his company built “the greatest boats” and that he would be personally “committed” to the project (both nonactionable puffery), but also that his company “had the capability and wherewithal to properly construct” the yacht. That statement was actionable as fraud because, at the moment he made that statement, the owner had reason to doubt his business’s operational abilities, knew that it was perhaps not up to the task, and concealed that uncertainty from the client. [vii]
Let’s consider a “fake it till you make it” case that Parker Pohl filed. Our client was a healthcare provider that needed to overhaul its billing processes to comply with regulatory changes. The task was complex, and our client sought to outsource it. They entered talks with a billing vendor which, during its sales pitches, said all the right things about its resources and know-how. In particular, it stated, with apparent certainty, that it had personnel who understood the new requirements, knew how to process the billings, and were otherwise equipped to get the job done. Our client relied on those assurances and hired the vendor. Massive problems ensued and millions of dollars in receivables were lost due, we claimed, to the vendor’s incompetence. We alleged that the vendor had defrauded our client because, at the moment the vendor gave assurances of ability, it actually had no idea whether it had the ability to do the job or not; in those sales pitches, the vendor had faked it to get the lucrative business, planning to “figure it out later.”
This, we alleged (and rightly so), made out a fraud claim, even though the vendor never wanted to lose a penny of our client’s money and had no intent to harm whatsoever. The reason is that common law fraud does not require the intent to harm — it requires something different: the intent to deceive. In “fake it till you make it” fraud, while the entrepreneur may not be seeking to harm anyone, he is clearly intending to deceive — he’s seeking to gain the potential client’s trust based on sales-pitch misrepresentations of ability and know-how. In our case (as alleged), the vendor, when it recklessly assured our client it could do something without knowing that to be true, intended to deceive our client into doing something that, had our client known the truth, it never would have done: give the vendor the job.
Thus, “fake it till you make it” fraud may arise when, during the sales pitch, the self-starter is subjectively uncertain as to whether she can actually do the job she claims she can do — with the plan being to get the business and figure it out on the fly. This concealed uncertainty can lead to fraud liability, as in EED Holdings, notwithstanding the entrepreneur’s sincere desire to deliver as promised.
“Faking it” is a perilous approach. And it all comes back to Justice Cardozo’s 1931 gem: “Fraud includes the pretense of knowledge when knowledge there is none.” Entrepreneurs and self-starters can fake it all they want when it comes to general confidence, assertiveness, and optimism — knock yourselves out. But “fake it till you make it” is not license to deceive clients or customers into believing you’re equipped to perform a job that you’re actually not sure how to do. If your aggressive sales pitch crosses the line from the former to the latter and you end up botching the job, you may find yourself in court, before a jury that will decide whether, despite your outward display, you were uncertain within.
So, entrepreneurs and self-starters, be careful. A reputation for fraud is hard to overcome.