Strategic Diversity v. Alchemix Corp.

A party wishing to rescind a contract, and claim negligent misrepresentation and fraud, must show economic damages.

Strategic Diversity, Inc. ("Strategic") invested $500,000 in start-up company Alchemix Corporation ("Alchemix") in exchange for security interests and a seat on the Alchemix board. Western Oil Sands ("Western") contacted Alchemix and offered to invest $30 million dollars in the company. Prior to Western's offer of investment, Alchemix entered into negotiations with Alchemix Funding Group ("AFG") regarding an additional investment of $3 million on the contingency that Strategic give up its rights in Alchemix. Strategic was then bought out of their investment for $560,832. AFG and Western subsequently decided not to invest in Alchemix. As part of the buy-out, Strategic relinquished its position on the Alchemix board, and as a result did not learn that Western had decided not to invest in Alchemix until months after the fact. Strategic filed a claim to rescind the contract, alleging Alchemix, among other things, had engaged in securities fraud and negligent misrepresentation. The district court granted summary judgment to Alchemix on all claims, and awarded Alchemix attorney’s fees. Strategic appealed. The Ninth Circuit remanded the decision stating that the state securities fraud claim was time-barred, as Alchemix did not meet its burden to show that Strategic, as a reasonably diligent plaintiff, should have discovered the fraud within the statute of limitations. The Ninth Circuit also remanded the issue of rescission, for Strategic to show that they suffered damages and that the damages were a result of not knowing that Western had ceased its investment. The Ninth Circuit affirmed the fraud and misrepresentation claims, as Strategic was unable to show damages, but might be able to convince a finder of fact that it is entitled to relief. The Ninth Circuit also vacated the attorney fees award because the other claims were remanded. AFFIRMED in part, REVERSED in part, VACATED in part, DISMISSED in part and REMANDED.