Elizabeth Holmes Will Use a Puffery Defense. Could It Work?

In a filing this week, lawyers for Elizabeth Holmes, former CEO of Theranos, made clear that their client plans to defend herself against federal fraud charges in part by arguing that everyone in Silicon Valley understands that start-ups make exaggerated claims. They asked the judge presiding over her forthcoming trial to allow the defense to argue to the jury that her alleged misstatements to investors were merely what the law calls puffery.

There’s a certain logic here. In common usage, puffery refers to an extravagant claim, a usage that the Oxford English Dictionary traces to the early 18th century. In the legal context, a statement that is mere puffery isn’t intended to be taken literally, and is understood by the hearer as an exaggeration, mere boosterism.

How does the concept relate to fraud charges? To prove its case, the prosecution must show that the company made misstatements, that the misstatements were material, and that the investors reasonably relied on them. The puffery defense asserts the contrary. In a case decided in 2019, a federal court wrote that the doctrine “presumes a relatively (but realistically) savvy consumer — the general idea being that some statements are just too boosterish to justify reasonable reliance.”

Or, as I tell my contracts students each fall, puffery is a defense when no reasonable listener would think the statement is literally true. (“The best-built cars in America.”)

But there are problems. For one thing, as the research reminds us, what some would-be buyers dismiss as puffery, others often believe. For another, once one party puffs, so must the next, and on and on until bad information drives out good.

Consider an example with which most readers will be familiar: the thousands of letters of recommendation received every year by colleges. The puffery has become so relentless that recommendations nowadays constitute a sort of meta-language, which admissions officers must translate. “One of the best students I’ve ever taught” means roughly “Did well on the final examination.” A student described as “Among of the best in this year’s class” was likely “A bit above the median.” I’m old enough to remember an era of detailed and nuanced letters that sought to deliver useful data, but I’m not so foolish as to imagine that those days are coming back.

All of this raises a “market for lemons” problem. If buyers expect sellers to make untruthful statements, they’ll tend to discount the truthful ones. Even if a professor really does believe that a particular student is the best she’s ever taught, there’s no easy way to signal that this time the statement is true. Thus we see why “everybody knows that everybody does it” might be a problematic defense.

The law professor Courtney M. Cox, in a forthcoming paper, calls puffery a term “that the law and legal theorists have used to suggest that permissible lies are somehow not lies.” She argues sensibly that allowing the concept of puffery into the various areas of law that penalize deception can only result in ... more deception.

Maybe that’s why courts tend to greet it skeptically, particularly in fraud cases. The highest profile executive to try the puffery defense in a criminal case was Enron CEO Jeffrey Skilling. In appealing his conviction for securities fraud, he argued that such statements as the claim that the subdivision Enron Broadband Services had “sustainable high earnings power” and was “having a great quarter” (there were many others) should be considered mere puffery, because they constituted only “generalized, positive statements” about the company's “competitive strengths and future prospects.” In rejecting the argument, the U.S. Court of Appeals for the Fifth Circuit wrote that misstatements aren’t puffery when they’re “so contrary to the verifiable historical facts that they falsely misstate the speaker’s true reasons” and mislead potential investors.

And although markets rely on the truth of companies’ statements, I wouldn’t want to leave the impression that no defendant ever prevails with the puffery argument. Some do, even in fraud cases. So I can’t predict whether Holmes will win. 

Certainly, she’s not alone in thinking that Silicon Valley culture is one of pervasive puffery. Here’s a retired lawyer writing in 2017: “At one time, Silicon Valley was known as the land of vaporware. Announce a product long before it is ready for the market and see how the market responds.” And here’s the law professor Donald C. Langevoort a few years earlier: “Start-up entrepreneurs are a well-studied breed, prone toward greater over-optimism and illusions of control than the general population.”

However the Theranos litigations plays out, one might argue that puffery is very much the appropriate language of post-modern America. Despite our newly discovered distaste for what we’re bold to call “misinformation,” the notion of objective truth remains one from which society is fleeing.

One proposal to fix this –if indeed anything’s broken – is to make it more difficult for sellers to hide behind claims that are vague.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his latest nonfiction book is “Invisible: The Forgotten Story of the Black Woman Lawyer Who Took Down America's Most Powerful Mobster.”

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