Requirement of Intended Third-Party Reliance in Fraud Claims: Daughtry v. Silver Fern Chemical

Introduction

Daughtry v. Silver Fern Chemical, decided by the United States Court of Appeals for the Fifth Circuit on May 12, 2025, arose out of a federal government investigation into the distribution of 1,4-butanediol (“BDO”), an industrial solvent that can be misused as a date-rape drug. Plaintiffs Jake Ellis Daughtry, family members, and related entities (“the Daughtrys”) sued their supplier, Silver Fern Chemical, Inc., and its employee, Gilda Franco, alleging that Franco doctored email records before producing them under subpoena to the Drug Enforcement Administration. According to the Daughtrys, those altered emails—purportedly showing that Silver Fern had provided correct Safety Data Sheets (SDS) with each sale—helped the government prosecute the Daughtrys on controlled-substances and money-laundering charges, causing the seizure and destruction of their inventory and businesses.

The key legal questions presented were:

Whether Texas courts had personal jurisdiction over Franco for alleged fraudulent document production to a federal prosecutor.
Whether the Daughtrys stated a viable fraud claim against Silver Fern when the alleged misrepresentations were made to the government rather than to the plaintiffs, and whether the plaintiffs themselves relied on those misrepresentations.
Whether related claims—civil conspiracy to commit fraud and products-liability failure-to-warn—survived a Rule 12(b)(6) motion to dismiss.

Summary of the Judgment

The Fifth Circuit affirmed the district court’s dismissal of all claims. The court held:

Personal Jurisdiction: Although the panel concluded that Texas courts could, in theory, exercise specific jurisdiction over Franco under the “effects” test from Calder v. Jones, the dismissal was nonetheless correct for other reasons.
Fraud Claim: The complaint failed to plead that Silver Fern or Franco intended the misrepresentations to influence the Daughtrys or that the Daughtrys relied on the altered emails. All alleged reliance was by the government, not by the plaintiffs.
Civil Conspiracy: Because no underlying fraud was adequately alleged, the conspiracy claim likewise failed.
Products-Liability Failure to Warn: The plaintiffs alleged economic injuries from criminal prosecution, not physical harm from a defective product, and thus could not maintain a failure-to-warn claim under Texas law.

Accordingly, the Fifth Circuit affirmed the dismissal of the entire suit.

Analysis

1. Precedents Cited

International Shoe Co. v. Washington (326 U.S. 310, 1945): Established the “minimum contacts” test for personal jurisdiction.
Walden v. Fiore (571 U.S. 277, 2014): Clarified that specific jurisdiction requires contacts by the defendant with the forum state itself, not merely with a forum resident.
Calder v. Jones (465 U.S. 783, 1984): Introduced the “effects” test for intentional torts, holding that libelous conduct aimed at California gives California courts jurisdiction when the harm is felt there.
Ernst & Young, L.L.P. v. Pacific Mutual Life Ins. Co. (51 S.W.3d 573, Tex. 2001): Recognized that a defendant may be liable for fraud to a third party if the defendant intended the misrepresentation to reach and induce reliance by that third party.
International Business Machines Corp. v. Lufkin Industries, LLC (573 S.W.3d 224, Tex. 2019): Summarized the elements of a Texas common-law fraud claim.
Mid–Continent Aircraft Corp. v. Curry County Spraying Service, Inc. (572 S.W.2d 308, Tex. 1978) and Darryl v. Ford Motor Co. (440 S.W.2d 630, Tex. 1969): Addressed the scope of products-liability and economic-loss doctrine.

2. Legal Reasoning

a) Personal Jurisdiction: The Fifth Circuit considered whether Franco’s alteration of documents, sent to federal prosecutors in Texas, created sufficient contacts under Calder’s “effects” test. While the panel agreed that “the effects of [Franco’s] alleged conduct connect her to Texas,” it affirmed for other reasons and did not rest its decision solely on jurisdictional grounds.

b) Fraud Claim: Under Texas law, a plaintiff must plead:

a material misrepresentation;
knowledge of its falsity;
intent that the plaintiff rely;
actual reliance by the plaintiff; and
injury proximately caused by that reliance.

The Daughtrys alleged that Silver Fern intended the government to rely on the doctored emails, not the plaintiffs themselves. They offered no coherent theory of why or how the plaintiffs would have acted on those altered records. In fact, the allegations showed that the plaintiffs discovered the falsity only after the government produced the emails in criminal discovery. Because a plaintiff cannot recover for fraud when it neither was the target of the representation nor relied on it, the claim failed as a matter of law.

c) Civil Conspiracy: Under Texas law, a conspiracy claim hinges on an underlying tort. With no viable fraud claim, the conspiracy theory also collapsed.

d) Failure to Warn: Texas products-liability law permits a claimant to recover for physical harm resulting from an inadequate warning. The Daughtrys suffered only economic injuries—business seizures, lost inventory, and legal expenses—stemming from government action. They alleged no physical injury or property damage from the chemical itself. As a result, they could not bring a failure-to-warn claim in the absence of physical harm.

3. Impact

Daughtry v. Silver Fern Chemical reinforces two important principles:

Third-Party Fraud Requires Targeted Intent and Reliance: When misrepresentations are made to an intermediary (such as a government agency), plaintiffs who were not the intended recipients cannot maintain a fraud claim unless they plausibly allege that the defendant intended them to rely and that they actually did.
Products Liability and Economic Loss: Texas law continues to draw a firm line between claims for physical injury or property damage (eligible for products-liability recovery) and purely economic loss (requiring different doctrines or contractual remedies).

Future litigants will need to plead with particularity how a defendant’s misrepresentation was directed at them, not just at the government or another third party, and must show direct reliance. Likewise, distributors and non-end users cannot sidestep the economic-loss rule by recasting lost profits or legal expenses as failure-to-warn injuries.

Complex Concepts Simplified

Specific vs. General Jurisdiction: General jurisdiction arises when a defendant’s contacts with the forum are so continuous and systematic that the defendant is “at home” there. Specific jurisdiction applies when the lawsuit “arises out of or relates to” the defendant’s forum contacts.
Effects Test (Calder): An intentional tortster who directs harmful conduct at the forum state and knows the resulting harm will be felt there can be sued in that forum even if all acts occurred elsewhere.
Fraud Elements: To win a fraud claim, you must show (1) a false statement, (2) knowledge of falsity, (3) intent to induce reliance, (4) actual reliance, and (5) damages from that reliance.
Economic-Loss Rule: Under Texas law, claims for purely economic losses (like lost profits or costs of litigation) cannot be shoehorned into a products-liability theory unless there is some accompanying physical harm or property damage.

Conclusion

Daughtry v. Silver Fern Chemical underscores that, in fraud actions, plaintiffs must be the intended and actual targets of the misrepresentation. False statements directed only to a government agency cannot support a separate fraud claim by a private party unless that party shows both intent to influence them and actual reliance. Moreover, the decision affirms the strict boundary between physical-harm products-liability claims and purely economic losses under Texas law. Companies and individuals dealing with intermediaries—government or otherwise—must be vigilant: if a misrepresentation is not aimed and relied upon directly by the ultimate claimant, a private suit for fraud is unlikely to survive.