Case Problem with Sample Answer. Thomas Persson and Jon Nokes founded Smart Inventions, Inc., in 1991 to market household consumer products. The success of their first product, the Smart Mop, continued with later products, which were sold through infomercials and other means.

Persson and Nokes were the firm’s officers and equal shareholders, with Persson responsible for product development and Nokes operating the day-to-day activities. By 1998, they had become dissatisfied with each other’s efforts. Nokes represented the firm as financially “dying,” “in a grim state, . . .

worse than ever,” and offered to buy all of Persson’s shares for

$1.6 million. Persson accepted. On the day that they signed the agreement to transfer the shares, Smart Inventions began marketing a new product—the Tap Light, which was an instant success, generating millions of dollars in revenues.

In negotiating with Persson, Nokes had intentionally kept the Tap Light a secret. Persson filed a suit in a California state court against Smart Inventions and others, asserting fraud and other claims. Under what principle might Smart Inventions be liable for Nokes’s fraud? Is Smart Inventions liable in this case? Explain. [Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist. 2005)]

After you have answered Problem 25.4, compare your answer with the sample answer given on the Web site that accompanies this text. Go to www.cengage.com/blaw/fbl, select

“Chapter 25,” and click on “Case Problem with Sample Answer.”