What Is Actual Knowledge? A Legal Primer
Legal definitions of ‘actual knowledge’ vary by jurisdiction, but in general, ‘actual knowledge’ in legal contexts is a standard that refers to what a party actually knows. This is generally distinguished from constructive knowledge, which is the legal determination that a person should have known information even if they didn’t. Such knowledge standards are often used in financial disclosure requirements (as in SEC rules) that go beyond the otherwise-general "reasonable person" standard.
In the US, the term "actual knowledge" refers to the knowledge a person has that is a part of the legal facts. Actual knowledge captures the information that a person reasonably believes to be true and necessary to be part of legal decisions. In various securities rules, the SEC rules allow for predominately fact-based inquiries, so ‘actual knowledge’ may be understood as either "actual knowledge, reasonable inquiry or due diligence" depending on the rules and context.
In many cases ‘actual knowledge’ is part of an investigative inquiry regarding the actions of a potentially responsible party . It is the (sometimes unexpressed but often implicit) legal standard that outlines what someone should know, as distinct from what they ought to know. Such a distinction is of great importance to setting legal liability.
In US Anti-Money Laundering (AML) regulatory guidelines:
"actual knowledge" is the full extent of the recipient’s knowledge. Accordingly, notice was given when the recipient learned of information which unequivocally demonstrates the involvement of a party in terrorist financing or money laundering activities . . . . For example, notice may be given through information contained in a bank’s own records or derived from its own due diligence . . . . Notice may also be given where a senior official of a bank, independent of the knowledge obtained in the course of his or her official duties, knowingly participates in a transaction involving a suspicious party.
Therefore, institutions must be familiar with the concept of ‘actual knowledge’ and how expansive it can be. In the context of AML, however, it has generally been circumscribed as limited to the defined scenarios as noted above, but parties should understand and plan for the possibility that Regulators may apply a wider understanding of ‘actual knowledge.’
Actual vs. Constructive Knowledge Explained
It is important to understand the difference between actual knowledge and constructive knowledge. Constructive knowledge only requires a person to know of facts that would make the source of the information know about the particulars of the situation at hand. For example, where a business’s attorney of record quits without informing the corporation’s board of directors, such a board may still be deemed to have constructive knowledge of a litigation issue. "Constructive knowledge" is defined in Black’s Law Dictionary as "[k]nowledge imputed by a legal presumption," and may be found "where knowledge by a party is reasonable given that party’s position."
The Texas Uniform Trade Secrets Act ("TUTSA"), like other state or federal statutes, does not define "actual knowledge", but courts have interpreted the term. For example, the Fifth Circuit Court of Appeals has described actual knowledge as "the actual, subjective awareness of the fact as distinguished from constructive knowledge." The United States Court of Appeals for the Seventh Circuit also opined that when an individual "is expressly and subjectively aware of a fact" it constitutes actual knowledge, "as opposed to constructive knowledge in which the actor is not aware of the fact, but the circumstances give rise to a duty of inquiry," and more importantly "a failure to inquire is still a failure – in that the inquiry was owed and required by law."
Legal Importance of Actual Knowledge
The legal implications of a party having actual knowledge are substantial. A party that possesses actual knowledge risks liability for damages stemming from personal injury or property loss when it fails to take reasonably prompt action upon such knowledge. Additionally, actual knowledge is often an implied term of contracts and relevant statutes, meaning that a breach of the provision providing that a party will be relieved of liability for damages if it does not receive notice may allow a party to avoid liability if it has actual knowledge within a reasonable time.
For instance, in Peters v. administratrix of the Estate of Lentz (569 N.E.2d 335 [Ind. Ct. App. 1991]), the Indiana Court of Appeals held that a dumpster company had a duty to warn a patron of its facility to check his tires for nails because the company had actual knowledge that "the area was highly susceptible to nails dropping from its vehicles when emptying their loads at the landfill." In Peters, the plaintiff suffered damage to his automobile tires after he drove over nails that dropped off of a dumpster truck that had just emptied its load at a nearby landfill. The court noted that the dumpster company’s management received complaints about nails dropped from its vehicles approximately one year prior to the plaintiff damaging his tires. In addition, the direct, "highly susceptible" correlation between the company’s operations and the size and quantity of nails on the ground, as well as the dumpster company’s intentional dumping of contents into a dumpster located near the landfill, further demonstrated that the company had actual knowledge that nails were littering the property and damaging cars.
Notably, the court modified a previous opinion of one of its court panels in which the court stated that a dumpster company would have a duty to warn patrons of its facility to check their tires only if the dumpster company received complaints about nails at the facility on the same day that the plaintiff damaged his tires. The Peters Court ultimately held that it was enough that the dumpster company received complaints "sufficiently near" to the date in order to hold the company liable for damages to a plaintiff who damaged his tires at the facility. While the Peters case is instructive, courts often place a heavier burden on plaintiffs to demonstrate that a party possesses actual knowledge of a dangerous condition than in contrast to a defendant’s constructive knowledge of the condition. For example, in In re: OSB Antitrust Litigation (204 F.Supp.2d 403 [D. Del. 2002]), the United States District Court for the District of Delaware dismissed the plaintiff class action complaint against the defendants on the grounds that the plaintiff failed to allege that the defendants possessed actual knowledge of potentially collusive activity with "particularly descriptive particularized" allegations. Similarly, in Shaohua Tang et al. v. Resession Inducements Securities Litigation (No. 04-CV-7159, 2006 WL 288453 [Aug. 1, 2006]), the United States District Court for the Southern District of New York dismissed the securities fraud claim against defendant Carlyle Capital Corp. and related entities on the grounds that plaintiffs failed to allege actual knowledge on the part of the defendants regarding a conflict of interest in the defendant Carlyle’s investment strategy. The plaintiffs alleged, among other things, that the Carlyle’s disclosures and actions in September 2007 suggested that Carlyle, which was experiencing significantly reduced net asset value, possessed actual knowledge of a conflict of interest. The Court focused specifically on a press release issued by the Carlyle, which was, in the opinion of the Court, "consistent with Carlyle’s stated profit-maximizing goals," and also inconsistent with plaintiffs’ theory that the defendant Carlyle possessed actual knowledge of a conflict of interest. The court distinguished the press release from the partial disclosures that would have been adequate to sustain plaintiffs’ theory of actual knowledge.
Actual Knowledge in Practice: How Courts Interpret the Concept
When determining whether a party had actual knowledge, courts rely on various methods and types of evidence. For starters, courts look to the language of the contract itself. Whether the contract, on its face, requires a particular action or not can be a key factor in finding actual knowledge. Courts also look for information that shows notice was provided to the party. For instance, receiving an amended complaint or a new set of interrogatories, specifically requesting a response regarding the information relevant to the circumstances, can be sufficient to confer actual knowledge as long as the contract doesn’t otherwise limit notice to those circumstances. Courts have also considered circumstantial evidence, such as "the defendant’s conduct, relationship to the other party, awareness of the facts and circumstances, [and] praise or blame for the ultimate success of the alleged acts . " This all-encompassing look at the practical realities of a parties’ relationship and responsibilities to each other can also play a part in assessing the knowledge of a party.
The standard of proof, which also serves as the burden of proof, is the same for the presence or absence of actual knowledge as the overall burden and standard of proof on the merits: the party having the burden merely has to prove the matters asserted by the party "by a fair preponderance of the evidence," or, in layman’s terms, that something is more likely true than not true. This lower standard of proof refers to the quality, not the quantity, of the evidence, and the courts have held that "a few words are enough to give rise to actual knowledge," so long as the ultimate finding is based on reasonable inferences, rather than mere speculation or guesswork.
Actual Knowledge in Various Areas of Law and How It’s Defined by Courts
In the realm of contract law, parties may gain actual knowledge through explicit terms set forth in an agreement or through written communications between the contracting parties. For example, when one party breaches, if the other party has been properly notified of the breach, they have actual knowledge of the breach. In tort law, a plaintiff is oftentimes required to demonstrate that they had actual knowledge of the harm at issue. For instance, actual knowledge of harm caused by a particular product is usually required before a plaintiff can bring a products liability action. In a criminal context, knowledge that one is committing a crime is an element of many crimes. For example, in criminal law, someone who is charged with embezzlement must have actual knowledge that they were diverting funds for their own use.
Legal Consequences of Actual Knowledge
The understanding of "actual knowledge" within a legal context has the potential to dramatically impact the outcome of a lawsuit, arbitration, or administrative decision. For example, within a judicial or quasi-judicial setting, the existence of actual knowledge may shift the burden of proof for an entire case away from the claimant to the accused or provide actual knowledge evidentiary value onto those instances where mere negligence may otherwise have sufficed for a ruling in favor of the plaintiff.
Indeed , the breadth of actual knowledge can be evidenced in this quote from the federal Fourth Circuit: "The question is whether [the party] had actual knowledge that [the property] was subject to the requirements of the [State Act]. Knowledge of the wrongdoing … can be established by circumstantial evidence." E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 731 F.3d 903, 926 (4th Cir. 2013).
Just like any other element of a case that has evidentiary and jurisprudential value, discovery and pre-litigation tasks can be used to develop actual knowledge within a case for the construction of a winning legal argument.
The point is that actual knowledge can influence the outcome of a case, and the astute practitioner with a clear understanding of the law concerning such knowledge can utilize that knowledge to his or her advantage.
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