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Recent Washington Decision Does Not Expand Boundaries of Negligent Misrepresentation
By Paul Raskin
In the wake of a recession and notorious financial scandals, the legal spotlight has been shining on accountants, attorneys and other professionals who find themselves facing claims for negligent misrepresentation.
When evaluating negligent misrepresentation claims, Washington courts have for decades followed the Restatement (Second) Torts, Section 552. For public policy reasons, the Restatement contains significant defenses limiting the persons who may assert negligent misrepresentation claims, the transactions for which such claims may be asserted and the recoverable damages.
More recently, however, the Washington Supreme Court in Lawyers Title Ins. v. Baik1 enunciated six elements that must be proven by a plaintiff. This expression of the elements may mask defenses available to defendants under the Restatement or create an opportunity for plaintiff's counsel to argue for more lenient standards and broader recovery of damages.
A review of case law suggests that the court did not intend to depart from the Restatement. Prospective litigants may benefit from clarification by appellate courts when the next opportunity arises.
Standing
Section 552(1) of the Restatement provides:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others, in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.2
In deference to the "legitimate fears of indeterminate liability to third persons" and in light of the "important social policy of encouraging the free flow of commercial information," subsection 2 of section 552 goes on to narrow the scope of the claim. Subsection 2(a) limits the class of persons who may assert a negligent misrepresentation claim to those for whom the defendant intended to supply information. Subsection 2(b) further focuses on the intention of the defendant to influence the plaintiff and the transaction at issue.
Subsection (2) provides:
- [T]he liability stated in Subsection (1) is limited to loss suffered
- (a) by the person or one of a group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
- (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.3
The Elements
In Lawyers Title, the Supreme Court identified six elements that must be proven by clear, cogent and convincing evidence to establish negligent misrepresentation:
- That [the defendant] supplied information for the guidance of others in their business transactions that was false; and
- That [the defendant] knew or should have known that the information was supplied to guide [the plaintiff] in business transactions; and
- That [the defendant] was negligent in obtaining or communicating false information; and
- That [the plaintiff] relied on the false information supplied by [the defendant]; and
- That [the plaintiff's reliance] on the false information supplied by [the defendant] was justified (that is, that reliance was reasonable under the surrounding circumstances); and
- That the false information was the proximate cause of damages to [the plaintiff].4
In enunciating these elements, the court expressly "reaffirmed its adoption of the definition of negligent misrepresentation set forth in the Restatement (Second) of Torts, Section 552."5 The limitation in section 552(2)(a) that loss may be recovered only "by the person or one of a group of persons for whose benefit and guidance [the defendant] intends to supply the information or knows that the recipient intends to supply it," however, is glossed over and potentially confused by the Supreme Court's enunciation of the second element of the claim.
As a result, plaintiff's counsel may seek to argue that the words "should have known" have superceded the Restatement's proclamation that the plaintiff must be either a person for whose benefit the defendant "intends" to supply the information or a person the defendant "knows" will be supplied the information by the recipient of it. The Restatement looks to the state of mind of the defendant, a fact that is much more clear than the amorphous negligence concept of what the defendant "should have known."
Similarly, the requirement of section 552(2)(b) that the defendant intend to influence the plaintiff in a specific transaction or substantially similar transaction may provide greater protection to the defendant than the loose assertion contained in the second element of Lawyers Title. The Restatement requires intent and a specific or substantially similar transaction. An isolated reading of the elements set forth by the Supreme Court could arguably require only negligence ("should have known") and "business transactions."
Potentially adding to the confusion, Court of Appeals opinions have further simplified the analysis. Following section 552(1) and Lawyers Title, but ignoring the safeguards of subsection 2, these courts have explained, "[T]his court analyzes a negligent misrepresentation claim by asking whether: (1) the defendant made a negligent misrepresentation; (2) the plaintiff relied on the misrepresentation causing the plaintiff harm; and (3) the plaintiff was justified in relying on the misrepresentation."6
No Departure From Restatement
A close reading of the Supreme Court cases regarding negligent misrepresentation suggests that the court did not intend to supercede the Restatement when it identified the six elements. When the court first sought to identify the elements and, in Lawyers Title, where those elements were repeated, the court confirmed "its adoption of the definition of negligent misrepresentation set forth in the Restatement (Second) of Torts."7
There was no indication whatsoever that the court diverged from its previous application of subsections 2(a) and (b) of section 552. To the contrary, in ESCA Corporation v. KPMG, the court - in affirming dismissal of a negligent misrepresentation claim on summary judgment - explained that the accounting firm defendant "did not intend to influence Seafirst's loan to ESCA:"
Seafirst is outside the class of parties able to bring a negligent misrepresentation claim for the preliminary draft audit because the preliminary draft was not created for Seafirst's benefit and guidance, KPMG did not intend to supply the information to Seafirst, and KPMG did not intend to influence Seafirst's loan to ESCA.8
Similarly, in Lawyers Title, the court quoted section 552, comment a: "Here, the respondents have no credible basis for urging this court to conclude as a matter of law that they were not Ômanifestly aware of the use to which the information was to be put.'"9
Prior Supreme Court cases also are instructive. In Hines v. Data Line Systems, Inc., for example, the Supreme Court affirmed the grant of summary judgment dismissing negligent misrepresentation claims asserted by investors against the Perkins Coie law firm, which had been involved in drafting an allegedly misleading offering memorandum. Among other reasons, the court explained that counsel could not be liable for negligent misrepresentation because "there [was] no evidence that Perkins Coie intended this information to influence or reach a particular class distinct from the general investing public who would have access to the information and rely on it."10
Damages
The Restatement (Second) of Torts and Washington case law also significantly limit the damages that a plaintiff may seek for negligent misrepresentation. Unlike fraud, where a plaintiff may seek benefit-of-the-bargain damages, section 552B provides that damages for negligent misrepresentation are limited to out-of-pocket losses. Comment b to section 552B explains:
The considerations of policy that have led the courts to compensate the plaintiff for the loss of his bargain in order to make the deception of a deliberate defrauder unprofitable to him, do not apply when the defendant has had honest intentions but has merely failed to exercise reasonable care in what he says or does.
Washington courts have expressly "adopted the Restatement (Second) of Torts with regard to negligent misrepresentation, including damages."11 Further, the Court of Appeals has confirmed, "Washington law does not permit the recovery of lost profits in a negligent misrepresentation action."12
Legal, financial and other professionals continue to play a vital role in our economy and personal lives. The policy reasons that led to the Restatement's limitations against negligent misrepresentation claims and their application under Washington law remain true today. n
Paul Raskin is a partner with Corr Cronin Michelson Baumgardner & Preece. His practice focuses on business litigation, including professional liability defense.
1 Lawyers Title Ins. Corp. v. Baik, 147 Wn.2d 536 (2002).
2 Restatement (Second) Torts, ¤ 552 (1977); see also Haberman v. Washington Pub. Power Supply Sys., 109 Wn.2d 107, 161Ð62 (1987).
3 Restatement (Second) Torts, ¤ 552; see also Haberman, 109 Wn.2d at 161Ð62.
4 Lawyers Title, 147 Wn.2d at 545 (quotations and emphasis omitted) (quoting ESCA Corp. v. KPMG Peat Marwick, 135 Wn.2d 820 (1998)).
5 Id.
6 Shulgan v. The Evangelical Lutheran Good Samaritan Society, 2006 Wn. App. LEXIS 18 (Jan. 10, 2006); Olympic Coast Investment Inc. v. Gadini, 2005 Wn. App. LEXIS 198 (Feb. 1, 2005).
7Lawyers Title, 147 Wn.2d at 545 (quoting ESCA Corp., 135 Wn.2d at 826).
8 ESCA Corp., 135 Wn.2d at 832Ð33.
9 Lawyers Title, 147 Wn.2d at 549Ð50 (quoting Restatement sec. 552 cmt. a).
10 114 Wn.2d 127, 151 (1990).
11 Vahanian v. Kaylor, 2001 Wn. App. LEXIS 1519 at *21 (July 13, 2001).
12 Janda v. Brier Realty, 97 Wn. App. 45, 47 (1999).
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