In a Win for Business, North Carolina Supreme Court Raises the Bar for Negligent Misrepresentation Claims

By Mike Mitchell, Chris Smith, Cliff Brinson and Hope Garber

Plaintiffs frequently tack on negligent misrepresentation claims to ordinary business disputes. A negligent misrepresentation claim alleges that one party carelessly supplied incorrect or incomplete information on which the other party relied. In the business context, negligent misrepresentation claims often are based on statements made during contract negotiations. Under a recent North Carolina Supreme Court opinion, those claims will be easier to dispose of at the outset of a lawsuit.

The North Carolina Supreme Court held in Value Health Solutions, Inc. v. Pharmaceutical Research Associates, Inc., No. 100A22 (Sept. 1, 2023), that negligent misrepresentation claims must be alleged with particularity. The general rule in civil proceedings is that a plaintiff’s complaint (or a defendant’s counterclaim) need only allege a short and plain statement of the claims. However, certain claims, like fraud, are subject to a higher standard under Rule 9(b) of the North Carolina Rules of Civil Procedure and therefore must be alleged with more detail. Until Value Health, North Carolina’s appellate courts had not addressed which standard applied to negligent misrepresentation claims. In Value Health, the Supreme Court made clear that negligent misrepresentation claims must satisfy the same heightened pleading standard as fraud claims. Specifically, parties bringing a negligent misrepresentation claim must allege the time, place, and content of the alleged misrepresentation, the identity of the person making the alleged misrepresentation, and how they justifiably relied on that information. The failure to do so will result in dismissal of the claim.

The ruling is a win for businesses across the state. Under the ordinary pleading standard, groundless negligent misrepresentation claims are more likely to be allowed to proceed to discovery, thereby increasing defense costs and the potential exposure for the targets of such claims. Under the heightened pleading standard required by Value Health, more of those claims (and the corresponding expense) will be eliminated early in the case. Furthermore, the decision promotes prompt resolution of simple contract disputes under basic principles of contract law, rather than allowing such disputes to be unduly complicated and protracted by the addition of tenuous negligent misrepresentation claims.

Value Health itself is a good example. It was a dispute that arose out of an asset purchase agreement for several software applications. The software company alleged that the buyer breached the asset purchase agreement by, among other things, failing to make required milestone payments for sales of software licenses to third parties. Relatedly, the software company alleged that in negotiating the asset purchase agreement, the buyer misrepresented its plans to license the software to third parties. The trial court ruled that the software company failed sufficiently to allege negligent misrepresentation and dismissed the claim. The Supreme Court affirmed, rejecting the software company’s attempt to embellish what was nothing more than an ordinary contract dispute.

The rule adopted in Value Health strengthens predictability in the court system by requiring a strong factual basis to pursue a negligent misrepresentation claim. Conclusory allegations of negligence are not sufficient to transform a contract dispute into a tort dispute.

If you have any questions about this development, please contact a member of the Litigation practice group or your regular Smith Anderson lawyer.