Culpability and Damages

Section 552B ties its remedy to carelessness: the plaintiff recovers the pecuniary loss of which the misrepresentation is a legal cause, and the benefit of the plaintiff’s contract with the defendant is excluded.¹ That limit is one rung of a ladder of fault. The classic misrepresentation is fraud, but liability for economic loss can also reach negligent misrepresentation in limited circumstances, and sometimes even innocent misrepresentation.² The Restatement fits the remedy to the rung, and some earlier negligence cases failed to see that negligence might call for a milder measure than fraud does.³

Each step up the ladder adds something to the recovery. An innocent misrepresentation yields out-of-pocket loss and nothing more.⁴ Negligence adds consequential damages while still excluding the benefit of the bargain. Fraud adds the plaintiff’s option to take the benefit of the bargain instead of out-of-pocket loss.⁵ When the fraud is malicious or oppressive, it also exposes the speaker to punitive damages.⁶

The statement at the bottom of that ladder need not be a flat assertion of fact. Section 539 reads an opinion to carry implied factual assertions: that the facts known to the speaker are not incompatible with the opinion, and that the speaker knows facts sufficient to justify forming it. When Hearst represented that shoes were “good ones” worthy of its seal, it also asserted that it had some basis for saying so.⁷ The inquiry below assumes some false statement, express or implied, and asks only what the speaker’s state of mind does to the remedy. The first part takes the fraud end of the ladder, where the plaintiff’s options are widest, and the second takes the innocent end.

Fraud Damages

Fraud opens the widest remedy. As one court explained in quoting Prosser and Keeton, the Restatement adopts the out-of-pocket rule for negligent and innocent misrepresentation and the benefit-of-the-bargain rule where the misrepresentation is fraudulent.⁸ Under § 549, the fraud plaintiff may recover as primary damages either out-of-pocket loss or, at the plaintiff’s option, the benefit of the bargain if the plaintiff can prove it to a sufficient degree of certainty.⁹ Consequential damages may be added instead of or, in proper cases, in addition to a market-value measure like the benefit of the bargain, and punitive damages join them when the fraud is malicious or oppressive enough to qualify.¹⁰

The two primary measures start from the same figure, the actual value of what the plaintiff received, and differ in what they compare it with. Out-of-pocket loss is the price paid less that value.¹¹ Benefit of the bargain is the value the thing would have had if it had been as represented, less that value.¹² A widget sale shows how far apart they can sit. A seller induces a buyer to pay $5,000 for a widget by falsely representing facts that, if true, would have made it worth $6,000, and the widget is actually worth $3,000.¹³ Out-of-pocket loss is $2,000, the price less the actual value, and benefit of the bargain is $3,000, the represented value less the actual value. The extra $1,000 is the profit the buyer expected, a $6,000 widget bought for $5,000. Because the election is the buyer’s, this buyer takes $3,000, although on other numbers, such as a price above the represented value, out-of-pocket loss would be larger and the buyer would choose it.

The choice recalls the contract choice between expectation and reliance: both measures put the plaintiff in the position the plaintiff would have occupied but for the wrong, and they define the wrong a little differently.¹⁴

Hold the widget facts constant and change only the seller’s state of mind. A seller who carelessly repeated the $6,000 figure owes the same buyer the $2,000 value differential under § 552B(1)(a),¹⁵ plus any other pecuniary loss that the buyer’s reliance legally caused under § 552B(1)(b).¹⁶ The $1,000 of expected profit is out, because § 552B(2) excludes the benefit of the buyer’s contract.¹⁷ The $1,000 gap between the two awards therefore traces to scienter alone. Consequential damages do not mark the line, since the negligence plaintiff recovers them too.¹⁸ What fraud adds is the benefit-of-the-bargain option and the exposure to punitive damages.

The argument for the larger measure begins with a gap in the smaller one. If the plaintiff were confined to out-of-pocket loss, a defendant could induce a sale by misrepresentation and escape tort liability whenever the price approximated the actual value, leaving the plaintiff holding something far different from what the plaintiff thought he was getting.¹⁹ The commentary doubts the force of that argument, because it understates the other remedies open to such a plaintiff.

A collector who dealt with a merely careless dealer would recover nothing on the value differential, because the price did not exceed the actual value. The Restatement accepts that result for carelessness; most courts decline to accept it for a lie.

Jurisdictions do not agree on how much of the fraud remedy to allow. Most courts now permit the plaintiff to recover the loss of bargain, some of them after having earlier supported the out-of-pocket measure, and others say with the Restatement that the plaintiff may recover under either measure at the plaintiff’s option. Sometimes courts choose the measure they deem best to fit the facts.²⁰ In Hinkle v. Rockville Motor Co., the Maryland court found that Maryland had not adopted a rigid stand for either theory to the exclusion of the other, since both had been used and approved. It reviewed the earlier Maryland cases because dicta in several of them seemed to suggest that the state used only the out-of-pocket remedy.²¹ The election has one further limit. When the misrepresentation is unrelated to any contract between the parties, no bargain exists to give the plaintiff the benefit of, so out-of-pocket loss is the only primary measure.²²

Punitive damages stand apart from the compensatory scale. They are recoverable when the defendant’s intentional fraud is sufficiently malicious or oppressive, so scienter alone does not trigger them, and consumer protection and similar statutes may authorize punitive, double, or treble damages.²³ In Casciola v. F.S. Air Service, Inc., a fraud verdict carrying $30,000 in actual damages supported $300,000 in punitive damages.²⁴ Because the trigger is intentional fraud of that kind, a speaker who was only careless ordinarily faces no such exposure.

Exam Analysis Steps

Because the fraud remedy differs from the negligence remedy at only two points, run the analysis as a comparison that begins with the speaker’s state of mind:

Decide whether the speaker acted with scienter, carelessly, or innocently, since that fact fixes which measures are open.
Compute out-of-pocket loss: the price paid less the actual value received.
If the speaker was careless, add any pecuniary loss that the plaintiff’s reliance legally caused, and stop; the benefit of the contract is excluded.
If the speaker acted with scienter, also compute the benefit of the bargain (the value as represented less the actual value), confirm that the jurisdiction allows the election and that the amount is provable, and give the plaintiff the choice of the two primary measures.
Add consequential damages in a proper case, and then ask whether the fraud was malicious or oppressive enough to support punitive damages.

Innocent Misrepresentation

Section 552C reaches the speaker at the bottom of the ladder, one who neither lied nor failed to take care. A party to a sale, rental, or exchange who misrepresents a material fact to induce the other side to act or to refrain from acting is liable for the pecuniary loss caused by the other side’s justifiable reliance, even though the statement was made neither fraudulently nor negligently.²⁶ The rule imposes liability without fault, and it follows a minority position.²⁷ In a jurisdiction that has not adopted it, a speaker who was both honest and careful ordinarily owes no tort damages for a mistaken statement.

Liability without fault looks odd in tort, and its source explains why it exists. In an English decision on the action of deceit, Lord Herschell separated that action from one to rescind a contract. Where rescission is claimed, it is enough to prove a misrepresentation, and however honestly it was made, a contract obtained by it cannot stand. In an action of deceit, by contrast, misrepresentation alone is not enough.²⁸ The notes reproducing § 552C add that a material innocent misrepresentation supports rescission without scienter or negligence, and that this action is not in tort but for restitution.²⁹ The earliest case to carry strict liability over to a tort action for damages was Holcomb v. Noble, an 1888 Michigan decision in which the court appears to have confused equitable relief with an action at law.³⁰

The damages remedy keeps the restitutionary mark. The case law allowing tort recovery for innocent misrepresentation is inconclusive on damages, but the Restatement confines the plaintiff to out-of-pocket loss. That excludes both the benefit of the bargain and consequential damages, and it creates what amounts to a restitutionary remedy in tort law clothing.³¹ Out-of-pocket loss is the value differential: the difference between the value of what the plaintiff received and its price.³² That is clause (a) of § 552B(1), and nothing else in § 552B(1) carries over. The pecuniary loss that clause (b) allows for reliance “otherwise” is unavailable against the innocent speaker.³³ Both sections exclude the plaintiff’s expected profit, and the line between them is that only the negligent speaker also answers for reliance losses.

Whether the first buyer recovers anything depends on where the sale took place. Michigan fully and consciously follows the doctrine of innocent misrepresentation, as U.S. Fidelity & Guaranty Co. v. Black shows.³⁴ Pennsylvania stands on the other side. In Growall v. Maietta, an appellate court rejected a buyer’s claim for out-of-pocket losses caused by an innocent misrepresentation when the buyer had not asked for rescission.³⁵ Even where a plaintiff cannot reach the speaker’s state of mind, one court held that an innocent misrepresentation may be actionable when the declarant has the means of knowing the truth, ought to know it, or has a duty to know it. It applied that holding to a residential developer’s statement about where a structure sat on its lot, a matter on which the developer had special means of knowledge and the buyers were entitled to rely.³⁶

An exam question that describes an honest but mistaken statement in a sale calls for three checks in sequence. First, ask whether the jurisdiction has adopted § 552C, because it follows a minority position and many jurisdictions will leave the buyer to rescission or another theory. Second, ask whether the dealing is a sale, rental, or exchange. Third, if both answers are yes, compute only the price-versus-value gap and leave out reliance expenses, consequential losses, and the profit the true statement would have produced.