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Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

$1 Million Jury Verdict Reversed in Tubby Smith and U of M Litigation

In a closely watched decision the Minnesota Supreme Court recently reversed a $1,000,000 jury verdict against the University of Minnesota (“U of M”) and head basketball coach Orlando Henry Smith (commonly known by his nickname “Tubby Smith”). The Court held that under the specific circumstances of this case, prospective assistant coach James R. Williams (“Williams”) was not entitled to protection against negligent misrepresentation by Tubby Smith or the U of M concerning whether or not Tubby Smith had the authority to hire Williams. See Williams v. Smith, Civ. Nos. A10-1802 and A11-0567, 2012 Minn. LEXIS 393 (Minn.Aug. 8, 2012). Although this decision was favorable for the U of M in the end, it highlights how dangerously close the U of M came to being held liable for damages in excess of $1,000,000. This case also makes it clear that when employers are negotiating with prospective employees, they should be transparent and direct with prospective employees about which managers possess hiring authority and train their managers to make accurate statements concerning their hiring authority.

Factual Background
In the spring of 2007, Tubby Smith was seeking out potential candidates for assistant coaching positions at the U of M. Near the end of March 2007, Tubby Smith approached Williams during the National Collegiate Athletic Association (“NCAA”) Final Four basketball tournament to discuss the possibility of bringing Williams on as an assistant coach at the U of M. Williams had previously been employed at the U of M as an assistant coach from 1971 to 1986. During his tenure, Williams was investigated two times by the NCAA and was found to have committed multiple violations of NCAA rules.

Over the next couple of days, Williams provided his resume to the U of M basketball office at the request of Tubby Smith, a Memorandum of Agreement between the U of M and Williams was prepared (but not finalized), and Tubby Smith negotiated a salary with Williams. On April 2, 2007, Tubby Smith and Williams had a telephone conversation during which Tubby Smith asked if Williams was “ready to join him at the University of Minnesota.” Williams believed that Tubby Smith had offered him a job, and that he had accepted. Williams also believed that Tubby Smith knew about the NCAA violations during the whole course of their negotiations, and Tubby Smith acknowledged that the disciplinary history of Williams may have been mentioned at the first meeting at the Final Four tournament.
On the evening of April 2, 2007, and in reliance on the belief that he had a job at the U of M, Williams verbally informed his current employer, Oklahoma State University, that he was resigning from his assistant coaching position.

On April 3, 2007, prior to submitting his formal resignation letter to Oklahoma State University, Tubby Smith told Williams that the U of M Athletic Director, Joel Maturi (“Mr. Maturi”), would need to approve the offer to Williams. The same day, Williams submitted his resignation letter to Oklahoma State University and the school made arrangements to hire a different assistant coach. Later that day, Tubby Smith told Williams that Mr. Maturi strongly opposed hiring Williams due to his prior NCAA rule infractions and that he wanted to maintain a clean program at the U of M and was concerned about potential media reaction if the U of M hired Williams. By April 8, 2007, Williams knew that the U of M did not consider him to be one of its assistant basketball coaches, despite the fact that he believed he had been offered and accepted the position.

Williams sued the Board of Regents of the U of M and Mr. Maturi under various legal theories and later commenced a second lawsuit against Tubby Smith. The cases were eventually consolidated at the district court and went to trial on negligent misrepresentation claims against the U of M and Tubby Smith. The jury found for Williams and awarded over $1,000,000 in damages. The U of M and Tubby Smith appealed, and Williams cross-appealed. The Court of Appeals affirmed. The U of M then sought review by the Minnesota Supreme Court.

Minnesota Supreme Court Holding
The Minnesota Supreme Court granted the U of M’s petition for review to determine, among other issues, whether under a negligent misrepresentation claim a duty of care exists in arm’s-length negotiations between a prospective employer and a prospective employee.1
The Court first defined negligent misrepresentation as:

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.

Williams v. Smith, 2012 Minn. LEXIS 393, at *21-22 (citing Bonhiver v. Graff, 248 N.W.2d 291, 298 (1976)).

To prevail on a negligent misrepresentation claim, the plaintiff must establish:

(1) a duty of care owed by the defendant to the plaintiff;

(2) the defendant supplies false information to the plaintiff;

(3) justifiable reliance upon the information by the plaintiff; and

(4) failure by the defendant to exercise reasonable care in communicating the information.

Id. at *22.

The Court examined the element of the duty of care. The U of M argued that an employer owes no duty to a prospective employee in the context of negotiations for an employment opportunity and therefore Williams’ negligent misrepresentation claim failed as a matter of law. Williams argued that Tubby Smith owed him a duty of care because liability for misrepresentations can arise even during an arm’s-length negotiation, and because once Tubby Smith chose to speak, he had a duty not to mislead Williams after Williams’ and Tubby Smith’s interests were “unified.”

Although the Court noted that it believed the U of M’s interactions with Williams were unfair and disappointing, it held that no duty of care against negligent misrepresentation was owed to Williams. The Court cited several reasons for its decision.

First, the Court explained that a duty of care is owed in the context of certain legal relationships, such as professional and fiduciary relationships. The Court noted, however, that it has declined to recognize a duty of care in the context of an arm’s-length commercial transaction, reasoning that sophisticated parties negotiating a commercial transaction are entitled to legal protection only for intentional, fraudulent misconduct. The Court has also declined to recognize a duty of care in the context of prospective government transactions.

Second, the Court examined whether public policy would favor protecting a prospective government employee from the negligence of a government representative by looking to the nature of the relationship between the parties. The Court determined that the relationship between Williams and Tubby Smith was not a professional or fiduciary relationship because neither party had superior knowledge or expertise in the negotiations, and Tubby Smith was not acting in an advisory capacity to Williams. The Court pointed out that Williams could have learned of the hiring authority of representatives at the U of M on the school’s public website, and that Tubby Smith warned Williams of the need for approval from Mr. Maturi prior to turning in his resignation letter. It further noted that Tubby Smith and Williams were two sophisticated business people, watching out for their individual interests while negotiating at arm’s length, and that each of them had decades of coaching experience at a variety of institutions, with a variety of hiring practices, a variety of athletic directors, and a variety of employment conditions.

Therefore, the Court narrowly construed the duty of care and determined that when a prospective government employment relationship is negotiated at arm’s length between sophisticated business persons and does not involve a professional, fiduciary, or other special legal relationship between the parties, the prospective employee is not entitled to protection against negligent misrepresentations by the representative for the prospective government employer.

Concurrence and Dissent
Justice Helen Meyer wrote an opinion dissenting from the majority and arguing that public policy does support imposing a duty of care on the U of M to supply accurate and truthful information to a prospective employee.

First, Justice Meyer argued that there is no evidence in the record that Williams had access to any publicly available information regarding Tubby Smith’s authority to hire, and that the majority’s view is not consistent with the jury’s finding that Tubby Smith failed to use reasonable care in communicating his authority to Williams, that Williams reasonably relied on Tubby Smith’s representation that he had final hiring authority, and that Williams was not negligent in doing so.

Second, Justice Meyer argued that the majority unfairly skewed the evidence of whether or not William’s should have known that a head basketball coach at a university, such as Tubby Smith, would possess authority to hire his own staff. Justice Meyer pointed out that other schools allow head basketball coaches to hire their own assistant coaches. She further noted that although Tubby Smith told Williams that Mr. Maturi was the person who had authority to hire, this disclosure took place only after Williams had orally resigned from his position at Oklahoma State University and the head coach had acted to fill that position. Therefore, Justice Meyer would have affirmed the jury verdict below in favor of Williams.

Lessons for Employers
Although in this case the Williams v. Smith Court held that no duty of care concerning negligent misrepresentation existed, the holding was narrowly construed and the dissenting opinion reveals that employers need to be careful when negotiating with potential employees. There are several lessons for employers to keep in mind in light of this case:

First, the Williams v. Smith opinion only examined a claim for negligent misrepresentation. This claim is distinct from claims for intentional misrepresentation and fraud. Employers will still have liability for intentional torts committed during negotiations with prospective employees.
Second, a duty of care concerning negligent misrepresentations may be imposed where a potential employer or agent of the employer is acting as an advisor to the potential employee, rather than having an adversarial relationship.

Third, a duty of care may exist where there is a professional relationship or a fiduciary relationship between the parties. For example, where there is an accountant/client or attorney/client relationship, or where certain fiduciary relationships involving guardians, executors, and directors of corporations exist, the duty of care in communicating information to potential employees also exists.

Fourth, here the job applicant was a sophisticated party who had negotiated and accepted coaching positions at several other colleges. In other cases, the job applicant may not be considered sophisticated. It is possible that a court would distinguish this case from other situations or different facts, and find that a duty of care does exist.

Fifth, even though the U of M ultimately won this case, the school was forced to deal with adverse publicity, high costs and expenses to defend the case, and the risk of liability. In the long run, it would be wise for employers to avoid claims for negligent misrepresentation altogether, instead of toeing the line or failing to consider the risks associated with representations made to prospecitve employees and job applicants.

In conclusion, employers would be wise to take proactive steps to avoid legal claims that could arise during the hiring process. For example, employers should specify which positions at the company have hiring authority in employee handbooks and job descriptions. Employers could also indicate in the job postings and hiring materials that all offers of employment must be in writing and must be approved by the Human Resources department. Employers should train managers (1) not to misrepresent whether they have hiring authority to prospective employees; (2) to affirmatively tell job applicants that they do not have final hiring authority; (3) to inform applicants that all offers must be in writing; and (4) to inform applicants that all offers must be approved by the Human Resources department. Finally, employers could include language in written job offers that the employer has the right to revoke the offer prior to acceptance by the employee and that the employment will be “at-will” and the employee can be terminated or the terms and conditions of employment can change even after the employee has accepted the offer.

If your company would like to learn more about legal pitfalls during the hiring process and tips to avoid potential liability, please contact any of the Trepanier MacGillis Battina P.A. employment law attorneys.
About the Author:
Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota. Their employment law attorneys can be reached at 612.455.0500.

1 The U of M also challenged the district court’s subject-matter jurisdiction over Williams’ negligent misrepresentation claim. The Court held that generally the exclusive method for review of decisions made by a constitutional corporation and an agency of the state, such as the U of M, is by a petition for certiorari pursuant to Minn. Stat. § 606.01. The Court noted, however, that when a prospective employee’s claim against the U of M alleges tortious conduct such as fraud or negligent misrepresentation that is separate and distinct from the decision not to hire, the district court has subject-matter jurisdiction to address that claim.