controlling California law on the issue of auditor liability to third parties was the Butler decision, which tracked closely with the reasonably-foreseeable-plaintiff position of H. Rosenblum v. Adler, 461 A.2d 138 (N.J. 1983). In the wake of enormous, recent, national verdicts against CPA firms performing audits, the California Supreme Court, in Bily, weighed in with a 5-2 decision that now places California in the group of states which purport to apply the Restatement (Second) of Torts Section 552 in negligent misrepresentation cases. Bily at 768-73. The supreme court's interpretation of the Restatement is a narrow one as indicated by the following negligent misrepresentation instruction the supreme court suggested be used henceforth by California trial courts.
The representation must have been made with the intent to induce plaintiff, or a particular class of persons to which plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a specific type of transaction, that defendant intended to influence. Defendant is deemed to have intended to influence [its client's] transaction with plaintiff whenever defendant knows with substantial certainty that plaintiff, or the particular class of persons to which plaintiff belongs, will rely on the representation in the course of the transaction. If others become aware of the representation and act upon it, there is no liability even though defendant should reasonably have foreseen such a possibility.
Bily at 772 (emphasis added).
Although the restoration of a more restrictive privily rule will provide a temporary respite for CPA firms from pending litigation, it is unlikely to be much of a long-term solution, inasmuch as third parties are sure to learn how to become members of the protected class of "foreseen plaintiffs" in negligent misrepresentation suits against professionals. See infra text accompanying note 27.
(n23) It could be argued that, even under restrictive privily rules, an auditor remains indirectly exposed to liability because its client, who becomes liable to creditors, investors, and guarantors, will have a right of contribution or indemnity (or a separate professional negligence claim) against its auditor who failed to detect and report internal fraud or other dubious transactions. See Suzanne Whoolley & Zachary Schiller, These White Shoes Are Splattered With Mud, BUS. WK., Sept. 7, 1992 (reporting lawsuit by Phar-Mor Inc. against its auditor Coopers & Lybrand for negligence in failing to uncover an alleged $10 million embezzlement and $350 million overstatement of net worth by Phar-Mor employees that led to the collapse and bankruptcy of the company). Frequently, however, the directors and managers of those companies were either aware of, or responsible for, the misconduct and may, for that reason, be barred from bringing such suits. See Sontag, infra note 186. But see also Lambert, infra note 186 (reporting that recent 9th Circuit decision gives FDIC broadened powers to maintain such suits in its role as receiver of failed thrifts).
(n24) See, e.g., H. Rosenblum v. Adler, 461 A.2d 138 (N.J. 1983).
(n25) See, e.g., Christy Harlan, Jury Awards $500 Million in Damages To Ex-Bondholders in MiniScribe Case, WALL ST. J., Feb. 5, 1992 at A3 (reporting that auditors Coopers & Lybrand were assessed $200 million punitive damages for negligence out of a $550 million award, which