1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-4-1994

J&R Ice Cream Corp. v. California Smoothie

Licens. Corp.

Precedential or Non-Precedential:

Docket 93-5516, 93-5547

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Recommended Citation

"J&R Ice Cream Corp. v. California Smoothie Licens. Corp." (1994). 1994 Decisions. Paper 102.

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1 

 UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

Nos. 93-5516 and 93-5547 

 

J & R ICE CREAM CORPORATION, 

a Corporation of the State of Florida 

 

 v. 

CALIFORNIA SMOOTHIE LICENSING CORPORATION, 

a Corporation of the State of New Jersey; 

CALIFORNIA SMOOTHIE INTERNATIONAL, INC., 

a Corporation of the State of New Jersey, 

 Defendants/Third-Party 

 Plaintiffs

v. 

JEFFREY K. BAUGHER; 

RICHARD ROSSETTI, 

 Third-Party Defendants

 

California Smoothie Licensing Corporation 

and California Smoothie International, Inc., 

 Appellants-Cross-Appellees

J & R Ice Cream Corporation, 

 Appellee-Cross-Appellant

 

On Appeal from the United States District Court 

for the District of New Jersey 

(D.C. Civ. No. 89-4638) 

 

Argued June 23, 1994 

BEFORE: GREENBERG and STAPLETON, Circuit Judges, 

and FARNAN, District Judge* 

(Filed: August 4, 1994) 
2 

 

* Honorable Joseph J. Farnan, Jr., United States District Judge 

for the District of Delaware, sitting by designation. 

 

 

 Samuel B. Santo, Jr. (argued) 

 Gregory B. Reilly 

 Lowenstein, Sandler, Kohl, 

 Fisher & Boylan 

 65 Livingston Avenue 

 Roseland, N.J. 07068 

 Attorneys for Appellants-

 Cross-Appellees

 California Smoothie

 Licensing Corp. and

 California Smoothie

 International, Inc.

 Brian P. Sullivan (argued) 

 Jay M. Zuckerman 

 Smith, Stratton, Wise, Heher & 

 Brennan 

 600 College Road East 

 Suite 4200 

 Princeton, N.J. 08540 

 

 Attorneys for Appellee-

 Cross-Appellant J & R

 Ice Cream Corporation

 

OPINION OF THE COURT 

 

GREENBERG, Circuit Judge. 

I. FACTUAL AND PROCEDURAL HISTORY

 A. Factual History

 This appeal arises from an unsuccessful attempt of a 

franchisee to operate a restaurant in Florida. The appellantscross-appellees are California Smoothie International, Inc. 

(CSI) and its wholly-owned subsidiary, California Smoothie 
3 

Licensing Corporation (CSLC). As a matter of convenience, we 

sometimes will refer to CSI and CSLC singularly as "California 

Smoothie". CSI owns and operates California Smoothie 

restaurants, and CSLC franchises California Smoothie restaurants. 

The appellee-cross-appellant is J & R Ice Cream Corporation, the 

franchisee, which Jeffrey Baugher and Richard Rossetti founded in 

1984. We note that in the business, restaurants sometimes are 

called "stores" and thus we will use that term. 

 We recite the facts taken from the perspective of J & R 

Ice Cream as the verdict winner. Baugher and Rossetti are 

longtime friends who decided in the 1980's to open an ice cream 

shop together. Soon after incorporating J & R Ice Cream for that 

purpose, they decided that to secure a desirable location and 

financing, they would try to acquire a franchise. They initiated 

preliminary discussions with a number of franchisors, including 

Frusen Gladje and Steve's Ice Cream. However, during the summer 

of 1985, Robert Keilt, a childhood acquaintance of the Baugher 

and Rossetti families who was the president of CSI and CSLC, 

learned from Baugher's brother that Baugher and Rossetti were 

considering acquiring a franchise. Subsequently, Joseph Kennedy, 

vice president of franchising and development for CSLC, contacted 

Baugher and suggested that they consider acquiring a California 

Smoothie franchise in the Boca Town Center in Boca Raton, 

Florida. Baugher agreed to attend a meeting at California 

Smoothie's headquarters in Clifton, New Jersey, to discuss that 

possibility. Prior to the meeting, California Smoothie sent 

Baugher brochures regarding California Smoothie franchises which 
4 

contained representations concerning California Smoothie's 

expertise in site selection. 

 The first meeting regarding the acquisition of a 

California Smoothie franchise by Baugher and Rossetti was on 

August 8, 1985. On that date, Baugher met first with Kennedy, 

then with Keilt, and then with Kennedy again. According to 

Baugher, in their initial discussions Kennedy told him that the 

average California Smoothie franchise accrued $300,000 in sales 

per year, that a store at the Boca Town Center would produce at 

least that level of sales and probably more, and that all 

existing stores were earning between 18 and 20 percent profit. 

Baugher then met with Keilt who reiterated Kennedy's 

representations. Finally, when Baugher met with Kennedy again 

after speaking with Keilt, Kennedy gave Baugher documents 

containing sales and profit figures for California Smoothie 

company-owned stores earning substantial profits. Some of the 

documents contained a "disclaimer" stating that prospective 

franchisees should not rely on the figures. Nonetheless, Kennedy 

told Baugher to ignore the disclaimer because it was merely a 

legal requirement. Kennedy also told Baugher that the 

distribution of the documents containing sales and profit figures 

to prospective franchisees violated FTC regulations and 

California Smoothie policy. Moreover, he gave Baugher CSLC's 

Uniform Offering Circular, which included the following 

statement: 

 [t]he Franchisor does not disclose to 

prospective Franchisees the actual, average 

or projected sales, profits or earnings of 
5 

existing California Smoothie restaurants. In 

the event that a prospective Franchisee 

should obtain such information, it should not 

be relied upon, since any information 

pertaining to sales, profits, or earnings is 

intended for internal use only as a basis for 

the Franchisor's management decisions. 

Uniform Offering Circular § 19, app. at 105. 

 The second meeting regarding the acquisition of a 

California Smoothie franchise by Baugher and Rossetti involved 

Rossetti and California Smoothie representatives, James Skouras 

and Gary Goddard. Goddard assured Rossetti that he and Baugher 

could match the profit and sales figures on certain documents 

Goddard showed him. There was a third meeting on August 26, 

1985, when Baugher met with Keilt and Skouras who suggested that 

Baugher consider the Pompano Fashion Square Shopping Center site 

in Pompano Beach, Florida, for a franchise and indicated that a 

store at that site would have sales in excess of $300,000 per 

year. 

 In September 1985, Baugher and Rossetti submitted 

franchise applications to California Smoothie, expressing 

interest in acquiring a franchise at the Boca Raton site. On 

November 22, 1985, California Smoothie notified Baugher and 

Rossetti that their applications had been approved. However, 

shortly thereafter California Smoothie informed them that Keilt 

had decided not to locate a "full-line-menu" restaurant at the 

Boca Town Center due to the lease economics of the site.0

 

0California Smoothie Restaurants served items including pita 

sandwiches, yogurt and blended fruit drinks. Their menus varied, 

however, from full-line menus including the greatest variety of 

products, to menus limited almost exclusively to the California 

Smoothie blended fruit drinks. 
6 

Meanwhile, in November 1985, CSI leased space in the food court 

scheduled to open at the Pompano Fashion Square Shopping Center 

some time in 1986. In late December 1985, Keilt and Skouras 

contacted Baugher and Rossetti and told them that a store at the 

Pompano mall would produce at least $300,000 in sales per year. 

Moreover, Keilt told Baugher that California Smoothie had 

conducted a full investigation of the Pompano mall site, 

including studies of demographic information. 

 Baugher and Rossetti retained an accountant, Thomas 

Maniscalo, to evaluate the Pompano mall site and to help them get 

financing should they choose to acquire a California Smoothie 

franchise. Maniscalo had several conversations with Keilt and 

another representative of California Smoothie, who indicated to 

him the level of gross sales and expenses associated with a 

franchise. In these discussions, the California Smoothie 

representatives understated the expenses and failed to mention 

that certain California Smoothie restaurants were operating at a 

loss or had closed due to financial failure. Based on the 

misleading information he received, Maniscalo advised Baugher and 

Rossetti to acquire the Pompano mall California Smoothie 

franchise. 

 On January 28, 1986, Baugher and Rossetti entered into 

a site selection agreement with CSLC, and made a $5,000 

downpayment on CSLC's $25,000 franchise fee. Subsequently, on 

February 21, 1986, Baugher and Rossetti paid the remaining 

$20,000 of the franchise fee and executed a franchise agreement 

and a sublease entitling and obligating them to operate a 
7 

California Smoothie Restaurant at the site leased by CSI in the 

food court at the Pompano mall. Prior to executing these 

agreements, Baugher and Rossetti expressed concern that the lease 

negotiated by CSI with the Pompano mall's landlord did not 

contain a cap on the common area maintenance fees. Indeed, 

California Smoothie's guidelines indicated that common area 

maintenance fees for a food court should not exceed two per cent 

of gross sales. Keilt responded to their concern by stating that 

he and the landlord had reached an oral agreement providing that 

common area maintenance fees would not exceed three percent of 

gross sales. 

 Baugher and Rossetti opened their California Smoothie 

restaurant at the Pompano mall on June 8, 1986, and on August 6, 

1986, they assigned their rights in the franchise agreement to J 

& R Ice Cream. By the end of 1986, the franchise was operating 

at a loss. Baugher and Rossetti complained to CSLC about their 

gross sales and about the level of the food court maintenance 

fees which the mall collected from food court tenants.0 These 

fees totaled more than the promised three percent of the 

restaurant's gross sales. After unsuccessfully seeking a 

reduction in the fees from the agent representing the mall's 

landlord, CSLC filed a lawsuit against the landlord and its agent 

in a Florida state court, alleging that the agent had made 

material misrepresentations to CSI during the lease negotiations. 

 

0The mall's landlord assessed CSI for the food court maintenance 

fees, and then CSI assessed Baugher and Rossetti for them 

pursuant to the sublease. 
8 

At that time, CSI began making reduced rent payments to the 

landlord and, in turn, began collecting reduced rent payments 

from J & R Ice Cream. 

 However, in October 1988, when settlement negotiations 

between CSI and the landlord proved unsuccessful, CSLC demanded 

that J & R Ice Cream pay the full amount owed under the sublease, 

including all past-due amounts. But J & R Ice Cream refused to 

pay the full amount due and continued to make reduced rent 

payments. J & R Ice Cream incurred losses in 1987, 1988, and 

1989. On November 6, 1989, J & R Ice Cream brought suit against 

CSI and CSLC. Subsequently, in December 1989, CSLC terminated J 

& R Ice Cream's franchise, and in February 1990, J & R Ice Cream 

gave CSLC notice of its intent to abandon the premises and cease 

operations, and it did so by March 1990. 

 B. Procedural History 

 As we have indicated, J & R Ice Cream filed the 

complaint in this diversity of citizenship action on November 6, 

1989. The complaint alleged violations of the Florida Franchise 

law, the Florida Business Opportunity Law, the Florida Deceptive 

and Unfair Trade Practices Act, the New York Consumer Protection 

from Deceptive Practices Act, and the New Jersey Consumer Fraud 

Act. See app. at 6-10, 12-15. The complaint also contained an 

equitable fraud count and a count alleging that California 

Smoothie was negligent in its selection of the Pompano mall site 

and its negotiation of the lease there. Id. at 11-12, 15-17. At 

a settlement conference in early August 1991, the district court 
9 

indicated that it would entertain choice-of-law motions, but not 

motions for summary judgment. Later that month, the parties 

filed choice-of-law motions and ultimately the court ruled that 

New Jersey law governed the action. Thus, the claims under 

Florida and New York law were dismissed. In September 1992, the 

parties consented to a jury trial before a magistrate judge. The 

trial began in the district court on May 3, 1993. Before the 

court submitted the case to the jury, J & R Ice Cream decided to 

forego its equitable fraud claim, and thus the court submitted 

only the New Jersey Consumer Fraud Act claim and the negligence 

claim to the jury. 

 On May 19, 1993, the jury found that CSI and CSLC 

violated the New Jersey Consumer Fraud Act by: (1) representing 

to J & R Ice Cream, without a reasonable basis in fact, that J & 

R would accrue gross sales of no less than $250,000 in its first 

year of operation at the Pompano location, and was likely to 

accrue more than $300,000 in gross sales; (2) representing, 

without a reasonable basis in fact, that they had acquired 

expertise in selecting profitable locations for franchises and 

had utilized that expertise in selecting the Pompano mall site; 

and (3) representing, without a reasonable basis in fact, that 

the food court common area maintenance fees at the Pompano mall 

would not exceed three percent of gross sales. Moreover, as 

noted above, the jury also found that CSI and CSLC had been 

negligent in the manner in which they selected the Pompano mall 

location and in the manner in which they negotiated the terms of 

the lease for that location. 
10 

 Based on its findings, the jury awarded J & R Ice Cream 

$200,000 for California Smoothie's violations of the New Jersey 

Consumer Fraud Act, and $55,000 for California Smoothie's 

negligent conduct. The $200,000 verdict was a lump sum which did 

not distinguish among the liability theories under the Consumer 

Fraud Act. The court trebled the damages for the New Jersey 

Consumer Fraud Act violations pursuant to N.J. Stat. Ann. § 56:8-

19 (West 1989), and, in a post-trial hearing, the court awarded J 

& R Ice Cream $287,455.83 in attorney's fees and costs. However, 

the court struck the jury's award of $55,000 on the negligence 

count and refused to award J & R Ice Cream prejudgment interest 

on the verdict. Thus, the total award to J & R Ice Cream as 

reflected in the court's order of judgment, was $887,455.83. CSI 

and CSLC appeal from the judgment entered on July 20, 1993, on 

the jury's verdict, and J & R Ice Cream cross-appeals from the 

court's denial of prejudgment interest and its decision to strike 

the jury's award of negligence damages. 

II. DISCUSSION

 A. An Overall View

 The district court's jurisdiction was based upon 28 

U.S.C. § 1332. Plaintiff J & R Ice Cream is a citizen of 

Florida, with its principal place of business in that state, the 

defendants CSI and CSLC are citizens of New Jersey with their 

principal places of business in that state, and the amount in 
11 

controversy exceeds $50,000.0 Our jurisdiction is based on 28 

U.S.C. § 636(c)(3) and 28 U.S.C. § 1291 inasmuch as this is an 

appeal from a final order of judgment in a trial presided over by 

a magistrate judge pursuant to 28 U.S.C. § 636(c)(1). 

 California Smoothie challenges the jury's verdict on 

six grounds: (1) that the court erred in admitting testimony by 

unrelated former California Smoothie franchisees as to 

misrepresentations California Smoothie made to them; (2) that the 

court erred in applying the New Jersey Consumer Fraud Act to the 

sale and acquisition of a franchise; (3) that the proof that 

California Smoothie falsely represented that it had acquired 

expertise in selecting profitable locations for franchises and 

that it had utilized that expertise in selecting the Pompano mall 

site did not establish a violation of the Consumer Fraud Act; (4) 

that the evidence did not support the jury's finding that 

California Smoothie represented to Baugher and Rossetti that 

"they could expect gross sales of $250,000 and likely in excess 

of $300,000";0 (5) that the court erred in admitting parol 

 

0The complaint stated that CSLC had "a" principal place of 

business in New Jersey, leaving open the possibility that it had 

"its" principal place of business in Florida. Thus, the 

complaint did not properly plead diversity jurisdiction. See

Hunt v. Acromed Corp., 961 F.2d 1079, 1080, 1082 n.7 (3d Cir. 

1992). However, letters and supporting material submitted to 

this court indicate that at the time the complaint was filed, 

CSLC's principal place of business was in New Jersey. Therefore, 

we regard the jurisdictional problem as cured. See 28 U.S.C. 

§1653. Baugher and Rossetti, who were additional defendants on a 

counterclaim, are citizens of New York and Florida, respectively. 

0The quotation which we take from California Smoothie's brief is 

a paraphrase of J & R Ice Cream's complaint and of an 

interrogatory to the jury. 
12 

evidence of one of the three misrepresentations allegedly made by 

California Smoothie; and (6) that the court erred in concluding 

that California Smoothie had a duty to select a franchise site 

and negotiate a lease for Baugher and Rossetti. 

 For reasons which we set forth below, we conclude that 

the district court abused its discretion by permitting J & R Ice 

Cream to introduce the testimony by former California Smoothie 

franchisees who were unrelated to J & R Ice Cream and its 

founders. Moreover, we find that the introduction of this 

evidence was prejudicial with regard to the Consumer Fraud Act 

count, a conclusion that standing alone would require a new trial 

on that count. 

 However, as we noted above, California Smoothie argues 

that the Consumer Fraud Act does not apply to the sale and 

acquisition of a franchise. We agree. Therefore, we will not 

remand for a new trial on the Consumer Fraud Act count. Rather, 

we will remand the matter for entry of a judgment for California 

Smoothie on that count. Nevertheless, we will remand this case 

to the district court for a hearing to determine whether J & R 

Ice Cream is entitled to a new trial on its equitable fraud 

claim, as J & R Ice Cream contended at oral argument before us 

that it only abandoned this cause of action after learning that 

the district court would not entertain motions for summary 

judgment and after it reasonably concluded that California 

Smoothie did not intend to challenge the Consumer Fraud Act's 
13 

applicability to this case.0 If the district court agrees with 

these factual contentions, it may deem it appropriate to 

reinstate the equitable fraud claim. We will reinstate the 

jury's verdict against California Smoothie on the negligence 

count, as the testimony by former California Smoothie franchisees 

did not taint the judgment on this count, and the district court 

was correct in concluding that California Smoothie had a duty to 

select a franchise site and negotiate a lease for Baugher and 

Rossetti. 

 In its cross-appeal, J & R Ice Cream challenges the 

district court's denial of prejudgment interest on the Consumer 

Fraud Act damages and the court's decision to strike the jury's 

award of negligence damages because they were duplicative of the 

Consumer Fraud Act damages. In light of our decision that the 

district court's admission of testimony by former franchisees 

requires reversal of the Consumer Fraud Act judgment and that the 

 

0We recognize that in view of our conclusion that the Consumer 

Fraud Act does not apply to the sale of a franchise that we 

probably could avoid deciding the admissibility of the testimony 

of the former franchisees. Nevertheless we reach that question 

because the evidence issue raises an important question of 

federal law which we think that we should decide. In light of 

our decision, however, we need not reach California Smoothie's 

claims: that the proof that California Smoothie falsely 

represented that it had acquired expertise in selecting 

profitable locations for franchises and that it had utilized that 

expertise in selecting the Pompano mall site did not establish a 

violation of the Consumer Fraud Act; that the evidence did not 

support the jury's finding that California Smoothie represented 

to Baugher and Rossetti that "they could expect gross sales of 

$250,000 and likely in excess of $300,000"; and that the court 

erred under New Jersey law in admitting parol evidence of one of 

the three misrepresentations allegedly made by California 

Smoothie. None of these claims raise important federal 

questions. 
14 

Consumer Fraud Act is inapplicable to the sale and acquisition of 

a franchise, we need not reach these claims and we will dismiss 

the cross-appeal as moot.0

 Instead, we will vacate the district court's order 

striking the negligence damages and remand with instructions to 

reinstate the negligence damages, enter a judgment for them, and 

award prejudgment interest on these damages. We follow this 

course because the district court concluded that the damages 

awarded on the negligence claim against California Smoothie 

duplicated the damages awarded on the Consumer Fraud Act claim 

against California Smoothie. It reached this conclusion as it 

reasoned that "the damages which would proximately flow from a 

misrepresentation as to expertise in site selection and failure 

to utilize that expertise properly [are] the same damages which 

would flow from a negligence claim" based on California 

Smoothie's alleged negligence in selecting the site. See supp. 

app. at 519. For this reason, the district court refused to 

enter judgment on the $55,000 awarded by the jury on the 

 

0CSI and CSLC have filed proceedings under Chapter 11 of the 

Bankruptcy Code but on November 29, 1993, they obtained an order 

from the bankruptcy court permitting them to continue this 

appeal. They contend that the order does not allow J & R Ice 

Cream to prosecute its cross-appeal. We need not consider this 

point because we are dismissing the cross-appeal. While we 

recognize that we are requiring entry of a judgment in favor of J 

& R Ice Cream on the negligence claim, we do not reach that 

result by reversing on the cross-appeal. Rather, we are 

remanding for entry of the judgment because we are reversing on 

California Smoothie's appeal and a consequence of that reversal 

is a reinstatement of the negligence verdict and the entry of a 

judgment thereon. We do not regard that outcome as implicating 

the automatic stay. 
15 

negligence count. Id. at 520; app. at 42-43 (order of judgment). 

Thus, the negligence damages should be reinstated because, based 

on our decision, they no longer are duplicative.0

 Prejudgment interest should be allowed on the judgment 

on the negligence claim pursuant to N.J. Ct. R. 4:42-11(b) which 

provides that prejudgment interest shall be awarded in all but 

"exceptional" circumstances. In reaching this conclusion, we 

have considered the district court's reasoning in disallowing 

interest on the Consumer Fraud Act judgment: 

 [u]nder the circumstances where a treble 

damage award is made to a prevailing 

plaintiff, . . . to additionally award 

prejudgment interest would in effect provide 

such a windfall and double recovery and this 

does indeed constitute exceptional 

circumstances. 

 As noted by counsel for plaintiff, the 

purpose behind the rule is twofold; to 

encourage settlement and to make the 

plaintiff whole. In the situation where 

treble damages are awardable, the treble 

damages [are] more than adequate to make a 

plaintiff whole; and indeed the prospect of 

treble recovery is also more than adequate to 

make a defendant focus on settlement and 

encourage settlement. 

See supp. app. at 522. But based on our decision that J & R Ice 

Cream is no longer entitled to treble damages, the district 

court's reasoning is no longer applicable. Thus, J & R Ice Cream 

is entitled to prejudgment interest on the negligence damages 

pursuant to the ordinary application of N.J. Ct. R. 4:42-11(b). 

 

0Of course, if the district court grants J & R Ice Cream a new 

trial on its equitable fraud claim and enters judgment against 

California Smoothie on this claim, a portion of the relief on the 

fraud claim may be duplicative of the negligence damages. 
16 

 

 B. The Testimony from Former Franchisees

 California Smoothie objected to the admission of the 

testimony of former California Smoothie franchisees on multiple 

occasions. See e.g., supp. app. at 13 (motion in limine), id. at 

283 (prior to testimony of former franchisees), id. at 505 

(charge conference), id. at 517-18 (post-trial motion). 

Nevertheless, J & R Ice Cream argues that we should not address 

California Smoothie's claim that the district court erred in 

admitting this testimony. In this regard, J & R Ice Cream 

contends that even if the testimony was inadmissible for purposes 

of its Consumer Fraud Act claim, California Smoothie is barred 

from challenging the admission of this testimony on appeal, 

because the evidence was admissible for purposes of its equitable 

fraud claim and California Smoothie failed to request a limiting 

or curative instruction after J & R Ice Cream voluntarily 

dismissed its equitable fraud claim. See br. at 23. However, 

the record indicates that California Smoothie continued to object 

to the admission of the testimony after J & R Ice Cream dismissed 

its equitable fraud claim, see supp. app. at 505 (charge 

conference), that the district court continued to hold that the 

testimony was admissible, id. at 505 (charge conference), 517-18 

(post-trial motion), and that J & R Ice Cream capitalized on the 

admission of the testimony by arguing in its closing that the 

former franchisees's testimony regarding misrepresentations made 

to them by California Smoothie was evidence that California 

Smoothie made misrepresentations to Baugher and Rossetti, id. at 
17 

509.0 Thus, California Smoothie is not barred from challenging 

the admission of this testimony on appeal. 

 The district court allowed J & R Ice Cream to introduce 

testimony by two former California Smoothie franchisees, Jean 

Dunlop and Charles McRae, both of whom testified that California 

Smoothie made representations to them regarding the sales and 

profits a franchise would produce. See id. at 280-355. Although 

California Smoothie objected to this testimony, the district 

court ruled that it was admissible as evidence of "intent" and a 

"common plan or scheme." Id. at 283, 307, 517-18. Subsequently, 

during argument on the post-trial motions, the court stated that 

"it became clear at the charge conference" that intent was not an 

element of a Consumer Fraud Act violation, but it reiterated that 

the testimony of the two former franchisees was admissible as 

evidence of California's common plan or scheme or business 

 

0Moreover, although J & R Ice Cream's brief refers to its nonstatutory fraud claim as a common law fraud claim, the complaint 

identifies it as an equitable fraud claim. The testimony of the 

former franchisees was inadmissible for purposes of J & R Ice 

Cream's equitable fraud claim because although "[a] plaintiff 

asserting a claim of legal fraud must show that the defendant 

acted with scienter, . . . a plaintiff advancing a claim of 

equitable fraud need not demonstrate scienter." Lightning Lube, 

Inc. v. Witco Corp., 4 F.3d 1153, 1182-83 (3d Cir. 1993) 

(citations omitted) (applying New Jersey law). Thus, for 

purposes of J & R Ice Cream's equitable fraud claim, the 

testimony of the former franchisees was not admissible as 

evidence of California Smoothie's intent. Finally, our 

discussion below concluding that the testimony was not admissible 

as evidence of a "common plan" or "scheme" for purposes of the 

Consumer Fraud Act claim applies with equal force to the 

equitable fraud claim. Thus, J & R Ice Cream's contention that 

the testimony of the former franchisees was admissible at the 

time it was introduced because J & R Ice Cream was still 

prosecuting its equitable fraud claim lacks merit. 
18 

practice of representing sales and profit figures to potential 

franchisees. Id. at 517. 

 We review the district court's decision to admit 

testimony by former California Smoothie franchisees regarding 

California Smoothie's prior "bad acts" for abuse of discretion. 

See United States v. Console, 13 F.3d 641, 659 (3d Cir. 1993), 

cert. denied, 114 S.Ct. 1660 (1994). As we indicated in Console, 

13 F.3d at 659 (quoting United States v. Sampson, 980 F.2d 883, 

886 (3d Cir. 1992)): 

[f]our guidelines set forth by the Supreme 

Court govern the admission of prior 'bad 

acts': '(1) the evidence must have a proper 

purpose under Rule 404(b); (2) it must be 

relevant under Rule 402; (3) its probative 

value must outweigh its prejudicial effect 

under Rule 403; and (4) the court must charge 

the jury to consider the evidence only for 

the limited purpose for which it is 

admitted.' 

Rule 404(b) provides that: 

[e]vidence of other crimes, wrongs, or acts 

is not admissible to prove the character of a 

person in order to show action in conformity 

therewith. It may, however, be admissible 

for other purposes, such as proof of motive, 

opportunity, intent, preparation, plan, 

knowledge, identity, or absence of mistake or 

accident. 

 The testimony given by Dunlop and McRae was not 

admissible as evidence of "intent" because, as the district court 

recognized subsequent to its initial ruling on the evidence, 

intent is not an essential element of a Consumer Fraud Act 

violation consisting of an affirmative act. See Fenwick v. Kay 

American Jeep, Inc., 371 A.2d 13, 16 (N.J. 1977); D'Ercole Sales, 

Inc. v. Fruehauf Corp., 501 A.2d 990, 996 (N.J. Super. Ct. App. 
19 

Div. 1985). There is no doubt that the alleged Consumer Fraud 

Act violations in this case consist of affirmative 

misrepresentations. 

 Moreover, the testimony was not admissible as evidence 

of a "common plan or scheme." 

Ordinarily, when courts speak of 'common plan 

or scheme,' they are referring to a situation 

in which the charged and the uncharged . . . 

[acts] are parts of a single series of 

events. In this context, evidence that the 

defendant was involved in the uncharged . . . 

[act] may tend to show a motive for the 

charged . . . [act] and hence establish the 

commission of the . . . [act], the identity 

of the actor, or his intention. 

Government of the Virgin Islands v. Pinney, 967 F.2d 912, 916 (3d 

Cir. 1992) (citing Edward W. Cleary et al., McCormick on Evidence

§ 190, at 559 (3d ed. 1984)). Alternatively a "common plan or 

scheme" may consist of "incidents [that] were sufficiently 

similar to earmark them as the handiwork of the same actor," and 

thus constitute "'signature evidence'" of identity. Id.

0 "With 

the possible exception of prosecutions for conspiracy, plan or 

design is not an element of the offense; therefore, evidence that 

 

0This method of proving identity through the use of other bad 

acts is "sometimes labelled proof of 'modus operandi'" and 

distinguished from the use of a common plan or scheme to prove 

identity. See 22 Wright and Graham, Federal Practice and 

Procedure § 5244, at 501 (1978). 
20 

shows a plan must be relevant to some ultimate issue in the 

case." See 22 Wright and Graham, Federal Practice and Procedure 

§ 5244, at 500-01 (1978). 

 Dunlop and McRae testified that California Smoothie 

made representations to them regarding the sales and profits they 

would achieve if they acquired franchises. This testimony was 

not relevant to an ultimate issue in this case, such as motive, 

identity or intent. These issues were not in dispute. See

Pinney, 967 F.2d at 917. Furthermore, the testimony was not 

germane to the negligence count. Therefore, the evidence was 

admitted for "exactly the purpose Rule 404(b) declared to be 

improper," id., namely to establish the defendants' propensity to 

commit the charged act. See United States v. Jemal, No. 93-5172, 

slip op. at 8 (3d Cir. June 21, 1994). The district court 

acknowledged that it admitted the former franchisees' testimony 

for this purpose, stating: "in the context of this case, I 

believe that it was proper to show that it was more likely that 

representations of sales figures were made to . . . [J & R Ice 

Cream] by demonstrating that the officials of California Smoothie 

had a practice of making such representations." See supp. app. 

at 518. Thus, the district court abused its discretion in 

admitting this testimony for an improper purpose. 

 Although J & R Ice Cream contends that the testimony 

was harmless because it was cumulative and accounted for only 

half an hour of a two-week trial, see br. at 28-29, we conclude 

that the testimony was prejudicial because it portrayed 

California Smoothie as an organization engaged in a large-scale 
21 

scheme to defraud prospective franchisees by using 

misrepresentations to persuade them to acquire franchises.0

Although the testimony of the former franchisees only addressed 

representations made by California Smoothie regarding the sales 

and profits that a franchise would produce, we are satisfied that 

the testimony prejudiced California Smoothie on the two aspects 

of the Consumer Fraud Act verdict which the testimony did not 

address directly, the representations with respect to California 

Smoothie's expertise in site selection and the representation 

regarding the limitation on the maintenance charges. We take 

this view because we believe that the jury could have used the 

highly prejudicial, indeed almost inflammatory evidence to 

conclude that California Smoothie used misrepresentations in 

multiple aspects of its sales efforts. At the very least, we 

cannot say with any confidence that it is highly probable that 

the error did not substantially affect California Smoothie's 

rights on all the Consumer Fraud Act issues. See Lippay v. 

Christos, 996 F.2d 1490, 1500 (3d Cir. 1993). Thus, the district 

court's abuse of discretion requires reversal of the judgment 

against California Smoothie on the Consumer Fraud Act count. 

 

0Moreover, as we noted above, J & R Ice Cream used the testimony 

of the former franchisees to support this inference in its 

closing argument, stating, "Did Mr. Keilt make representations to 

them that they would make specific numbers, whether it be 320 to 

350, which I believe was Miss Dunlop's testimony and I think Mr. 

McRae would make $300,000. That's all that's relevant. From 

that you can deduce that he probably made the same or similar 

representations to Mr. Baugher and Mr. Rossetti." See supp. app. 

at 509. 
22 

 The admission of this testimony does not, however, 

require reversal of the judgment against California Smoothie on 

the negligence count because the evidence of California 

Smoothie's alleged misrepresentations was quite distinct from the 

evidence supporting the jury's determination that California 

Smoothie was negligent in its selection of a franchise site and 

negotiation of a Pompano mall lease. We also point out that 

there was sufficient evidence supporting this determination.0 

 

 C. Applicability of the Consumer Fraud Act

 California Smoothie argues that the district court 

erred in applying the New Jersey Consumer Fraud Act to the sale 

and acquisition of a franchise because: (1) purchasers of a 

franchise are not the "ordinary consumers" that the Act was 

intended to protect, and (2) a sale of a franchise does not 

qualify as either a sale of real estate or a sale of merchandise, 

the only two types of transactions to which the Act applies. J & 

R Ice Cream answers that California Smoothie should be barred 

from challenging the applicability of the New Jersey Consumer 

Fraud Act to this case because "[t]he first time this issue was 

raised was by way of post-trial motion." See br. at 15. 

 However, we are satisfied that California Smoothie 

preserved its objection to the applicability of the Act. As the 

 

0Moreover, in determining that the district court was correct in 

finding that California Smoothie assumed the duty to select a 

franchise site and negotiate a lease for Baugher and Rossetti, we 

do not rely on the evidence of California Smoothie's 

misrepresentations to other former franchisees. 
23 

district court declined to entertain motions for summary 

judgment, California Smoothie objected to the Act's application 

to the case in its trial brief, see trial br. at 34 n.9, and 

cited its trial brief as the basis for its motion for a judgment 

as a matter of law at the conclusion of J & R Ice Cream's case. 

Moreover, at the post-trial motions hearing, the district court 

rejected on the merits California Smoothie's argument that the 

Consumer Fraud Act improperly was applied to the case, stating to 

counsel for J & R Ice Cream, "your waiver argument . . . is made 

very clear. I just, in fact, preferred to decide this on the 

merits rather than dealing with the waiver issue." Thus, its 

treatment of the argument suggests that the district court did 

not believe that California Smoothie had waived the argument. See

Griffiths v. CIGNA Corp., 988 F.2d 457, 468 n.8 (3d Cir.) 

("because the district court acknowledged during oral argument on 

the appellants [sic] post-trial motions that the 'contention 

about the, but for charge, I think that was reasonably well 

preserved' . . . , we will consider the appellants' exception to 

the retaliatory discharge instruction on the merits"), cert. 

denied, 114 S.Ct. 186 (1993); see also Lippay v. Christos, 996 

F.2d at 1497 n.8 ("we are satisfied from our review of the record 

that . . . [appellant] objected on the ground of hearsay at the 

time of the testimony. Furthermore, the district court noted in 

its opinion denying . . . [appellant's] motion for a new trial 

that although 'defendant's counsel objected somewhat belatedly to 
24 

the admission of this testimony, [he] nevertheless preserved his 

objection on the record'").0

 The Consumer Fraud Act provides in relevant part that: 

[t]he act, use or employment by any person of 

any unconscionable commercial practice, 

deception, fraud, false pretense, false 

promise, misrepresentation, or the knowing 

concealment, suppression, or omission of any 

material fact with intent that others rely 

upon such concealment, suppression, or 

omission, in connection with the sale or 

advertisement of any merchandise or real 

estate, or with the subsequent performance of 

such person as aforesaid, whether or not any 

person has in fact been misled, deceived or 

damaged thereby, is declared to be an 

unlawful practice. 

N.J. Stat. Ann. § 56:8-2 (West 1989). The Act defines 

"merchandise" to include "any objects, wares, goods, commodities, 

services or anything offered, directly or indirectly to the 

public for sale." See N.J. Stat. Ann. § 56:8-1(c) (West 1989). 

It defines "person" to include "any natural person or his legal 

representative, partnership, corporation, company, trust, 

business entity or association, and any agent, employee, 

salesman, partner, officer, director, member, stockholder, 

 

0We also point out that the district court's case management 

techniques with respect to declining to entertain motions for 

summary judgment may have interfered with California Smoothie's 

ability to raise its objection to the applicability of the 

Consumer Fraud Act. Furthermore, it is possible that inasmuch as 

we are reversing the judgment on the Consumer Fraud Act claim 

because the court erroneously admitted prejudicial evidence from 

the former franchisees, California Smoothie might have been able 

to raise the issue of the applicability of the Act on remand if 

we ordered a new trial. 
25 

associate, trustee or cestuis que trustent thereof." See N.J. 

Stat. Ann. § 56:8-1(d) (West 1989). 

 The parties have not cited any Supreme Court of New 

Jersey cases addressing the application of the Act to the sale 

and acquisition of franchises. In fact, we are aware of only one 

case, Morgan v. Air Brook Limousine, Inc., 510 A.2d 1197 (N.J. 

Super. Ct. Law Div. 1986), which has addressed the question 

explicitly. Morgan involved an agreement between Air Brook 

Limousine and Morgan, providing that Morgan would lease a 

limousine from Air Brook and accept only limousine rides referred 

to him by Air Brook. Morgan later filed suit against Air Brook, 

alleging inter alia, that Air Brook violated the Consumer Fraud 

Act. Air Brook moved for summary judgment, arguing that the Act 

applied only to retail consumer sales or advertising and that a 

franchise did not qualify as merchandise under the Act. 

 However, the court rejected these arguments and held 

that the Act applied to the agreement. The court concluded that 

because the Act's definition of "person" includes business 

entities and the Act contains no "retail restriction" or 

definition of the term "consumer," the "Act is not restricted to 

retail consumer consumption transactions and its protective sweep 

includes transactions in which a person, like Morgan, makes an 

investment rather than a consumption purchase." Morgan, id. The 

court also concluded that "[a]lthough the term 'franchise' is not 

included within § 1(c)'s definition of 'merchandise,' it is 

subsumed within the terms 'commodities', 'services' or 'anything 
26 

offered, directly or indirectly to the public for sale.'" Id. at 

1204. 

 We also consider a second inferior court case, Kugler 

v. Koscot Interplanetary, Inc., 293 A.2d 682 (N.J. Super. Ct. Ch. 

Div. 1972), which involved practices used by a cosmetics 

manufacturer to recruit distributors for the cosmetics and to 

promote the sale of distributorships. The Koscot court held the 

"referral or pyramid sales practice" employed by the cosmetics 

manufacturer violated the Consumer Fraud Act as did the 

misrepresentations made to prospective cosmetics distributors. 

Id. at 691-92. Thus, the Koscot court applied the Consumer Fraud 

Act to the sale and acquisition of cosmetics distributorships. 

However, the court did so without analysis of the definition of 

"merchandise" under the Act or reference to the Act's underlying 

purpose. 

 We are exercising plenary review over the legal issue 

of whether the Consumer Fraud Act is applicable. Nonetheless, 

"'in the absence of any indication that the highest state court 

would rule otherwise,'" we must attribute "'significant weight'" 

to the decisions by the lower state courts. Nationwide Mut. Ins. 

Co. v. Budd-Baldwin, 947 F.2d 1098, 1101 n.6 (3d Cir. 1991) 

(quoting Wisniewski v. Johns-Manville Corp., 759 F.2d 271, 273-74 

(3d Cir. 1985)). In this case, however, we see many indications 

that the Supreme Court of New Jersey would not adopt the 

reasoning in Morgan or apply the result in Koscot, and thus we 

reject a construction of the Consumer Fraud Act's definition of 

"merchandise" that would include franchises. See Dillinger v. 
27 

Caterpillar, Inc., 959 F.2d 430, 435 n.11 (3d Cir. 1992) ("In 

deciding this case [under Pennsylvania law] we must give due 

consideration to the decisional law of inferior state courts but 

we need not give those decisions binding effect. A decision of 

'an intermediate appellate state court . . . is a datum for 

ascertaining state law which is not to be disregarded by a 

federal court unless it is convinced by other persuasive data 

that the highest court of the state would decide otherwise'") 

(quoting West v. American Telephone & Tel. Co., 311 U.S. 223, 

237, 61 S.Ct. 179, 183 (1940)). See also Blanding v. 

Pennsylvania State Police, 12 F.3d 1303, 1306 (3d Cir. 1993). 

 As the Supreme Court of New Jersey stated in Daaleman 

v. Elizabethtown Gas Co., 390 A.2d 566, 568 (N.J. 1978), the 

Consumer Fraud Act was "aimed basically at unlawful sales and 

advertising practices designed to induce consumers to purchase 

merchandise or real estate." "[T]he legislative concern 

[underlying the Act] was over sharp practices and dealings in the 

marketing of merchandise and real estate whereby the consumer 

could be victimized by being lured into a purchase through 

fraudulent, deceptive or other similar kind of selling or 

advertising practices." Id. at 569. Based on this understanding 

of the purpose of the Act, the court in Daaleman held that the 

Act did not apply to a privately owned public utility company's 

alleged overstatement of the costs and quantity of gas it 

purchased, although the overstatement was reflected in the 

monthly bills sent to its customers. We recognize that, as J & R 

Ice Cream points out, this holding also was based on the court's 
28 

conclusion that inasmuch as the utility operated under the 

jurisdiction of the Board of Public Utility Commissioners of the 

State of New Jersey (the "PUC"), "the subject matter of 

plaintiff's complaint . . . [was] within the exclusive 

jurisdiction of PUC." Id. at 570. This distinction, however, 

does not undercut the Supreme Court's conclusion that the Act was 

designed to protect consumers. 

 Moreover, in an earlier case holding that house-tohouse sales of books at an "exorbitant price" was "a fraud . . . 

within the contemplation" of the Consumer Fraud Act, Kugler v. 

Romain, 279 A.2d 640, 653-54 (N.J. 1971), the Supreme Court cited 

the following statement from the legislative history of the Act: 

[t]he purpose of this bill is to permit the 

Attorney General to combat the increasingly 

widespread practice of defrauding the 

consumer. The authority conferred will 

provide effective machinery to investigate 

and prohibit deceptive and fraudulent 

advertising and selling practices which have 

caused extensive damage to the public. 

Id. at 653 (emphasis added). This statement of the Act's purpose 

and the Supreme Court's reading of the Act in Daaleman both 

indicate that although the Consumer Fraud Act does not define the 

term "consumer" or contain an explicit "retail restriction," it 

was intended to protect persons engaging in "consumer" 

transactions, not those acquiring businesses. 

 The New Jersey Superior Court, Appellate Division, 

adopted this reading of the Act in Neveroski v. Blair, 358 A.2d 

473 (N.J. Super. Ct. App. Div. 1976), abrogated by Arroyo v. 

Arnold-Baker & Assocs., Inc., 502 A.2d 106 (N.J. Super. Ct. Law 
29 

Div. 1985) (abrogating Neveroski in light of the 1976 amendment 

adding "the sale or advertisement of . . . real estate" to the 

provisions of N.J. Stat. Ann. § 56:8-2 (West 1989)). Neveroski

involved a suit by a home buyer against his real estate broker, 

the seller of his home, and the termite exterminator, all of whom 

allegedly concealed the termite damage at the home he purchased. 

At the time of the sale, the Consumer Fraud Act did not include 

the term "real estate," and thus the Neveroski court was 

confronted with the question of whether the term "merchandise" 

included real estate. The court held that the phrase "anything 

offered, directly or indirectly, to the public for sale", which 

is included in the Act's definition of "merchandise," was not a 

"catch-all phrase" which included real estate, but instead should 

be "construed under the doctrine of ejusdem generis as a 

comprehensive definition intended to incorporate other products 

or services similar in nature to those enumerated by the specific 

words" which precede it. Id. at 480. 

 The court based its holding in part on its 

considered opinion that the entire thrust of 

the Consumer Fraud Act is pointed to products 

and services sold to consumers in the popular 

sense. Such consumers purchase products from 

retail sellers of merchandise consisting of 

personal property of all kinds or contract 

for services of various types brought to 

their attention by advertising or other sales 

techniques. The legislative language 

throughout the statute and the evils sought 

to be eliminated point to an intent to 

protect the consumer in the context of the 

ordinary meaning of that term in the market 

place. 
30 

Id. (first emphasis added). Moreover, construing the definition 

of the term "merchandise" under the doctrine of ejusdem generis, 

the court concluded that real estate did not qualify as 

"merchandise" under the Act because it "is not included in the 

definition of the products encompassed by the act, nor is it a 

commodity which can be considered included within the more 

general statutory language" of the definition. Id. at 481. The 

court concluded that real estate was not covered by the phrase 

"anything offered, directly or indirectly, to the public for 

sale," because "[r]eal estate is wholly foreign to any of the 

listed examples specifically referred to in the definition." Id. 

at 480. 

 Like the Supreme Court in Daaleman and Romain, and the 

Appellate Division in Neveroski, we conclude that the term 

"merchandise" must be construed in light of the overriding 

purpose of the Act, which was "to protect the consumer in the 

context of the ordinary meaning of that term in the market 

place." Neveroski, 358 A.2d at 480 (emphasis added). The 

ordinary meaning of the consumer in the marketplace does not 

include a purchaser of a franchise. Moreover, like "real 

estate," "franchises" are not included expressly in the Act's 

definition of "merchandise" and are "wholly foreign to any of the 

listed examples specifically referred to in the definition." Id. 

It is true that on January 19, 1976, the New Jersey Legislature 

amended section 2 of the Consumer Fraud Act to bar the enumerated 

practices "'in connection with the sale or advertisement of any 

merchandise or real estate.'" Id. at 479 n.3 (emphasis added). 
31 

See Arroyo v. Arnold-Baker & Assocs., Inc., 502 A.2d at 107-08. 

However, the legislature has not amended the Act to cover 

franchises. Thus, we hold that J & R Ice Cream is not entitled 

to a new trial on its Consumer Fraud Act claim because the Act 

does not apply to the sale and acquisition of a franchise.0

 We realize that, as the court in Morgan noted, the 

Consumer Fraud Act's definition of "person" includes business 

entities. Thus, as the court concluded in BOC Group, Inc. v. 

Lummus Crest, Inc., 597 A.2d 1109, 1112-13 (N.J. Super. Ct. Law 

Div. 1990), "[i]t is clear that a corporation may qualify as a 

person under the Act when it finds itself in a consumer oriented 

situation," id., such as when it acts as the purchaser of a tow 

truck, D'Ercole Sales, Inc. v. Fruehauf Corp., 501 A.2d 990, 996-

97 (N.J. Super. Ct. App. Div. 1985), as the purchaser of a yacht, 

Perth Amboy Iron Works, Inc. v. American Home Assur. Co., 543 

A.2d 1020, 1024-25 (N.J. Super. Ct. App. Div. 1988), aff'd, 571 

A.2d 294 (N.J. 1990), or as the purchaser of computer 

 

0In its brief J & R Ice Cream argues without citation of 

authority that "[s]ince the inducement of [J & R Ice Cream by 

California Smoothie] also involved inducing [J & R Ice Cream] 

into taking the lease for real property at Pompano, this stands 

as an independent justification for application of the Act to 

this transaction." Br. at 37 n.6. While there is authority for 

the application of the Act to a lease, 316 49 St. Assocs. Ltd. 

Partnership v. Galvez, 635 A.2d 1013, 1019 (N.J. Super. Ct. App. 

Div. 1994), in our view this authority is not applicable here 

because the sublease was merely incidental to the basic 

relationship between the franchisee, J & R Ice Cream, and the 

franchisor, California Smoothie. Thus, if J & R Ice Cream had 

not acquired a franchise there would not have been a sublease. 

See BOC Group, Inc. v. Lummus Crest, Inc., 397 A.2d 1109, 1112 

(N.J. Super. Ct. Law Div. 1990) (services collateral to sale of 

technology not subject to Act). 
32 

peripherals, Hundred East Credit Corp. v. Eric Schuster Corp., 

515 A.2d 246, 247-49 (N.J. Super. Ct. App. Div.), certif. denied, 

526 A.2d 146 (N.J. 1986). See also Coastal Group, Inc. v. Dryuit 

Systems, Inc., A.2d , No. A-5028-92T5 (N.J. Super. Ct. 

App. Div. June 23, 1994) (purchase by corporation of 

prefabricated panels for exterior wall system for condominium 

project subject to Consumer Fraud Act). However, we conclude 

that when an individual or a corporation purchases a franchise, 

it is not a person in a "consumer oriented situation," and thus 

the transaction is not covered by the Act. In short, it is the 

character of the transaction rather than the identity of the 

purchaser which determines if the Consumer Fraud Act is 

applicable. See, e.g., Daaleman, 390 A.2d at 570 (concurring 

opinion) (a utility may be subject to Consumer Fraud Act when it 

sells merchandise though it is not subject to the Act in making 

computations for monthly service bills). 

 The BOC Group court's decision that a corporation that 

purchased technology and certain support services through an 

"Engineering Services Agreement and Licensing Agreement" was not 

protected by the Consumer Fraud Act in that transaction supports 

our decision. The court based its decision on the "'need to 

place reasonable limits upon the operation of the Act . . . so 

that its enforcement properly reflects legislative intent,'" id. 

at 1112 (quoting DiBernardo v. Mosley, 502 A.2d 1166, 1167 (N.J. 

Super. Ct. App. Div.), certif. denied, 511 A.2d 673 (N.J. 1986)), 

and the conclusion that the term "merchandise" did not apply to 
33 

the technology and services acquired in BOC Group, id. at 1112-

13. 

 The court determined that the technology and services 

acquired in BOC Group were not merchandise because they were not 

"available to the public at large and sold in large quantities" 

or "mass produced." Id. at 1113. The court also based its 

conclusion on the rules promulgated by the New Jersey Division of 

Consumer Affairs pursuant to the Consumer Fraud Act, N.J. Stat. 

Ann. § 56:8-4 (West 1989). See BOC Group, 597 A.2d at 1113. "In 

developing these rules, the Division of Consumer Affairs 

identified 21 types of consumer transactions for goods and/or 

services ranging from defective automobile parts to the sale of 

meat and health club services." Id. See N.J. Admin, Code tit. 

13, § 45A-1, et seq. Construing the rules under the doctrine of 

ejusdem generis, the court concluded that the technology and 

services acquired in BOC Group bore "no similarity whatsoever to 

any of these 21 comprehensive definitions," and thus were not 

covered by the Act. Id. 

 We conclude that even where franchises or 

distributorships are available to the public at large in the same 

sense as are trucks, boats or computer peripherals, they are not 

covered by the Consumer Fraud Act because they are businesses, 

not consumer goods or services. They never are purchased for 

consumption.0 Instead, they are purchased for the present value 

 

0As the court in Hundred East Credit Corp. stated, the "generally 

recognized meaning [of the term 'consumer'] is 'one who uses 

(economic) goods, and so diminishes or destroys their 

utilities.'" 515 A.2d at 248 (quoting Webster's New 
34 

of the cash flows they are expected to produce in the future and, 

like the technology and services acquired in BOC Group, bear no 

resemblance to the commodities and services listed in the 

statutory definition of "merchandise" or the rules promulgated by 

the Division of Consumer Affairs.0 Thus, J & R Ice Cream is not 

entitled to a new trial on its Consumer Fraud Act claim. 

 

 D. The Negligence Count

 The district court deferred ruling on a motion in 

limine regarding whether California Smoothie had a duty to select 

a franchise site and negotiate a lease for Baugher and Rossetti. 

See supp. app. at 12. Subsequently, the district court ruled 

that California Smoothie had assumed this duty,0 and instructed 

the jury accordingly, see id. at 511-12. While California 

Smoothie, citing Rustay v. Consolidated Rail Corp., 775 F. Supp. 

161, 163 (D.N.J. 1991), concedes that the court was required to 

 

International Dictionary, 2d edition). Under this definition, 

the purchaser of a franchise does not qualify as a "consumer" 

because its use of the franchise does not "diminish" or "destroy" 

the franchise's "utilities." We point out, however, that some 

consumer goods may not be diminished or destroyed through use and 

that our result is not dependent on the acceptance of this 

definition. 

0In BOC Group the court suggested that the sale of "franchises" 

could be subject to the Consumer Fraud Act. 597 A.2d at 1112. 

But this statement was not necessary to its opinion and 

apparently the court included it because it had cited Morgan

which it did not find controlling. Thus, we do not find the 

reference to franchises in BOC Group to be significant. 

0Neither party has pointed us to the precise point in the record 

reflecting this ruling, but both parties proceed on the basis 

that the court made it. 
35 

determine whether it had the duty, it urges that the court erred 

in its conclusion. 

 California Smoothie makes a strong paper argument that 

its relationship with Baugher and Rossetti, and thus with J & R 

Ice Cream as their assignee, was primarily contractual as it was 

based on the Site Selection Agreement and the Franchise 

Agreement. See br. at 42-43. The Site Selection Agreement 

provides that California Smoothie grants Baugher and Rossetti 

"the right to obtain a Franchise to establish and operate a 

Restaurant if . . . [they] (a) identif[y] a specific location for 

the restaurant within the Assigned Area and (b) obtain[] the 

Franchisor's approval of the site." See app. at 179-80. Thus, 

Baugher and Rossetti were contractually responsible for proposing 

a site, and California Smoothie retained the right to reject the 

proposed site based on certain criteria identified in the 

agreement. The agreement also provides that within 30 days of 

California Smoothie's approval of the site, Baugher and Rossetti 

must negotiate a lease for the site, and that this lease must be 

approved in writing by California Smoothie. Id. Finally, the 

agreement provides that upon request from Baugher and Rossetti, 

California Smoothie will provide "any additional guidelines and 

reasonable site selection assistance and counseling." Id. Thus, 

the Site Selection Agreement does not impose a duty on California 

Smoothie to select a site for Baugher and Rossetti or to 

negotiate a lease for their site. 

 However, even where a relationship is "essentially 

contractual [in] nature," a party may be "subject to a negligence 
36 

action if the 'act complained of was the direct result of duties 

voluntarily assumed . . . in addition to the mere contract.'" 

Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 562 A.2d 208, 

221 (N.J. 1989) (quoting Brown's Tie & Lumber v. Chicago Title 

Co., 764 P.2d 423, 426 (Idaho 1988)); see also Gudnestad v. 

Seaboard Coal Dock Co., 99 A.2d 201, 204 (N.J. Super. Ct. App. 

Div. 1953), aff'd in part and rev'd in part on other grounds, 104 

A.2d 313 (N.J. 1954) ("[i]t is undoubtedly the established rule 

of law that one who in the absence of a legal obligation to do so 

voluntarily undertakes to render a service for the protection of 

the safety of another may become liable to him for the failure to 

perform or the failure to exercise reasonable care in the 

performance of that service, although the volunteer is not the 

owner or in control of the property with respect to which the 

service is to be performed"). As the district court concluded, 

the record indicates that the site selection and lease 

negotiation processes did not follow the pattern described in the 

Site Selection Agreement. California Smoothie concedes that it 

already had selected the Pompano mall site and negotiated a lease 

for the site prior to the execution of the Site Selection 

Agreement. See br. at 43 n.42. 

 Moreover, the evidence indicates that when California 

Smoothie selected and leased the Pompano mall site: (1) 

California Smoothie intended to sublease it to a prospective 

franchisee, see supp. app. at 137; and (2) already had begun 

negotiations with Baugher and Rossetti regarding their 

acquisition of a franchise in Florida and suggested the Pompano 
37 

mall site to them. The evidence also indicates that Keilt made a 

deliberate decision not to include Baugher and Rossetti in 

negotiations for the lease, see supp. app. at 383-84. Thus, we 

conclude that the district court did not err in holding that 

California Smoothie assumed a duty to select the Pompano mall 

site for Baugher and Rossetti and to negotiate the lease for 

them. As a result, we will affirm and reinstate the jury's 

verdict on the negligence count and will remand the matter to the 

district court to enter judgment against California Smoothie on 

that count. 

III. CONCLUSION

 In view of the foregoing discussion, we will reverse 

the judgment of July 20, 1993, in favor of J & R Ice Cream on the 

Consumer Fraud Act count and will remand the matter to the 

district court for entry of a judgment in favor of CSI and CSLC 

on that count and for entry of a judgment for $55,000 in favor of 

J & R Ice Cream on the negligence count with prejudgment interest 

up to and including July 20, 1993.0 Thereafter interest shall 

accrue on the judgment. See Fed. R. App. P. 37. On the remand, 

 

0In its brief, California Smoothie does not ask for any relief 

with respect to the attorney's fee awarded in the judgment 

entered July 20, 1993, to J & R Ice Cream under N.J. Stat. Ann. 

§56:8-19 (West 1989). Consequently, we do not deal with those 

fees even though the basis for them has been eliminated. Of 

course, we do not preclude California Smoothie from moving under 

Fed. R. Civ. P. 60(b) for an order vacating the fees. We also 

note that California Smoothie indicates that "[a]s a result of 

the jury's finding, the jury was not permitted to consider CSLC's 

counterclaims, which were dismissed." CSLC does not seek a 

reinstatement of the counterclaims, and thus we do not consider 

them. 
38 

J & R Ice Cream may move for reinstatement of its equitable fraud 

claim. J & R Ice Cream's cross-appeal from the denial of 

prejudgment interest on the Consumer Fraud Act judgment and from 

the striking of its judgment based on negligence is dismissed as 

moot. The parties will bear their own costs on this appeal.