Opinion ID: 676040
Heading Depth: 2
Heading Rank: 3

Heading: Applicability of the Consumer Fraud Act

Text: 37 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. 38 However, we are satisfied that California Smoothie preserved its objection to the applicability of the Act. As the 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, --- U.S. ----, 114 S.Ct. 186, 126 L.Ed.2d 145 (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 the admission of this testimony, [he] nevertheless preserved his objection on the record' ). 12 39 The Consumer Fraud Act provides in relevant part that: 40 [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. 41 N.J.Stat.Ann. Sec. 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. Sec. 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, associate, trustee or cestuis que trustent thereof. See N.J.Stat.Ann. Sec. 56:8-1(d) (West 1989). 42 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., 211 N.J.Super. 84, 510 A.2d 1197 (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. 43 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 Sec. 1(c)'s definition of 'merchandise,' it is subsumed within the terms 'commodities', 'services' or 'anything offered, directly or indirectly to the public for sale.'  Id., 510 A.2d at 1204. 44 We also consider a second inferior court case, Kugler v. Koscot Interplanetary, Inc., 120 N.J.Super. 216, 293 A.2d 682 (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., 293 A.2d 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. 45 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. 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, 85 L.Ed. 139 (1940)). See also Blanding v. Pennsylvania State Police, 12 F.3d 1303, 1306 (3d Cir.1993). 46 As the Supreme Court of New Jersey stated in Daaleman v. Elizabethtown Gas Co., 77 N.J. 267, 390 A.2d 566, 568 (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., 390 A.2d 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 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. 47 Moreover, in an earlier case holding that house-to-house sales of books at an exorbitant price was a fraud ... within the contemplation of the Consumer Fraud Act, Kugler v. Romain, 58 N.J. 522, 279 A.2d 640, 653-54 (1971), the Supreme Court cited the following statement from the legislative history of the Act: 48 [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. 49 Id., 279 A.2d 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. 50 The New Jersey Superior Court, Appellate Division, adopted this reading of the Act in Neveroski v. Blair, 141 N.J.Super. 365, 358 A.2d 473 (App.Div.1976), abrogated by Arroyo v. Arnold-Baker & Assocs., Inc., 206 N.J.Super. 294, 502 A.2d 106 (Law 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. Sec. 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., 358 A.2d at 480. The court based its holding in part on its 51 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. 52 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. 53 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. 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). 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. 13 54 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., 251 N.J.Super. 271, 597 A.2d 1109, 1112-13 (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., 206 N.J.Super. 11, 501 A.2d 990, 996-97 (App.Div.1985), as the purchaser of a yacht, Perth Amboy Iron Works, Inc. v. American Home Assur. Co., 226 N.J.Super. 200, 543 A.2d 1020, 1024-25 (App.Div.1988), aff'd, 118 N.J. 249, 571 A.2d 294 (1990), or as the purchaser of computer peripherals, Hundred East Credit Corp. v. Eric Schuster Corp., 212 N.J.Super. 350, 515 A.2d 246, 247-49 (App.Div.), certif. denied, 107 N.J. 60, 61, 526 A.2d 146 (1986). See also Coastal Group, Inc. v. Dryvit Systems, Inc., 274 N.J.Super. 171, 643 A.2d 649 (App.Div.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). 55 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., 597 A.2d at 1112 (quoting DiBernardo v. Mosley, 206 N.J.Super. 371, 502 A.2d 1166, 1167 (App.Div.), certif. denied, 103 N.J. 503, 511 A.2d 673 (1986)), and the conclusion that the term merchandise did not apply to the technology and services acquired in BOC Group, id., 597 A.2d at 1112-13. 56 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. Sec. 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, Sec. 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. 57 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. 14 Instead, they are purchased for the present value 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. 15 Thus, J & R Ice Cream is not entitled to a new trial on its Consumer Fraud Act claim.