Hector D. Ruiz Authors Article in ‘Law360’

Hector D. Ruiz Authors Article in ‘Law360’

February 5, 2019 in Client Alerts

The following article originally appeared on Law360.

Clarifying State Consumer Fraud Act At NJ High Court

 

Partner Hector D. Ruiz authored an article on the New Jersey Supreme Court’s treatment of CFA claims in the context of business-to-business transactions involving custom-made goods.


This article examines the New Jersey Supreme Court’s latest pronouncement on New Jersey’s Consumer Fraud Act, N.J.S.A. 56:8-1 to -210, and in particular, application of the CFA in the context of business-to-business transactions involving custom-made goods.

In All The Way Towing LLC v. Bucks County International Inc.,[1] the New Jersey Supreme Court addressed the applicability of the CFA to a transaction involving a contract for the purchase of a customized tow truck with particular specifications. This decision is the latest in a line of cases addressing the contours of CFA claims in the commercial setting.

The court held that a $160,000 tow truck customized with a towing mechanism intended for use by a business providing towing services satisfied the CFA’s “expansive” definition of “merchandise.”[2] In reaching its conclusion, the court focused on the nature of the goods in question rather than the commercial character of the transaction, or whether the customized goods were considered complex.

To this end — and in an effort to provide consistency to courts tasked with evaluating commercial claims brought under the CFA — the court adopted a fact-sensitive test to guide courts in assessing whether a business-to-business transaction meets the CFA’s definition of “merchandise.” Importantly, the court also clarified what it means to be a good or service of the type “offered to the public for sale” within the meaning of the CFA, finding that this requirement is met so long as any member of the public could purchase the product or service.

Background

Plaintiff Chayim Goodman was the sole owner of plaintiff All the Way Towing, or ATW. In late 2010, the plaintiffs sought to purchase an all-wheel-drive, medium-duty tow truck, ostensibly for purposes of securing a contract requiring medium-duty towing capability. After conducting research on the internet, Goodman contacted Bucks County International Inc., or BCI, about an “International” brand medium-duty truck tow truck which could be modified with a towing mechanism manufactured by the defendant, Dynamic Towing Equipment and Manufacturing Inc. BCI was in the business of truck sales, parts sales and service, and exclusively sold “International” brand trucks. Dynamic manufactured towing mechanisms that could be mounted on truck cabs and chassis.

After discussing options and pricing over a period of “a couple of months,” ATW entered into a 10-page contract with BCI. ATW paid BCI a $10,000 deposit, a portion of the estimated total purchase price of $166,089.27. After BCI delivered the tow truck to Dynamic, Dynamic discovered that its towing rig was incompatible with the truck and subsequently made modifications to the towing unit. The defendants attempted to deliver the truck to plaintiffs on four different occasions. Each time, however, ATW identified deficiencies with the truck and/or the towing rig. After ATW rejected the fourth attempt at delivery, it requested a refund of the deposit. When BCI refused, ATW commenced suit against the defendants asserting causes of action for, among other things, breach of contract and violation of the CFA.

Procedural History

Following the completion of discovery, the defendants successfully moved for summary judgment on all counts of the complaint. In granting the defendants’ application, the trial court found that the tow truck’s custom design removed it from the CFA’s definition of “merchandise.” The plaintiffs appealed, arguing, inter alia, that the trial court erred in failing to apply the CFA to the transaction in question.[3] The Appellate Division reversed the trial court’s dismissal of the CFA claims on summary judgment, finding that the CFA encompasses the sale of a customized tow truck.[4]

Given that the trial court failed to reach the issue, however, the appellate panel declined to decide whether the plaintiffs established the elements of the CFA claim and remanded that determination to the trial court.[5] The New Jersey Supreme Court granted the defendants’ petition for certification, but limited the issues on appeal to two issues: whether the customized tow truck and rig satisfied the CFA’s definition of “merchandise”; and, whether the Appellate Division erred in failing to address whether the plaintiffs established the elements of a claim under the CFA.[6]

The Court’s Holding

New Jersey’s CFA is one of the strongest consumer protection laws in the country.[7] Generally speaking, the CFA requires a plaintiff to establish three elements: “1) unlawful conduct by defendant; 2) an ascertainable loss by plaintiff; and 3) a causal relationship between the unlawful conduct and the ascertainable loss.”[8] The court only addressed the first element. In assessing whether the tow truck qualifies as “merchandise” under the CFA, the court began its analysis by considering the plain language of the statute to ascertain and apply the Legislature’s intent.[9] In relevant part, the CFA provides that:

[t]he act, use or employment by any person of any unconscionable commercial practice, deception, [or] fraud, . . . in connection with the sale or advertisement of any merchandise . . . , whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice[.][10]

The term “merchandise,”:

shall include any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale[.][11]

Finally, the CFA defines “person” broadly to include not just a “any natural person,” but also, a “partnership, corporation, company, trust, business entity or association[.]”[12] The court examined the act’s original remedial purpose and its history since its enactment in 1960.[13] And the court observed that, while the CFA was initially passed to deter “sharp practices and dealings in the marketing of merchandise,” the act’s history has been one of “constant expansion of consumer protection.”[14] The court noted that given the act’s remedial purpose and continuous expansion by the Legislature, courts have consistently recognized that the CFA must be construed liberally.[15]

Against this backdrop, the court addressed the applicability of the CFA to customized goods and transactions in the commercial setting, noting that neither removed the transaction from the CFA’s reach.[16] The court observed that the CFA’s applicability to commercial transactions is well established, explaining that the act’s definition of “person” not only encompasses business entities such as a “partnership, corporation, company . . . , business entity or association,” but also refers to the person who is the victim of such practice.[17]

The court added that, while all business-to-business transactions do not automatically qualify for CFA protection, “context is important.”[18] The court further explained that customizing an item did not automatically remove the transaction from the act’s ambit, and highlighted a number of New Jersey decisions which held that the CFA governs custom-made goods including, for instance, custom kitchen cabinets, custom automotive repair work, and a yacht with a custom modified engine.[19]

The court cautioned, however, that “a more nuanced assessment” may be necessary to determine whether a transaction, good or service is of the type “offered to the public for sale” within the contours of the CFA’s definition of “merchandise.”[20] The court focused its attention on the Appellate Division’s decisions in Finderne Mgmt. Co. v. Barrett[21] and Princeton Healthcare Sys. v. Netsmart New York Inc.,[22] — cases which defendants relied heavily upon in challenging the CFA’s applicability to the parties’ transaction, arguing that the sale of the custom truck did not involve the sale of merchandise because the item was custom built and therefore not offered “to consumers in the popular sense.”[23]

In Finderne, the plaintiffs sought to recover losses under the CFA in connection with their participation in a “a tax-deductible vehicle to fund preretirement death benefits for owner-employees.”[24] In reaching its conclusion that the CFA was inapplicable and the service was not “of the type sold to the general public,” the panel in Finderne relied on certain facts including the inclusion of a sixty-page disclosure document and recommendation to consult tax counsel in the contract, that the plaintiffs received advice from an accountant and attorney, and that the parties had engaged in a series of “very complex” transactions over the course of years.[25]

Similarly, Princeton Healthcare involved a complex computer software system for use in the plaintiff’s health care facilities. The panel concluded that the transaction at issue was not protected by the CFA, reasoning that it did not constitute a simple purchase of a computer system sold to the public; but rather, was “a heavily negotiated contract between two sophisticated corporate entities” which did not qualify as “sale of merchandise” within the meaning of the CFA.[26]

Unpersuaded by the defendants’ arguments, the court declined to find that Princeton Healthcare and Finderne imposed limitations on the application of the CFA in business-to-business transactions, noting that “[a]s Finderne and Princeton Healthcare demonstrate, courts have examined with care the nature of the transaction when customized products and commercial entities are involved in a private individual CFA claim.”[27]

In addition, the court observed that the defendants conflated “complexity” with “customization,” explaining that “[a] product or service can be customized without being ‘complex.’”[28] Importantly, with respect to the CFA’s availability requirement, the court emphasized that as long as any member of the public is able to purchase the product or service, the requirement that the good or service is “offered to the public for sale” is met.[29]

Finally, to “promote consistency” among courts tasked with assessing CFA claims in the business-to-business setting, the court announced a fact-sensitive test comprised of four “considerations” that courts could employ to analyze whether a transaction satisfies the CFA’s definition of “merchandise”: “(1) the complexity of the transaction, taking into account any negotiation, bidding, or request for proposals process; (2) the identity and sophistication of the parties, which includes whether the parties received legal or expert assistance in the development or execution of the transaction; (3) the nature of the relationship between the parties and whether there was any relevant underlying understanding or prior transactions between the parties; and, as previously noted, (4) the public availability of the subject merchandise..”[30]

No direction was given regarding application of these “considerations,” however. Therefore, it is not entirely clear whether the “considerations” announced by the court are dispositive or mutually exclusive, or whether they are simply factors courts can employ at their discretion.

Interestingly, in concluding that the customized tow truck qualifies as “merchandise” under the CFA, the court seemed to limit its analysis to only two of the four “considerations.” First, the court noted that All The Way Towing was the direct consumer, and was unaided by attorneys or other experts.[31] The court also found that although the public at large does not purchase this item, it is not dispositive because the CFA protects consumers “regardless of the popularity of the product or service sold or advertised.”[32] It is unclear, however, what the court determined on the remaining considerations, or if they were even incorporated at all.

The court affirmed the Appellate Division’s ruling which reversed the trail court’s granting of summary judgment of the CFA claims, and agreed with the Appellate Division panel’s remand to the trial court on the defendants’ remaining summary judgment arguments.[33]

What it All Means

The decision in All The Way Towing confirmed that the CFA is construed broadly to protect customers and that neither the business-to-business transaction, nor the customization of a good removes a transaction from the CFA’s purview.

While the New Jersey Supreme Court also observed that “courts have examined with care the nature of the transaction when customized products and commercial entities are involved in a private individual CFA claim,” it did not provide further direction for courts or litigants on the meaning of reviewing facts with “care.”[34]

Conveniently, however, the court clarified what it means for a product to be offered to the public under the CFA, holding that as long as any member could purchase the product or service, this requirement is met. Finally, the high court also offered a fact-specific test to guide businesses and courts in evaluating whether particular goods and services fit within the act’s “expansive” definition of “merchandise.” The court, however, did not elaborate on how the factors are to be applied by courts, which may leave the door open for further refinements to this newly announced test.

[1] (A-66/67-17) (080700)

[2] Id. at 2.

[3] On appeal, plaintiffs also argued that the trial court erred by applying Article Two of the Uniform Commercial Code (UCC), N.J.S.A. 12A:2-101 to -725, to their breach of contract claim. However, this issue was not addressed by the New Jersey Supreme Court, which limited its decision to the CFA claim.

[4] All The Way Towing, LLC v. Bucks Cty. Int’l Inc. , 452 N.J. Super. 565, 572 (App. Div. 2018).

[5] 452 N.J. Super. at 572 n.6.

[6] A-66/67-17 at 8.

[7] Cox v. Sears Roebuck & Co. , 138 N.J. 2, 15 (1994).

[8] Bosland v. Warnock Dodge, Inc. , 197 N.J. 543, 557 (2009).

[9] A-66/67-17 at 12.

[10] N.J.S.A. 56:8-2 (emphasis supplied).

[11] N.J.S.A. 56:8-1(c) (emphasis supplied).

[12] N.J.S.A. 56:8-1(d)

[13] A-66/67-17 at 12-14.

[14] Id. at 13 (quotes and citation omitted).

[15] Id. at 14.

[16] Id. at 18.

[17] Id. at 15-16 (citing N.J.S.A. 56:8-1(d), N.J.S.A. 56:8-2).

[18] Id. at 16

[19] Id. at 17-18 (collecting cases).

[20] Id. at 18.

[21] 402 N.J. Super. 546, 955 A.2d 940 (App. Div. 2008)

[22] 422 N.J. Super. 467, 29 A.3d 361 (App. Div. 2011)

[23] All The Way Towing LLC v. Bucks Cty. Int’l, Inc., 452 N.J. Super. 565, 571-72 (App. Div. 2018)

[24] Finderne, 402 N.J. Super. at 553.

[25] Id. at 570, 572-73.

[26] Princeton Healthcare, 422 N.J. Super. at 474.

[27] A-66/67-17 at 20.

[28] Id. at 21.

[29] Id. at 21.

[30] Id. at 22.

[31] Id. at 22.

[32] Id. at 22-23.

[33] Id. at 23.

[34] Id. at 20.