A Questionable Consumer Fraud Act Decision

Princeton Healthcare System v. Netsmart New York, Inc., 422 N.J. Super. 467 (App. Div. 2011).  This opinion, written by Judge Skillman, involves “a negotiated contract between corporations for the installation and implementation of a complex computer software system.”  The panel found that the software system was not “merchandise” within the meaning of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. (“CFA”), because the system was not sold “to the public” (citing the definition of “merchandise” is N.J.S.A. 56:8-1(c)), meaning “the public at large.”  Rather, the contract involved “the design of a custom-made program to satisfy [plaintiff’s] unique needs” (in contrast to “a standardized comupter software program”), defendant’s “active participation in the implementation of this program,” and “lengthy negotiations …. between two sophisticated corporate entities.”

The panel recognized that corporations can be protected by the CFA just as individuals can.  That was not why plaintiff lost.  Rather, the customized nature of the product at issue took it outside the CFA definition of “merchandise.”  The panel relied heavily on Finderne Mgmt. Co. v. Barrett, 402 N.J. Super. 546 (App. Div. 2008).  That case involved the sale of a complex financial plan that the Appellate Division found was more a sophisticated “device to shelter income from taxation” than any sort of “merchandise” contemplated by the CFA.  Such a financial product, which is not really sold to the public, is a far cry from computer software, which is sold extensively. 

The panel in Finderne relied on language from DiBernardo v. Mosley, 206 N.J. Super. 371 (App. Div. 1986), to the effect that the judiciary has recognized a “need to place reasonable limits upon the operation of the [CFA] despite broad statutory language[,] so that its enforcement properly reflects legislative intent.”  DiBernardo, though, involved a sale of a single-family home by an individual seller, not a professional developer or contractor.  In contrast, the defendant in the present case was a professional seller.  The panel in the present case did not cite the statement from many other cases involving professional sellers, including decisions from the Supreme Court, that the CFA is to be construed liberally in favor of consumers.  The court’s restrictive view of the CFA is at odds with those cases. 

This decision is in some tension with New Mea Const. Corp. v. Harper, 203 N.J. Super. 486 (App. Div. 1985).  There, the Appellate Division held that a builder of a custom home could be liable under the CFA.  A custom home is, analytically, little different from a customized computer software product.  Nor is there a dispositive difference in the fact that the CFA claimant in New Mea was an individual while in the present case plaintiff was a corporation.  As the panel noted, citing numerous cases (including Finderne), corporate status does not disqualify a party from suing under the CFA. 

The decision has the potential to create mischief in the application of the CFA.  The CFA did not create two classes of citizens– those who buy “standardized” goods and those who purchase “customized” ones.  Professional sellers of a product that would be “merchandise” if it were standardized should be covered by the CFA even when the product is not a standard one.  Though the CFA is especially concerned about parties who lack bargaining power, the fact that plaintiff here negotiated extensively with defendant does not exempt defendant from the CFA. 

Small businesses are more likely to need “customized” products and to have at least some ability to negotiate for those products than do individuals.  This ruling undermines the status of businesses as consumers protected by the CFA.  The Supreme Court should consider reviewing this decision and harmonizing this area of CFA law if plaintiff invites the Court to do that.