2003-2004 Supreme Court Year in Review:
Commercial Law
By: Arthur L. Raynes, Partner
Wiley, Malehorn and Sirota
The Supreme Court dealt with some novel and important commercial law issues during its last term.
I.
Limitations
on Professionals’ Liability
In
Macedo v. Dello Russo, 178 N.J. 340 (2004) the Supreme Court
unanimously reversed the Appellate Division with respect to whether the
Consumer Fraud Act applies to “learned professionals”. Plaintiffs’ claim in that case was that they
were treated by a Dr. Kellogg, who had apparently been advertised by Dr. Dello
Russo as having been fully licensed but who was alleged not to have been so
licensed. Plaintiffs did not claim any
deviation from appropriate medical standards of care, but instead sought
damages under the Consumer Fraud Act.
In holding that the Consumer Fraud
Act applied to advertisements by doctors, the Appellate Division had relied on Blatterfein
v. Larkin, 323 N.J. Super. 167 (App. Div. 1999) and Lemelledo v.
Beneficial Management Corp., 150 N.J. 255 (1997). The Supreme Court in Macedo disagreed
with the Appellate Division and rejected that court’s reliance on Blatterfein
and Lemelledo. In Blatterfien,
the Appellate Division had held that the Consumer Fraud Act applied to an
architect. The
In other words,
although he “happened” to be an architect, he was not functioning in that
capacity when he made false representations to induce the purchase of a
house. Rather, he was operating as a
real estate salesperson and that is what subjected him to the CFA.
178 N.J. at 345.
In Lemelledo, the
Supreme Court had held that individuals engaged in certain loan packing
practices were subject to the Consumer Fraud Act since enforcement under the
Consumer Fraud Act would not conflict with the regulatory scheme of the
Department of Banking and Insurance. The
Supreme Court in Macedo rejected such a ‘preemption’ analysis, stating
that the initial issue should have been whether the Consumer Fraud Act applied
to learned professionals at all. In Macedo,
the Court held unequivocally that the Consumer Fraud Act did not.
In response to Macedo,
the Legislature is presently considering an amendment to the Consumer Fraud Act
that would subject doctors, lawyers and other licensed professionals to the Act. The Assembly has passed A2088 and the Senate
is presently considering S1259. The
Bills recognize in their text the potential conflict between legislation
regulating lawyers’ advertising and Supreme Court regulation on that
subject.
Dickerson & Son, Inc. v.
Ernst & Young, 179 N.J. 500 (2004), also dealt with a limitation
on professional liability, in this case with respect to accountants. Plaintiffs in the case were food service
corporations that in turn were shareholders of Twin County Grocers, Inc., a
corporation that fashioned itself as a “cooperative”.
The Plaintiffs, seventeen
corporations that were also shareholders, alleged that they generally relied on
the audit of Ernst & Young, and brought an action for accounting negligence
against the accounting firm. The Supreme
Court affirmed the Appellate Division in permitting Ernst & Young to use N.J.S.A.
2A:53A-25 as a full shield against the common law claim. This statute limits liability of an
accountant to third parties for negligence except when there is a ‘privity’ (or
at least close-to-‘privity’) relationship.
Plaintiff corporations argued that in light of the ‘cooperative’ nature
of
II.
Restrictive
Covenants
In Maw v. Advanced Clinical
Communications, Inc., the majority of the Supreme Court eschewed an
opportunity to alter dramatically
As a practical matter, the Appellate
Division decision turned a somewhat unpredictable area of the law into a
complete ‘crapshoot’. In other words, a
company seeking to require restrictive covenants in order to protect its
perceived legitimate interests would bear the risk that an employee could in
the future successfully challenge the legitimacy of the covenant and hold the
employer liable for damages under CEPA.
The Supreme Court majority rejected
the notion that restrictive covenants constitute a clear mandate of public
policy with respect to CEPA. Referring
to prior Supreme Court restrictive covenant cases, the
The
Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing
parties and entities be identified, but also, those interests must be gauged
for reasonableness and legitimacy. The
application of that test here, and as a general matter, simply does not evoke
the type of a “clear mandate of public policy” that was contemplated by N.J.S.A.
34:19-3c(3) [CEPA].
We are informed
by the amici that non-compete agreements are a common part of commercial
employment. We do not accept as a
premise that employers, in large numbers, are engaging in a practice that is
“indisputably dangerous to the public health, safety or welfare.”
79 N.J.
at 447-448. (Cits. omitted).
Justices
Zazzali and Long dissented, and would have gone far in radically changing
I am aware of the concern by some that allowing
the cause of action in these and similar circumstances might have a chilling
effect on employers’ legitimate use of non-compete agreements, but that
argument is unavailing. The approach I
propose would have the salutary effect of encouraging employers to enter into
agreements that comply with, rather than flout, sound public policy.
Id at 459.
In
Borteck v. Riker,
The issue in Borteck dealt
with a retirement provision in a law firm’s partnership agreement. The Riker Danzig retirement provision
afforded substantial benefits to capital partners who retire after reaching the
age of 55 or to capital partners who retire before reaching the age of 55
provided that they leave the private practice of law. Departing capital
partners under the age of 55 who are appointed to the bench, assume a
governmental or academic position or “engage in comparable public service work”
were also deemed eligible for the enhanced retirement benefits.
The Riker Danzig provision also
required that any partner desiring to retire or withdraw from the firm had to
give no less than three months prior written notice.
The Court determined that the
retirement plan was a bona fide retirement plan and refused to find it
unenforceable as against public policy.
The Court distinguished Apfel v. Budd, Larner, Rosenbaum, Greenberg
& Sade, 324 N.J. Super 133 (App. Div.) certif. denied
162 N.J. 485 (1999), in which the Appellate Division had stricken a
provision limiting ‘retirement’ benefits to a departed lawyer. In Apfel, retirement was unrelated to
age but was defined as ceasing to practice law within the states in which the
law firm maintained an office, or becoming a member of the Judiciary. The Appellate Division in Apfel held
that the provision in that case was not a bona fide retirement clause, but
instead merely a restraint on competition.
The Supreme Court seemed to place a
great deal of reliance on Riker, Danzig’s retirement benefits expert, who
opined that even though the Riker Danzig plan would not qualify as a retirement
plan under IRS rules, its agreement “includes all of the normal indicia one
would expect to see in a legitimate retirement plan”.
As to the three-month notice provision, the Court suggested that such “provisions are not unenforceable per se”. The Court referred the matter to the Professional Responsibility Rules Committee for review.
III.
Filed
Rate Doctrine
The
filed rate doctrine, also known as the filed tariff doctrine, provides that
telecommunications carriers are prohibited from charging rates different from
those on file with the FCC. The purpose
of the doctrine is two-fold: (1) it prevents price discrimination by carriers
among ratepayers; and (2) it preserves the exclusive role of the FCC in
approving reasonable rates for telecommunications services, and excludes courts
from the ratemaking process. The
doctrine serves as a bar to lawsuits against carriers when a consumer is
challenging the reasonableness of its rates, or when the practical effect of a
suit would result in a carrier charging rates other than those charged to other
consumers. Further, a consumer is
presumed to have constructive knowledge of the filed rates, and as such, is
incapable of demonstrating an ascertainable loss, a requisite in filing state
law causes of action for fraud or breach of contract.
Smith v. SBC Communications, Inc.,
178 N.J. 265 (2004), presented an issue of national first impression
regarding the filed rate doctrine. The
Supreme Court had an opportunity to determine whether the filed rate doctrine
would act as a per se bar to state
law causes of action against retailers arising out of the marketing and sales
of prepaid calling card services. The
Plaintiff purchased a pre-paid calling card from a vending machine located at a
BJ’s Wholesale Club. The card was
advertised as having a 9.9-cents-per-minute rate, i.e., a $20 card was expected
to yield 202 minutes of calling time.
However, in light of unadvertised surcharges and a “round-up” practice,
the Plaintiff received only 50 minutes of calling time at a rate of
40-cents-per-minute. The Plaintiff filed
a putative class action suit alleging claims of consumer fraud and breach of
contract. In that suit, the Plaintiff
named SNET, a telecommunications corporation governed by the FCC, and BJ’s
Wholesale Club, Inc., as Defendants.
Although the case involved a more protracted procedural history than set
forth herein, SNET filed a motion to dismiss pursuant to R. 4:6-2(e) on
the grounds that the Plaintiff’s claims were barred by the filed rate
doctrine. BJ’s joined in the motion and the
Law Division dismissed the complaint pursuant to the doctrine. The Appellate Division affirmed the decision
regarding monetary damages against SNET, but remanded the case as to BJ’s. A unanimous Supreme Court held that the doctrine
does not always apply to retailers, i.e., BJ’s, and remanded the case to
explore the relationship between BJ’s and SNET.
While the case law is well
established prohibiting suits against carriers, no court previously had the
opportunity to consider the applicability of the doctrine as to retailers who
purchase, in bulk, telecommunications services from a carrier and then offer
them for resale.
In
determining whether the case could proceed against BJ’s, the Court looked at
whether an adverse ruling against it would impinge upon SNET’s filed
rates. Thus, if an agency relationship
existed, the retailer would be entitled to the same protections provided by the
doctrine as the carrier. The Court
reasoned that in such a case, the net effect of permitting monetary damages
would be to effectuate a rebate for the services provided by the carrier,
thereby resulting in discrimination between ratepayers.
When an agency relationship exists between the carrier
and the retailer, the dual purposes of the filed rate doctrine continue to be
implicated, since the carrier then continues to remain liable for the actions
of the retailer, as its agent. Unless
the filed rate doctrine is enforced, “agents of the carrier might easily become
experts in the making of errors and mistakes in the quotation of rates to
favored [customers], while other [customers]…whose business is less important,
would be compelled to pay the higher published rates.” Id. at 277, quoting Maislin
Indus., U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, 128, 110 S.Ct.
2759, 2766, 111 L.Ed.2d 94, 109 (1990).
On
the other hand, in the absence of an agency relationship, the Court stated that
once the sale between the carrier and retailer, in accordance with the terms of
the FCC filings, was complete, the retailer was free to sell the services at
higher or lower rates. The Court
considered the fact that the consumer had the option of purchasing the services
directly from the carrier, in which case she would have paid the same rate as
BJ’s did. Thus, the nondiscrimination
purpose was not affected. As for the
nonjusticiability prong, the Court indicated that it would not be involved in deciding the appropriateness of
the rates charged by the FCC, because SNET complied with its filed rates when
it sold the services to BJ’s.
The
Court remanded for a determination of the existence of an agency relationship
between BJ’s and SNET. If BJ’s is
determined to be SNET’s agent (if, for example, SNET had a hand in the
misleading advertisements distributed at BJ’s) then BJ’s would be immune under
the doctrine.
IV.
Commerce
Clause
In
American Trucking Associations v. State of New Jersey, ____ N.J. _____;
2004 WL 1593427 (2004), the Supreme Court invalidated the State’s annual
hazardous waste transporter registration fee as an unconstitutional flat
tax. Pursuant to the Solid Waste
Management legislation, N.J.S.A. 13:1E-1, et seq.,
The
issue boiled down to whether the unapportioned State fee violated the Commerce
Clause by discriminating against out-of-state commerce. The Court determined that the fee was not
fairly apportioned – even though the same fee was imposed on each vehicle
delivering or picking up waste, it had the effect of charging out-of-state
transporters more per activity than in-state transporters, as the key was the
“frequency with which New Jersey-based operations conduct[ed] their activities
in [the] State as compared to non-New Jersey entities.”
The
State attempted to argue that the fees were sustainable “user fees” pursuant to
Evansville-Vanderburg Airport Authority Dist. v. Delta Airlines, 405
V.
Statute
of Frauds
In Morton v. 4 Orchard Land Trust,
180 N.J. 118 (2004), the Supreme Court for the first time addressed the
amended version of N.J.S.A. 25:1-13, the Statute of Frauds as to the
sale of an interest in real estate. “For
centuries”, the law in
Morton dealt with the sale of
residential property in
The
gist of the Court’s opinion was that the parties contemplated that any final
contract in the case would be reduced to writing. Plaintiff’s proposed written contract stated
that it would be binding only on “parties who sign it”. The Court distinguished McBarron v. Kipling
Woods, LLC, 365 N.J. Super 114 (App. Div. 2004), noting that in that
case the seller’s attorney, Barry Jost, had repeatedly assured the spurned buyers
(including in a tape-recorded conversation) that “the deal was done” and there
was “definitely a contract”. The
Appellate Division in McBarron had held that “the mere anticipation of a
written memorialization of an oral agreement does not as a matter of law
vitiate an oral contract”. 365 N.J.
Super. at 116.
The Court in Morton avoided an opportunity to address a conflict that it acknowledged between the Statute of Frauds, which now permits oral agreements for the sale of real estate, and the Court’s own requirement that broker-prepared real estate contracts be signed by the parties. See N.J. State Bar Association v. N.J. Association of Realtor Boards, 93 N.J. 470, 472, 475 (1983).
VI.
Liens
In
Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56 (2004), an
individual retained a builder, Aladich Builders, Inc., to build a house for a
total cost of $220,000. While
constructing the individual’s home, Aladich had several other projects on which
it was working. Aladich bought the
supplies for all of its jobs from the same lumber yard, but did not delineate
any of its payments to the respective projects.
Thus, when the individual made its timely payments to the builder, which
passed in the payments to the lumber yard, the lumber yard applied the payments
to Aladich’s oldest outstanding accounts.
The builder eventually stopped working on the individual’s property
after $166,980 had been paid. The
individual contended that all payments due were made. The lumber yard filed a construction lien
against the individual’s property for more than $50,000 to collect against the more
than $75,000 owed by the builder. The trial
court awarded summary judgment to the lumber yard. On appeal, the Appellate Division affirmed
the grant of summary judgment in favor of the lumber yard, although noting that
the result was inequitable since the homeowner was forced to bear the financial
burden of the builder even though he had paid the builder in full and had no
knowledge of the builder’s outstanding accounts with the lumber yard.
The
Supreme Court addressed two issues regarding lien claims and the lien
fund. The first issue was whether an
innocent property owner is liable to a supplier when the property owner made
payment to the general contractor for supplies, where the funds transferred to
the supplier were not earmarked and the supplier did not consider the funds as
satisfying the property owner’s balance.
On this issue the Supreme Court held that it is the supplier’s duty to
determine which of the contractor’s projects is the source of the payment and
to properly allocate payments. When a
supplier fails to do so, it cannot verify the existence of a debt as required
under the statute and thus cannot advance a lien claim against the owner’s
property. The Court’s reasoning was that
when a creditor knows, or should know, a debtor is under an obligation to a
third party to dedicate a payment to discharge a duty the debtor owes to the
third party, the payment must be so applied whether or not the debtor provides specific
instructions. In this case, the lumber
yard knew of the individual’s project because it had delivered materials there
and also knew that the builder, like most contractors, is a conduit for
property owners’ payments. As a result,
the Court found that the lumber yard knew that the payments had to be applied
to reduce the property owner’s particular indebtedness.
Moreover,
the Court reasoned that the lumber yard had a statutory duty to allocate the
builder’s payments to the accounts from which they were derived if it wanted to
file a lien claim. A claimant can only
attest under oath that a debt is owed if it maintains accurate records in which
the funds received are applied to the proper accounts. Since the lumber yard did not allocate the
builder’s payments to the accounts from which they derived, it was unable to
state under oath that the individual owed a debt in a particular amount and
thus the lumber yard had no basis to file a lien claim.
The second issue related to the
measure of the amount that is available to a subcontractor or supplier with a
lien claim when the contractor abandons the project and the property owner has
made all of the progress payments to date.
The Supreme Court held that the measure is determined in accordance with
N.J.S.A. 2A:44A-10 and N.J.S.A. 2A:44A-23 by deducting the
payments made to date from the total contract price that the parties agreed to
in writing. The Court’s reasoning
provided that the remedy under the Construction Lien Law (CLL) is a balancing
of the interests of owners, subcontractors and suppliers by securing payment
from the money the owner owes the contractor.
In Craft, this was a critical element because the CLL limits the
lien to the extent the owner is indebted to the contractor. As the lien fund was limited to the amount
owed and the parties agreed that the individual did not owe the builder
anything further when he walked off the job, there was no fund. The Court limited its holding that there was
no lien fund to the factual situation where a contractor abandons a job when he
had been paid to date and the owner owes him no money.
In General Electric Capital Auto
Lease v. Violante, 180 N.J. 24 (2004), an individual leased a
vehicle and the title listed the leasing company as the owner. After the vehicle was vandalized, the lessee
contacted a garage keeper to make repairs to and store the vehicle. The lessee told the garage to hold off on
repairs until the insurance company inspected the damage. Approximately six weeks later, the lessor
sought access to inspect and remove the vehicle, because the lessee had
defaulted. The garage sought the towing
charges and storage fees from the leasing company, but the company
refused.
The
issues in Violante related to the Garage Keeper’s Lien Act and the
ability of the garage owner to get payment from the leasing company. The first issue was whether a lessee is a lessor’s
“representative” under the Act when the lease agreement requires the lessee to
service and repair the car. The trial
court concluded that the Act did not apply to leased vehicles. The Appellate Division affirmed on a
different basis, finding that the garage did not have a valid lien because the
lessee lacked authority to incur storage and repair charges on behalf of the
leasing company. The Supreme Court
reversed, holding that the obligation under the agreement to service and repair
gave the lessee the power of a representative to provide the lessor’s consent
for services and repairs contemplated in the agreement.
The
second issue was whether a garage keeper is required to notify a lessor of the
vehicle’s location and the amount of the charges against the vehicle in order
to include storage fees in the lien claim.
As an initial matter, the Supreme Court noted that the issue should be
resolved by the Legislature, but it went on to provide “interim guidance” on
the issue. The Court found that the garage
keeper should provide notice to the lessor and trial courts should use a test
of reasonableness when evaluating the garage keeper’s efforts to notify the
lessor. The Court stated that notice
within seven days of the vehicle’s arrival at the garage is reasonable. If a garage keeper provides notice after
seven days, then it will not be permitted to get storage charges incurred from
the end of the initial seven day period until the time of notification. However, the Court further noted that trial
courts are to determine how much time is reasonable in the circumstances of
each case, using its guidelines. In the
present case, the garage keeper did not provide notice and thus was only
entitled to storage charges incidental to the requested repairs. Justice Verniero dissented on this part of
the opinion, indicating that the analysis should not have added a timeframe or
notice requirement that was not in the statute and that the legislative and
executive branches should address the issue.
In
its analysis, the Court also noted that N.J.S.A. 39:10A-14 does not
afford garage keepers with a right of recovery against lessors for costs of
storage and repairs requested by a lessee.
The statute is limited to situations where the vehicle is abandoned and
the garage keeper has notified the owner of its intent to sell or junk the
vehicle.