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Bracco Diagnostics, Inc. v. Bergen Brunswig Drug Co.

226 F. Supp.2d 557 (D. N.J. 2002)

CONSUMER FRAUD— If one party is providing a service to another as a small part of a contract or transaction that is not covered by the Consumer Fraud Act, such as a sale to a wholesaler, that service, otherwise possibly qualifying, is not governed by the Act.

A developer and marketer of a variety of healthcare products sold those products to wholesalers, including the particular wholesaler involved in this case. Those wholesalers then sold and distributed the developer’s products to customers, including hospitals and physicians. That arrangement was subject to a Wholesale Distribution Agreement which, among other things, required that the wholesaler purchase the products exclusively from the developer, that the wholesaler maintain accurate records of sales and returns, that the wholesaler report sales and return information on a monthly basis, and that the wholesalers records be available for audit from time to time. The developer also had contracts with certain groups of hospitals that purchased the products at a negotiated “contract price” which, in most instances, was lower than the price paid by the wholesalers. Under the terms of the Wholesale Distribution Agreement, the wholesaler sold products to those contract customers at the contract price. It then periodically sent a report to the developer listing those sales and the price differential. That price differential was reimbursed by the developer to the wholesaler, as a “chargeback.” The chargeback was either paid by the developer to the wholesaler or credited against the wholesaler’s account. In some cases, the wholesaler was required to return a chargeback to the actual manufacturer. Those returns or reversals of the chargeback were referred to as a “negative chargebacks.”

The developer accused this particular wholesaler of using the chargeback system in a “scheme to cheat” the developer in two types of transactions. In the first type of transaction, the developer accused the wholesaler of failing to submit a negative chargeback when required and thus keeping many unearned chargebacks. Essentially, it accused the wholesaler of reselling the returned product and submitting a report to the developer “claiming a second reimbursement for the same item while failing to disclose that it [the wholesaler] had already received reimbursement.” If true, such “double dipping” would result in the wholesaler obtaining two chargeback reimbursements for the same product. The developer alleged “that in the second type of transaction, [the wholesaler] purchased [the developer’s] products from sources other than [the developer] in violation of the Wholesale Distribution Agreement.” According to the developer, the wholesaler then sold such “secondary source” goods to contract customers, and the developer “subsequently paid chargeback to the wholesaler on those sales.”

In its law suit, the developer argued that its wholesaler had violated the New Jersey Consumer Fraud Act (NJCFA). The wholesaler sought to have that portion of the complaint dismissed on two grounds. First, it contended that the NJCFA did not allow a manufacturer or seller of goods to bring an action against a wholesaler. Essentially, it argued that “a manufacturer’s sale of goods to a wholesaler or retailer, which [was] the transaction at issue, [was] not a ‘consumer’ transaction within the meaning of the NJCFA because the wholesaler [resells] the goods rather than consume[s] them.” Second, the wholesaler argued that a seller such as the developer in this case lacked standing to sue under the NJCFA.

The NJCFA declares unconscionable commercial practices, deception, fraud, and actions of that type in connection with the sale of merchandise or with the subsequent performance of such person to be an unlawful practice. There is a private right of action under the NJCFA and a broad category of “persons,” including corporations, can enforce the NJCFA. Here, there was no question that the developer qualified as a “person” under the NJCFA, but only when it finds itself in a consumer-oriented transaction. It is “[t]he character of the transaction, not the identity of the purchaser, [which] determines whether the NJCFA is applicable.” New Jersey “courts have consistently concluded that purchaser[s] of wholesale goods for resale are not consumers within the meaning of the NJCFA.” The developer conceded that issue, but sought to distinguish these particular circumstances claiming that it was suing for the “blatantly fraudulent practices in connection with [the wholesaler’s] provision of accounting, inventory and chargeback processing services to [the developer].” In essence, the developer was arguing that it was a consumer vis-a-vis [the wholesaler] by reasoning as follows: The definition of ‘merchandise’ includes services. In this case [the wholesaler] ‘was obligated, quite extensively, to provide services and perform other obligations to [the developer]. [The wholesaler] committed fraudulent practices as part of that provision of services. [The developer] is thus a consumer vis-a-vis [the wholesaler] as to those services and obligations.’” That reasoning failed to persuade the Court. According to the Court, “[t]he entire thrust of the NJCFA is ‘pointed to products and services sold to consumers in the popular sense.’” Here, the wholesaler did not “sell,” accounting, tracking or reporting functions to the public either directly or indirectly. “Those functions [were] incidental to a contract for the sale of products between a manufacturer and a wholesaler.”

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