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Christy v. We the People Forms and Services Centers, USA, Inc.

213 F.R.D. 235 (D. N.J. 2003)

CONSUMER FRAUD—The purchase of a franchised business is not covered by the Consumer Fraud Act even if the business itself sells to consumers.

An individual purchased a legal forms preparation franchise and then when he was dissatisfied with the transaction, he sued the franchisor in a New Jersey court. The franchisor had the case removed to the U.S. District Court. One count of the franchisee’s complaint was based on the New Jersey’s Consumer Fraud Act. The franchise agreement called for California law to apply. The franchisor argued that New Jersey law did not apply, but that if it did, the sale of a business franchise was not a consumer transaction covered by the Act. The Court applied New Jersey’s choice of law rules. In doing so, it recognized that New Jersey would honor the parties’ choice of law decision so long as the chosen state has a substantial relationship to the parties or the transaction, but would not recognize that choice if “the law of the chosen state would be contrary to a fundamental policy of [New Jersey] at a time” if New Jersey had a materially greater interest in the determination of the particular question at issue.

The Consumer Fraud Act deals with misrepresentations and other unconscionable commercial practices “in connection with the sale or advertisement of any merchandise or real estate… .” The term “merchandise” includes “any objects, wares, goods, commodities services or anything offered, directly or indirectly to the public for sale.” Here, the franchisor argued that the purchase of a franchise is not a “consumer oriented situation.” In response, the franchisee argued that the Act is to be applied on a case by case basis “and that it is the character of the transaction rather than the identity of the purchaser that determines if the Act is applicable.” In line with that logic, the franchisee claimed that “because the franchise relationship was consumer oriented, the Act therefore applie[d].” The Court disagreed. It held that “a franchise purchaser is not the ordinary consumer of merchandise in the marketplace.” It is the sale of a business and not one of consumer goods and services. “Franchises ‘are purchased for the present value of the cash flows they are expected to produce in the future and ... 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.’” Accordingly, the Consumer Fraud action was dismissed.

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