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IDT Telecom, Inc. v. CVT Prepaid Solutions, Inc.

07-1076 (U.S. Dist. Ct. D.N.J. 2009) (Unpublished)

CONSUMER FRAUD ACT —Competitors do not have standing to assert claims under the New Jersey Consumer Fraud Act because they are not consumers as defined by the Act, and only consumers have standing to sue under the Act.

One prepaid phone card supplier completed the acquisition of substantially all of the operating assets and certain liabilities of another supplier. Pursuant to the asset purchase agreement, the former supplier’s operations ceased. The agreement also provided that all liabilities with respect to claims arising prior to the closing date were to remain with the seller. The selling corporation continued to exist, but it was just a shell of its former self. A third prepaid phone card supplier and its exclusive distributor each claimed they lost market share and millions of dollars in sales because of the bought-out supplier’s allegedly misleading advertising campaign. The complained of campaign took the form of voice prompts (which could not be heard until after the purchase when the card was actually used) and posters which focused solely on the number of minutes to the key destination for that card. They sued the buyer and the seller, asserting among other things, claims of false advertising under the Lanham Act and false advertising under the New Jersey Consumer Fraud Act (CFA).

First, the United States District Court ruled that the competing supplier, but not its distributor, had standing to sue under the Lanham Act. Here, the Court found that the competitor had alleged an actual injury that was of the exact nature that the Lanham Act was enacted to protect against: the loss of sales due to a competitor’s false advertising. These allegations, the Court believed, were sufficient to support a claim, even if the damages were speculative, since that is but one factor in the test that granted the competitor standing to sue. It also found that the alleged injury was sufficiently direct. On the other hand, it denied standing to the distributor because it found that the distributor lacked a sufficiently direct competitive relationship with the competitor. According to the Court, the type of injury suffered by the distributor – sales loss at the retail level because of alleged false advertising – did not impact the distributor’s ability to compete. It also found the alleged harm was not the type that Congress sought to redress when it enacted the Lanham Act and that recognizing the right of every potentially injured party in the distribution chain to bring a private damages action would subject suppliers to multiple liability for the same misconduct and would result in administratively complex damages proceedings. Further, it noted that while the distributor alleged commercial harm as a result of the advertising-seller’s conduct, it failed to present any evidence of competitive harm vis-à-vis other distributors of prepaid of prepaid calling cards. Thus, the Court concluded that the distributor’s asserted injury was indirect.

The Court also held that both the distributor and the competing supplier lacked standing to assert a claim under the CFA because they were not “consumers” as defined under that Act and only consumers have standing to sue under that Act. It noted that no prior court explicitly had held that a competitor had standing to sue under the CFA.

The Court disagreed with the defendants that certain of the elements of the Lanham Act could not be proven and this denied a motion to dismiss these claims. As to the first required element – “causation” – the Court held there were genuine issues of material fact with respect to causation, including the changes in market share and other details about the allegedly deceptive trade practices. It noted that the competitor’s failure to proffer a consumer survey was not fatal to the case as no section of the Lanham Act or Third Circuit case law holds that such a survey was a requirement to establish a damages claim under the Lanham Act. The Court then stated that, as to the “communication element” required by the Lanham Act, there were two sets of communications at issue: (a) the poster advertising; and (b) the voice prompts. The allegedly injured competitor argued that the posters were misleading per se because there would be no way that a customer, using the card in such a way to bypass all extra fees, could actually be able to use a prepaid phone card for the amount of minutes advertised. The Court held that a determination of whether the posters were false and misleading was a genuine issue of material fact. The Court, however, found that the voice prompts did not constitute “commercial advertising,” because the prompts were informational statements designed to alert the consumer of the remaining talk time and had nothing to do with promoting or furthering the sales of more prepaid phone cards. Therefore, the Court concluded that the voice prompts could not be the subject of a Lanham Act claim.

Finally, the Court ruled that the allegedly injured competitor did not have a claim against the supplier who bought the assets from the advertising seller. The Court looked at the “successor liability doctrine.” That doctrine provides that when one company sells or transfers all of its assets to another, the second entity ordinarily does not become liable for the debts and liabilities, including torts, of the transferor. Here, the Court noted: (a) the asset-purchase agreement expressly provided that the successor corporation would not assume pre-closing liabilities; (b) the principals of the predecessor corporation did not in any way control the successor corporation, so there was no continuity of ownership; (c) the ordinary business of the predecessor corporation ceased when the corporation was sold; and (d) there was no evidence presented of a fraudulent transaction. Thus, none of the four judicially created exceptions to the presumption against successor liability under the successor liability doctrine applied to the present matter.

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