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Princeton Healthcare System v. Netsmart New York, Inc.

422 N.J. Super. 467, 29 A.3d 361 (App. Div. 2011)

CONSUMER FRAUD ACT — Although a corporation may be a “person” for purposes of the Consumer Fraud Act, not every contract entered into by a corporation is a subject to a claim under the Act because it is the character of the transaction, not the identity of the purchaser, which determines whether the Act is applicable.

A non-profit corporation that provided healthcare services contracted with a computer software company for the upgrade of its computer and medical billing system. Initially, it distributed a request for proposals to potential suppliers. That proposal was prepared by the healthcare system’s computer consultant and “contained detailed specifications any proposal was required to meet and outlined the criteria [the healthcare provider] used in selecting a company for the project.” The selected computer company submitted a 149 page response. A lengthy process of evaluation ensued, including numerous meetings between representatives of the respective parties. The healthcare provider visited other healthcare facilities that were using computer systems supplied by the computer company. Extensive discussions took place with the computer consultant and legal counsel.

Nearly three years later, the healthcare provider selected the computer company and the project went forward.

The project incurred substantial delays and there were “significant disagreements between the parties concerning responsibility for those delays.” Ultimately, the healthcare provider terminated the contract, claiming that the computer company was “in default of its obligations.” The healthcare provider commenced suit, asserting “claims for breach of contract; violation of the covenant of good faith and fair dealing; rescission based on [the computer company’s] alleged fraud in inducing [the healthcare provider] to enter into the contract, and violations of the [Consumer Fraud Act (CFA)].”

As a preliminary matter, the lower court denied the computer company’s motion to dismiss the CFA claim. The computer company filed a motion for leave to appeal from that part of the order. Although the Appellate Division denied that motion, the New Jersey Supreme Court granted the motion and “remanded the appeal to [the Appellate Division] ‘to consider on the merits.’” In that review, the Appellate Division examined the operative sections of the CFA and the case law interpreting the CFA. Generally speaking, the CFA protects “persons” from being a victim of a CFA violation and such “persons” include any “natural person or his legal representative, partnership, corporation, company, trust, business entity or association.” Case law informed the Court that “[e]ven the most world-wise business entity can be inexperienced and uninformed in a given consumer transaction. Unlawful practices thus can victimize business entities as well as individual consumers.”

Unfortunately for the healthcare provider, “this [did] not mean that every contract entered into by a corporation may be the subject of a CFA claim. The CFA only applies to the sales of ‘real estate,’ which [was] obviously not involved in this case, and ‘sales of merchandise.’ ... The CFA defines ‘merchandise’ as including ‘any objects, wares, goals [sic], commodities, services or anything offered, directly or indirectly to the public for sale.’” Prior case law also indicated that “the public,” referred to “the public at large.” This is because the CFA is directed primarily at “deception, misrepresentation and unconscionable practices engaged in by professional sellers seeking mass distribution of many types of consumer goods.” As a result, the Court, citing case law, that “[i]t is the character of the transaction, not the identity of the purchaser, which determines whether the CFA is applicable.” Hence, because the Court found that this particular contract “for the installation and implementation of a complex computer systems ... did not constitute a simple purchase of computer software sold to the public at large,” it held that the goods or services embodied by this contract were not those sold to the “public.” Fundamentally, the Court held that “[t]his kind of heavily negotiated contract between two sophisticated corporate entities [did] not constitute a ‘sale of merchandise’ within the intent of the CFA.” Consequently, it reversed the lower court’s partial summary judgment and, in effect, struck the CFA claims.

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