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Morgan v. Air Brook Limousine Inc.

Decided: January 31, 1986.

THEODORE R. MORGAN, PLAINTIFF,
v.
AIR BROOK LIMOUSINE, INC., DEFENDANT



Villanueva, J.

VILLANUEVA

Plaintiff's complaint alleges various causes of action for fraud arising out of his obtaining a franchise to operate a limousine service from defendant.

The sole issue involved in cross motions for summary judgment is whether the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq., applies to a franchise relationship.

The court holds that it does apply because a franchise or business opportunity venture is "merchandise" within the intendment of the Act.

Since plaintiff's attorney failed to notify the Attorney General of this action, in accordance with N.J.S.A. 56:8-20, the court directed the attorney to do so to determine if he wanted to intervene or appear. As a result thereof, the Attorney General has appeared in support of plaintiff's position, arguing that the Act is not restricted to consumer retail sales or advertising, that a franchise, including Air Brook's, is merchandise within the intendment of the Act and that the failure of a franchisor, including Air Brook, to provide a prospective franchisee, like Morgan, with a Rule disclosure statement (required by F.T.C. Rule 16 C.F.R. § 436.1) is a per se unconscionable commercial practice, deception, fraud, false pretense, false promise or misrepresentation in violation of § 2 of the Act.

PRELIMINARY STATEMENT

Plaintiff filed a four count complaint alleging causes of action for fraud under the New Jersey Consumer Fraud Act (the "Act"),*fn1 N.J.S.A. 56:8-1; breach of the franchise agreement; violation of Federal Trade Commission Rule 16, C.F.R. § 436.1, dealing with unfair and deceptive practices of a franchisor; and violation of 18 U.S.C. § 1961 et seq., the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Defendant filed a counterclaim for damages for breach of the franchise agreement.

Defendant has moved for summary judgment to dismiss all counts of the complaint except the one for breach of the franchise agreement. Plaintiff has made a cross motion for

summary judgment on the first count alleging violation of the Act.

Plaintiff now concedes that he has no private cause of action for a violation of Federal Trade Commission Rule 16 C.F.R. § 436.1, adopted pursuant to 15 U.S.C. § 41 et seq. He also concedes that the count of his complaint alleging "RICO" violations does not set forth a cause of action because he has no standing and has not satisfied the necessary prerequisites for a civil "RICO" action and therefore withdraws those counts. Therefore, these motions are limited to the First Count of the complaint alleging violation of the Act.

The defendant, Air Brook Limousine, Inc., (hereinafter "Air Brook"), conducts a limousine business in New York and New Jersey, wherein it sells franchises to individuals who become drivers of vehicles leased from defendant.

The plaintiff, Theodore Morgan (hereinafter "Morgan"), entered into a franchise agreement with Air Brook on February 29, 1984. Prior to the execution of the agreement, Morgan received a descriptive brochure and sample earning program from Air Brook. Morgan alleges that these documents intentionally omitted material facts concerning the operation of the franchise, intentionally misrepresented the benefits of the obligation and that the material used to induce Morgan to enter into the agreement was likely to, and in fact did, deceive him.

Morgan alleges that Air Brook told him that the numbers shown on Air Brook's sample earnings sheet were minimal and that a driver could do even better. Morgan agreed to accept only rides given to him by Air Brook's dispatcher. Morgan alleges that, as time went on, the rides were insufficient to cover his fixed expenses to Air Brook. Although Morgan worked six days a week and accepted virtually every ride assigned to him, based upon the fees set by Air Brook for the rides, including tips, there was no possible way for him to meet the fixed obligations. He alleges that had he received the proper financial information from Air Brook, there is no way he

would have undertaken the risk of entering into the franchise agreement and the lease of the car.

By virtue of these allegations, Morgan seeks to bring the franchise relationship between the parties within the ambit of the New Jersey Consumer Fraud Act by alleging that Air Brook violated the Act by soliciting him to enter into the franchise obligation by the use of certain materials.

Air Brook denied these allegations in its Answer and set forth seven Separate Defenses to this claim, including: (a) the Act does not apply to the transaction or the relationship between Morgan and Air Brook; (b) no merchandise was offered for sale to the public, directly or indirectly, by Air Brook; (c) Air Brook was not engaged in the sale or advertisement of any merchandise; (d) Air Brook did not engage in any act or practice violative of § 2 of the Act; (e) any statements made by Air Brook were made in good faith; (f) Morgan is not a consumer or a protected person within the intendment of the Act; (g) Air Brook's written materials did not intentionally omit material facts and did not intentionally misrepresent the benefits.

Morgan alleged in his motion for summary judgment that Air Brook had sold merchandise within the intendment of the Act and that Air Brook's failure to provide him with the written disclosure statement required by the Federal Trade Commission, 16 C.F.R. § 436 ("Rule"), lent further support to his claim that Air Brook had omitted and misrepresented its operation and benefits in violation of § 2 of the Act.

Air Brook, in its motion for summary judgment, maintained that the Act does not apply because it applies only to sales or advertising of merchandise at the retail level and not to an investment or a for-profit type of transaction and even assuming that the Act did apply to the parties' transaction, the failure to provide the Rule's disclosure statement to Morgan did not constitute a violation of § 2 of the Act.

It is undisputed that a Rule disclosure statement was not provided to Morgan although certain Air Brook promotional and informational materials were provided. There also is nothing in the record to indicate that the internal operation of Air Brook is subject to the regulatory or supervisory control of any agency, federal or state.

THE ACT IS NOT RESTRICTED TO CONSUMER RETAIL SALES OR ADVERTISING.

Air Brook's argument that the Act only applies to retail consumer sales or advertising is without support. Preliminarily, it should be noted that Air Brook's reference to the Division of Consumer Affairs ("Division") regulations governing merchandise advertising, N.J.A.C. 13:45A-9.1 et seq. ("Advertising Regulations"), to support its argument that only the retail level of sales or advertising is encompassed by the Act, is incorrect. The Advertising Regulations, promulgated pursuant to § 4 of the Act ("To accomplish the objectives and to carry out the duties prescribed by this act, the Attorney General . . . may . . . promulgate such rules and regulations . . . which shall have the force of law"), represent the Attorney General's determination that greater protection against deception in merchandise advertising on the retail level is necessary. No such "retail restriction" is contained anywhere within § 2 of the Act. Indeed, the regulations governing the jurisdiction of the Division to adjudicate matters involving a violation of the Act or regulations promulgated thereunder specifically employ the Act's § 1 definition of merchandise in which no "retail restriction" exists. N.J.A.C. 13:45A-2.1(a) and (b).

The Act defines advertisement as including:

The attempt directly or indirectly by publication, dissemination, solicitation, indorsement or circulation or in any other way to induce directly or indirectly any person to enter or not enter into any obligation or acquire any title or interest in any merchandise or to increase the consumption thereof or to make any loan; . . . . [Emphasis supplied; N.J.S.A. 56:8-1(a).]

Thus, when a franchisor solicits a person to enter into an obligation for a franchise, that transaction falls within the aforesaid definition of advertisement.

Section 2 of the Act declares the following practices to be unlawful:

The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby; . . . ." [Emphasis supplied.]

For purposes of applying § 2 of the Act to a particular transaction, several words contained therein are expressly defined in § 1 and are not given their ordinary or generally accepted meaning. The term "person" is defined as "any natural person or his legal representative, partnership, corporation, company, trust, business entity or association, and any agent, employee, salesman, partner, officer, director, member, stockholder, associate, trustee or cestuis que trustent thereof". [Emphasis supplied.] The term "sale" is defined as "any sale, rental or distribution, offer for sale, rental or distribution or attempt directly or indirectly to sell, rent or distribute." The term "merchandise" shall include "any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale." [Emphasis supplied.] Moreover, by the repetition of the term "person" (as defined in § 1) within § 2, an express indication of § 2's application to transactions involving more than the ordinary retail merchant and personal consumption consumer is apparent.

It is a cardinal principle of statutory construction that "the words and phrases contained in [a] statute should be given their ordinary and well-understood meaning." DeHart v. Bambrick, 177 N.J. Super. 541, 549 (App.Div.1981), citing Fahey v. Jersey City, 52 N.J. 103, 107 (1968); Kingsley v. Hawthorne Fabrics, Inc., 41 N.J. 521, 526 (1964). Nonetheless, this principle only

governs "in the absence of explicit indication of a special meaning." In re Barnert Memorial Hosp. Rates, 92 N.J. 31, 40 (1983), citing Levin v. Parsippany-Troy Hills Tp., 82 N.J. 174, 182 (1980); Safeway Trails, Inc. v. Furman, 41 N.J. 467, 478 (1964), cert. den. 379 U.S. 14, 85 S. Ct. 144, 13 L. Ed. 2d 84 (1964); See Serv. Armament Co. v. Hyland, 70 N.J. 550, 556 (1976). This overriding principle of statutory construction has been legislatively recognized in N.J.S.A. 1:1-1, which provides:

1:1-1 General Rules of construction

In the construction of the laws and statutes of this state, both civil and criminal, words and phrases shall be read and construed with their context, and shall, unless inconsistent with the manifest intent of the legislature or unless another or different meaning is expressly indicated, be given their generally accepted meaning, according to the approved usage of the language. Technical words and phrases, and words and phrases having a special or accepted meaning ...


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