United States District Court, District of New Jersey, D.
September 30, 2002
BRACCO DIAGNOSTICS INC., PLAINTIFF,
BERGEN BRUNSWIG DRUG CO., DEFENDANT.
The opinion of the court was delivered by: Cooper, District Judge.
This matter comes before the Court on the motion of defendant to
dismiss Counts I and II of plaintiffs Complaint pursuant to Federal Rule
of Civil Procedure 12(b)(6). For the reasons stated in this Memorandum
and Order, the Court will grant the motion to dismiss.
Plaintiff Bracco Diagnostics Inc. ("Bracco") develops and markets a
variety of health care products, including diagnostic imaging agents and
diagnostic pharmaceutical products. (Compl. ¶ 6.) Defendant Bergen
Brunswig Drug Co. ("Bergen") is a wholesaler of pharmaceuticals and other
health care products. To distribute its products to end-users, Bracco
sells its products to wholesalers, such as Bergen, which have warehouse
and distribution facilities across the United States. The wholesalers
then sell and distribute Bracco's products to customers, including
hospitals and physicians. (Compl. ¶¶ 1, 2, 6.) Since 1994, Bergen has
been one of Bracco's wholesalers. (Id. ¶ 2, 6.)
The terms governing Bracco's sales to wholesalers are set forth in
"Wholesale Distribution Agreements." (Id. ¶ 9.) In 1995, Bracco and
Bergen entered into such a Wholesale Distribution Agreement. Bracco and
Bergen are parties to certain other agreements that include substantially
similar terms, referred to collectively in the Complaint as "Wholesale
Distribution Agreements." (Id. ¶ 9.) The terms of the Wholesale
Distribution Agreements require, among other things, that (1) Bergen
purchase Bracco products exclusively from Bracco; (2) Bergen maintain
accurate records of sales and returns of Bracco products; (3) Bergen
report to Bracco on a monthly basis information on sales and returns of
Bracco product; and (4) Bergen allow audit of its records from time to
time, at Bracco's expense, by Bracco or by a public accounting firm
selected by Bracco. (Id. ¶ 10.)
Bracco also enters into contracts with certain groups of hospitals
("contract customers"). (Id. ¶ 11.) Those contract customers
purchase Bracco's products at a negotiated "contract price" that, in most
instances, is lower than the wholesale acquisition price that wholesalers
pay Bracco. (Id.) Under the terms of the Wholesale Distribution
Agreements, Bergen sells Bracco products to contract customers at the
Bracco contract price. (Id.) Bergen then periodically sends an electronic
report to Bracco detailing sales to such contract customers and the price
differential between the contract price and the higher wholesale price at
which Bergen purchased the products. (Id. ¶¶ 11, 12.) That price
differential, which Bracco reimburses to Bergen, is known as a
"chargeback." (Id. ¶ 11.) Bracco pays the chargeback owed Bergen
either by making payments to Bergen or by crediting Bergen's account in
the amount of the chargeback. (Id. ¶ 12.) The purpose of the
chargeback is to make Bergen whole in those cases in which it sells a
product to a Bracco contract customer for less than Bergen paid for the
product. (Id. ¶ 11.) In certain circumstances, wholesalers such as
Bergen are required to return the chargeback to the manufacturer. (Id.)
Such a return or reversal of the chargeback is referred to as a "negative
According to the Complaint, Bergen began using the chargeback system in
a "scheme to cheat" Bracco, involving two types of transactions. (Id.
¶ 14.) Bracco alleges that in the first type of transaction, Bergen
failed to submit a negative chargeback when required and thus kept many
unearned chargebacks. (Id. ¶ 15.) Bergen often would re-sell the
returned product and submit a report to Bracco claiming a second
reimbursement for the same item while failing to disclose that it
(Bergen) had already received reimbursement. (Id.) That "double dipping"
would result in Bergen obtaining two chargeback reimbursements for the
same product. (Id.) Bracco alleges that in the second type of
transaction, Bergen purchased Bracco products from sources other than
Bracco in violation of the Wholesale Distribution Agreements. (Id.
¶ 16.) According the Complaint, Bergen then sold such "secondary
source" goods to contract customers, and Bracco subsequently paid
chargebacks to Bergen on those sales. (Id.)
Bracco filed a six-count Complaint on December 12, 2001. In addition to
claims for breach of contract, Bracco asserts claims for common-law fraud
(Count I) and violation of the New Jersey Consumer Fraud Act (Count II).
Bergen now moves for dismissal of the fraud and statutory claims
contained in Counts I and II of the Complaint pursuant to Rule 12(b)(6).
I. Standard Under Rule 12(b)(6)
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for
failure to state a claim upon which relief can be granted does not attack
the merits of the case, but merely tests the legal sufficiency of the
complaint. Sturm v. Clark, 835 F.2d 1009, 1011 (3d Cir. 1987). When
considering such a motion, the reviewing court must accept as true all
well-pleaded allegations in the complaint and view them in the light most
favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94
S.Ct. 1683, 40 L.Ed.2d 90 (1974); Wisniewski v. Johns-Manville Co.,
759 F.2d 271, 273 (3d Cir. 1985); Rogin v. Bensalem Township, 616 F.2d 680,
685 (3d Cir. 1980), cert. denied, 450 U.S. 1029, 101 S.Ct. 1737, 68
L.Ed.2d 223 (1981). A court may not dismiss the complaint "unless it
appears beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
In considering the motion, a district court must accept as true the
facts pleaded in the complaint and any and all reasonable inferences
derived from those facts. Unger v. Nat'l Residents Matching Program,
928 F.2d 1392, 1400 (3d Cir. 1991); Glenside West Corp. v. Exxon Co.,
761 F. Supp. 1100, 1107 (D.N.J. 1991); Gutman v. Howard Sav. Bank,
748 F. Supp. 254, 260 (D.N.J. 1990). Moreover, it is not necessary for
the plaintiff to plead evidence, and it is not necessary to plead the
facts that serve as the basis for the claim. Bogosian v. Gulf Oil Corp.,
561 F.2d 434, 446 (3d Cir. 1977), cert. denied, 434 U.S. 1086, 98 S.Ct.
1280, 55 L.Ed.2d 791 (1978); In re
Midlantic Corp. S'holder Litig., 758 F. Supp. 226, 230 (D.N.J. 1990).
Legal conclusions offered in the guise of factual allegations, however,
are given no presumption of truthfulness. Papasan v. Allain, 478 U.S. 265,
286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986).
The question before the court is not whether the plaintiff will
ultimately prevail; rather, it is whether the plaintiff can prove any set
of facts in support of the asserted claims that would entitle the
plaintiff to relief. Hishon v. King & Spalding, 467 U.S. 69, 73, 104
S.Ct. 2229, 81 L.Ed.2d 59 (1984). However, although the Federal Rules of
Civil Procedure do not dictate that a "claimant set forth an intricately
detailed description of the asserted basis for relief, they do require
that the pleadings give the defendant fair notice of what the plaintiffs
claim is and the grounds upon which it rests." Baldwin County Welcome
Ctr. v. Brown, 466 U.S. 147, 149-50 n. 3, 104 S.Ct. 1723, 80 L.Ed.2d 196
(1984) (quoting Conley, 355 U.S. at 47, 78 S.Ct. 99).
II. Consumer Fraud Act
Bergen argues that Bracco's claim in Count II under the New Jersey
Consumer Fraud Act ("NJCFA"), N.J.S.A. § 56:8-1 to-106, should be
dismissed on two grounds. First, Bergen contends that the CFA does not
allow a manufacturer/seller of goods, such as Bracco, to bring an action
against a purchaser/wholesaler, such as Bergen. (Mem. of Law in Supp. of
Def.'s Mot. to Dismiss Counts I and II of the Compl. ("Def.Br.") at 5-7;
Def.'s Reply Br. in Supp. of Its Mot. to Dismiss Counts I and II of the
Complaint ("Def. Reply Br.") at 1-2.) Bergen maintains that a
manufacturer's sale of goods to a wholesaler or retailer, which is the
transaction at issue here, is not a "consumer" transaction within the
meaning of the NJCFA because the wholesaler will resell the goods rather
than consume them. (Def. Br. at 6.) Second, Bergen argues that even if
the present circumstances involve a consumer transaction, a seller such
as Bracco lacks standing to sue under the NJCFA. (Id. at 5-7.)
The NJCFA provides in relevant part: 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,
is declared to be an unlawful practice.
N.J.S.A. 56:8-2. The NJCFA provides a private right of action for any
"person" who is harmed by such unlawful practices, N.J.S.A. 56:8-19, and
defines "person" to include, among others, "any . . . corporation,
company, trust, business entity or association[,]" N.J.S.A. 56:8-2(d).
"Merchandise" is defined to include "any objects, wares, goods
commodities, services or anything offered, directly or indirectly to the
public for sale." N.J.S.A. 56:8-1.
The Court determines that Bracco's claim under the CFA must be
dismissed in accordance with prevailing authority. There is no dispute
between the parties that a corporation may qualify as a "person" under
the CFA when it finds itself in a consumer-oriented transaction. The
character of the transaction, not the identity of the purchaser,
determines whether the CFA is applicable. J & R Ice Cream Corp. v.
Cal. Smoothie Lic. Corp., 31 F.3d 1259, 1273 (3d Cir. 1994). We note that
New Jersey "courts have consistently concluded that purchaser of
goods for resale are not consumers within the meaning of the NJCFA."
Lithuanian Commerce Corp. v. Sara Lee Hosiery, 179 F.R.D. 450, 469
(D.N.J. 1998) (choosing to "follow the well-reasoned authorities which
have determined that purchasers of wholesale goods for resale are not the
consumers who may invoke the protections of the NJCFA"). Bracco
acknowledges that proposition, conceding that "Defendant Bracco would not
be able to sue Plaintiff Bracco for a claim involving Bracco's
distribution to Bergen of defective goods." (Pl. Br. at 12.) Bracco,
however, seeks to distinguish the present circumstances. maintaining that
"[i]n this case, the Plaintiff manufacturer is suing Defendant wholesaler
for blatantly fraudulent practices in connection with Defendant's
provision of accounting, inventory and chargeback processing services to
Plaintiff." (Id.) Bracco, therefore, argues that it was a consumer
vis-a-vis Bergen by reasoning as follows: The definition of "merchandise"
includes services. In this case, Bergen "was obligated, quite
extensively, to provide services and perform other obligations to
[Bracco]. [Bergen] committed fraudulent practices as part of that
provision of services. [Bracco] is thus a consumer vis-a-vis [Bergen] as
to those services and obligations." (Id. at 12.)
That reasoning fails to persuade the Court. Although Bracco accurately
notes that fraud in connection with the sale of services is actionable
under the NJCFA, the challenged services generally must be of the type
sold to the general public. The entire thrust of the NJCFA is "pointed to
products and services sold to consumers in the popular sense." Neveroski
v. Blair, 141 N.J. Super. 365, 378, 358 A.2d 473, 480 (App.Div. 1976).
The services that Bracco contends it "consumed" are Bergen's maintaining
accounting records, tracking Bergen's own inventory, and providing data
reports to Bracco regarding sales by Bergen to Bracco's contract
customers. Bergen does not "sell" those accounting, tracking, and
reporting functions to the public, either directly or indirectly. Those
functions are incidental to a contract for the sale of products between a
manufacturer and a wholesaler.
We find the court's reasoning in Windsor Card Shops, Inc. v. Hallmark
Cards, Inc., 957 F. Supp. 562 (D.N.J. 1997), albeit in dicta, compelling
for the present analogous circumstances. In that case, Windsor argued
that it should qualify as a consumer within the meaning of the NJCFA
because it purchased services from the defendant corporation related to
financial planning, store planning, and merchandising. Id. at 567 n. 6.
Rejecting that argument, the court noted that those services are not
services sold to the general public and thus are not "merchandise" under
the NJCFA. Id. According to the court in Windsor, those services
can at best be characterized as promises that were
implied by the [contract]. If we were to read the
NJCFA as covering those "services," we would be
construing the statute to allow recovery for any
breached promise in connection with a contract for the
sale of merchandise. We decline to allow such a broad
reading of the statute. These services, if offered,
were collateral to a contract for the sale of products
to a wholesaler. As such, they do not qualify Windsor
as a consumer under the NJCFA.
Id. (citation omitted). That logic carries force for the present
circumstances in which services were provided ancillary to a contract.
Also supporting our decision BOC Group, Inc. v. Lummus Crest Inc.,
251 N.J. Super. 271, 597 A.2d 1109 (Law Div. 1990), which the Court of
Appeals for the Third Circuit has discussed favorably. See J & R Ice
Cream Corp., 31 F.3d at 1274. In BOC Group, the court determined that
a corporation that purchased technology and certain support services
through an "Engineering Services Agreement and Licensing Agreement" was
not protected under the NJCFA. Recognizing the need for reasonable limits
on the operation of the NJCFA, the court concluded that the technology
and services supplied in BOC Group did not come within the definition of
"merchandise" because the technology and services (1) were not "available
to the public at large and sold in large quantities" or "mass produced"
and (2) bore no similarity to the comprehensive definitions of goods and
services promulgated by the New Jersey Division of Consumer Affairs
pursuant to the NJCFA. 251 N.J. Super. at 277-79, 597 A.2d at 1112-13.
Because Bracco is not a "consumer" of "merchandise" within the meaning
of the NJCFA, the Court concludes that the NJCFA is inapplicable to the
circumstances presented in plaintiffs Complaint. Accordingly, Count II of
the Complaint must be dismissed pursuant to Rule 12(b)(6).
III. Economic Loss Doctrine
Bergen argues that the economic loss doctrine bars Bracco's common-law
fraud claims because Bracco's breach of contract claim is based on the
very conduct upon which the fraud claim is based. (Def. Br. at 7; Def.
Reply Br. at 2.) The economic loss doctrine "prohibits plaintiffs from
recovering in tort economic losses to which their entitlement only flows
from a contract." Duquesne Light Co. v. Westinghouse Elec. Co.,
66 F.3d 604, 618 (3d Cir. 1995).
The New Jersey Supreme Court first approved the economic loss doctrine
in Spring Motors Distributors, Inc. v. Ford Motor Co., 98 N.J. 555,
489 A.2d 660 (1985), and has recently reaffirmed its commitment to that
doctrine in Alloway v. General Marine Industries, L.P., 149 N.J. 620,
627, 695 A.2d 264, 267 (1997) (holding that individual plaintiff, as well
as commercial plaintiff, was limited to remedies under UCC when seeking
to recover for purely economic loss).*fn1
Spring Motors, however, only addressed the status of strict liability
and negligence claims in a breach of contract case. "No New Jersey
Supreme Court case holds that a fraud claim cannot be maintained if based
on the same underlying facts as a contract claim." Gleason v. Norwest
Mortgage, Inc., 243 F.3d 130, 144 (3d Cir. 2001). Consequently, New
Jersey courts have struggled with the viability of fraud claims to
recover for purely economic loss. Lithuanian Commerce Corp., 179 F.R.D.
at 473. The Court of Appeals for the Third Circuit has summarized the
ambiguous status of the law in this area:
The question of the continuing validity of fraud
claims in cases involving frustrated economic
expectations is very complex and troublesome. The
United States District Court for New Jersey
unequivocally has held that the New Jersey Supreme
Court's reasoning in Spring Motors, though not
explicitly addressing fraud claims, "leads . . . to
conclusion that, as between commercial parties New
Jersey will not countenance" claims for fraud other
than fraud in the inducement. Unifoil Corp. v. Cheque
Printers & Encoders Ltd., 622 F. Supp. 268, 270-71
(D.N.J. 1985). Spring Motors held that "as among
commercial parties . . . contract law, provides the
more appropriate system [as compared to tort law] for
adjudicating disputes arising from frustrated economic
expectations." 98 N.J. at 581, 489 A.2d at 673.
Contrary to this proposition, the New Jersey
Superior Court after Spring Motors has upheld fraud
claims between commercial parties. See Perth Amboy
Iron Works, Inc. v. American, Home Assurance Co.,
226 N.J. Super. 200, 543 A.2d 1020 (App.Div. 1988)
[aff'd, 118 N.J. 249, 571 A.2d 294 (1990) (affirming
for the reasons stated within appellate court's
decision).] No New Jersey court, though, has
explicitly considered whether these claims are barred
by Spring Motors. Because we determine that plaintiff
fails to allege sufficient facts to support its claim
of fraud, making summary judgment proper, we decline
to wade into this morass.
Gleason, 243 F.3d at 144 (quoting Vanguard Telecommunications, Inc. v.
S. New England Tel. Co., 900 F.2d 645, 654 (3d Cir. 1990)). The parties
here effectively are asking the Court to step into that continuing
The parties agree that New Jersey federal and state decisions have held
that fraud claims may co-exist with a contract-based cause of action.
(Def. Br. at 9-10; Def. Reply Br. at 6; Pl. Br. at 14-15.) The essential
dispute between the parties centers on Bergen's contention that although
New Jersey cases hold that some fraud claims may be brought in
conjunction with breach of contract claims, those fraud claims that have
been permitted to proceed were premised on fraud in the inducement and
not fraud in the performance of a contract. (Def. Br. at 9; Def. Reply
Br. at 7.) In contrast, plaintiff contends that New Jersey law permits
fraud claims to stand alongside breach of contract claims regardless of
whether the fraud claim is premised on fraud in the inducement or fraud
in the performance of a contract. (Pl. Br. at 14-17.)
The parties' positions present a close question for the Court, as we
find authority that would justify alternative outcomes in this matter.
The Court concludes, however, that the economic loss doctrine does bar
Bracco's claim for common-law fraud.
The distinction between fraud in the inducement and fraud in the
performance of a contract remains relevant to the application of the
economic loss doctrine in New Jersey. Courts have continued to affirm
"the conceptual distinction between a misrepresentation of a statement of
intent at the time of contracting, which then induces detrimental
reliance on the part of the promisee, and the subsequent failure of the
promisor to do what he has promised." LoBosco v. Kure Eng'g Ltd.,
891 F. Supp. 1020, 1032 (D.N.J. 1995). No decision has formally
"negate[d] the distinction between fraudulent inducement extraneous to
the contract and fraud in its subsequent performance." Id.
New Jersey federal and state decisions that have permitted a fraud
claim to proceed with a breach of contract claim generally appear to have
involved a fraud in the inducement of a contract or an analogous
situation based on pre-contractual misrepresentations. See Florian
Greenhouse v. Cardinal IG Corp., 11 F. Supp.2d 521, 528 (D.N.J. 1998)
(permitting fraud claim, but noting that "the factual basis for the
alleged fraud is extraneous to the contract," and that it "more closely
resembles a fraud-in-the-inducement claim"); LoBosco,
891 F. Supp. At 1032 (noting that there may have been pre-contractual
mispresentations mad by defendant to plaintiff); Coastal Group, Inc. v.
Dryvit Sys., Inc., 274 N.J. Super. 171, 178-79, 643 A.2d 649, 652
(App.Div. 1994) (holding that plaintiffs action under NJCFA, which was
based on pre-contractual representations, could be brought in conjunction
with action under UCC); D'Angelo v. Miller Yacht Sales,
261 N.J. Super. 683, 686, 619 A.2d 689, 690 (App.Div. 1993) (allowing
fraud claim, which was based on defendant's misrepresentation of yacht,
to be brought in connection with contract claim).
Further, in our most recent statement recognizing the
fraud-in-the-inducement and fraud-in-the-performance distinction, this
District Court stated again that the "critical issue" with regard to
economic loss "is whether the allegedly tortious conduct is extraneous to
the contract." Emerson Radio Corp. v. Orion Sales, Inc., No. Civ. A.
95-6455, 2000 WL 49361, at *7 (D.N.J. 2000), aff'd in part, rev'd in part
on other grounds, 253 F.3d 159 (3d Cir. 2001). The court in Emerson
Radio explained that "an act that is in breach of a specific contractual
undertaking would not be extrinsic, but an act that breaches some other
duty would be." Id. The court further illustrated "with the example of
fraud, to break a promise is to breach a contractual duty; to falsely
state that one intends to honor a promise is a misstatement of present
fact and breaches a separate and extraneous duty not to commit fraud."
Approximately one year ago and after the decision in Emerson Radio, the
Third Circuit stated that "New Jersey District Courts still hold that
fraud claims not extrinsic to underlying contract claims are not
maintainable as separate causes of action." Gleason, 243 F.3d at 144. In
this case, Bracco's fraud claim is not extrinsic to their underlying
contract claims, and this Court shall remain consistent with New Jersey
District Courts' repeated holding that such a fraud claim is not
cognizable as a separate cause of action. The pattern that has emerged in
New Jersey decisional law is that claims for fraud in the performance of
a contract, as opposed to fraud in the inducement of a contract, are not
cognizable under New Jersey law. Bracco does not dispute that its
common-law fraud claim relates to alleged fraud in the performance of a
We also find support for our ruling is the New Jersey Supreme Court's
decision in Alloway v. General Marine Industries, L.P., 149 N.J. 620,
695 A.2d 264. Although the Supreme Court in Alloway stated that "[i]n
addition to the right to recovery under the U.C.C., victims of fraud or
unconscionable conduct possess substantial rights to recover for common
law fraud or for violations of various state and federal statutes[,]"
that position is consistent with our determination that Bracco's
common-law fraud claim must be dismissed. In support of that statement
that fraud claims may co-exist with claims under the U.C.C., the Supreme
Court in Alloway cites to N.J.S.A. 12A:1-103, which provides:
Unless displaced by the particular provisions of this
Act, the principles of law and equity, including the
law merchant and the law relative to capacity to
contract, principal and agent, estoppel, fraud,
misrepresentation, duress, coercion, mistake,
bankruptcy, or other validating or invalidating cause
shall supplement its provisions.
N.J.S.A. 12A:1-103 (emphasis added). That citation to section 1-103,
which related to "validating or invalidating" causes such as "fraud,"
supports Bergen's position that only claims for fraud in the inducement
are cognizable in conjunction with action that the U.C.C. governs.
Further, the Supreme Court in Alloway "expanded the reach of the
economic loss doctrine in New Jersey." Naporano Iron & Metal Co. v.
Am. Crane Corp., 79 F. Supp.2d 494, 499 (D.N.J. 1999). The Alloway court
extensively discussed the policies embodied in contract and tort law and
the compelling reasons for limiting recovery for purely economic loss to
contractual remedies. Alloway, the Supreme Court's most recent decision
involving the economic loss doctrine, indicates that the Supreme Court
has moved to expand, rather than contract, the economic loss doctrine.
After Alloway, "it is now well established in New Jersey that contract
remedies . . . are better suited than tort law to resolve claims for
economic loss." Boyes v. Greenwich Boat Works, Inc., 27 F. Supp.2d 543,
550 (D.N.J. 1998).
The economic loss doctrine's underlying main purpose further moves this
Court to dismiss Bracco's common-law fraud claim. The Third Circuit most
recently stated, "The economic loss doctrine is designed to place a check
on limitless liability . . . and establish clear boundaries between tort
and contract law." Werwinski v. Ford Motor Co., 286 F.3d 661, 680 (3d
Cir. 2002).*fn2 When, as here, there are two competing and sensible
interpretations of state law, the Third Circuit in Werwinski noted that
courts "should opt for the interpretation that restricts liability,
rather than expands it." Id. Adhering, as this Court must, to the
dictates of the Third Circuit, we opt for the liability-restricting
interpretation of New Jersey law given the two present competing
interpretations from the parties here.*fn3
Pursuant to the economic loss doctrine, the Court determines that Count
I of the Complaint must be dismissed.
The Court concludes that Bergen's motion to dismiss Count I (common-law
fraud) and Count II (Consumer Fraud Act) should be granted. Those Counts
of the Complaint will be dismissed.
An appropriate Order accompanies this Memorandum Opinion.