On appeal from the Superior Court of New Jersey, Law Division, Camden County, L-3979-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Cuff, Baxter and King.
This is an appeal by Frank Moroz (plaintiff) from the summary judgment dismissal of his complaint against defendant Wholesale Automotive Supply Co. (defendant). The complaint alleged claims under New Jersey's civil Racketeer Influenced and Corrupt Organizations Act, N.J.S.A. 2C:41-1 to -6.2 (NJRICO), the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -20 (CFA), and the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, 15 U.S.C.A. §§ 2301 to 2312 (MMWA). The complaint also sought damages for civil conspiracy and unjust enrichment. Plaintiff's claims arose from his purchase of an automobile loss prevention system, marketed by defendant through automobile dealers.
Plaintiff contends that the court erred in concluding (1) that the product in question constituted a warranty, rather than insurance; (2) that the sale of the product did not constitute an illegal tie-in under the MMWA; (3) that plaintiff had no standing to sue under the MMWA, and (4) that plaintiff suffered no ascertainable loss under the CFA. We reject plaintiff's contentions and affirm.
This is the procedural history. Plaintiffs Andrew Kaplan and Frank Moroz filed an amended ten-count complaint in Superior Court, Law Division, Camden County, on behalf of themselves and others similarly situated, against defendant and a number of automobile dealers, alleging violations of NJRICO (counts one through three), the CFA (count four), and the MMWA (count eight), and civil conspiracy (count five) and unjust enrichment (count ten), in connection with defendant's sale of an automobile loss deterrent system. Counts six, seven, and nine related to the sale of a lease protection guarantee that is not at issue on this appeal.*fn1
On June 20, 2006 defendant moved to dismiss count eight of the complaint, alleging violations of the MMWA. On July 21, 2006 Judge Fratto heard argument, granted the motion and signed an order dismissing this count with prejudice.
On July 26, 2006 a stipulation of dismissal was entered, dismissing the complaint as to the Warnock defendants. On December 5, 2006 the Ditschman and Auto Nation defendants were dismissed pursuant to Rule 1:13-7 for lack of prosecution.
On December 21, 2006 defendant moved for summary judgment on counts one through five of the amended complaint. Plaintiffs cross-moved for partial summary judgment, seeking a declaration that the sale of defendant's product constituted the sale of insurance. Judge Fratto heard argument on February 16, 2007 and placed his rulings on the record the same day. At oral argument, the parties agreed that the determination regarding certification of the class would be deferred pending the outcome of the summary judgment motions.
On March 1, 2007 the judge entered an order finding that as a matter of law, sale of defendant's product constituted the sale of a product with a warranty, rather than the sale of insurance. He denied plaintiffs' cross-motion for partial summary judgment. He also denied defendant's motion to dismiss counts one through five, pending defendant's further application as to the viability of these counts in light of his legal ruling on the warranty-insurance issue.
The judge also dismissed Kaplan as a plaintiff, pursuant to the representation of plaintiffs' counsel that he was no longer in the case. Hereafter, "plaintiff" in the singular refers to Moroz only.
Defendant then renewed its motion for summary judgment as to counts one through five, and also moved for summary judgment as to count ten. Plaintiff moved for partial summary judgment, seeking an order that the warranty provided with defendant's product contained an illegal tie-in under the MMWA. Judge Fratto heard argument on May 25, 2007 and entered orders dismissing with prejudice counts one through three of the complaint as to defendant, and denying plaintiff's motion for partial summary judgment.
On June 20, 2007 defendant moved for summary judgment as to counts four, five, and ten. On July 20, 2007 the judge heard argument, granted the motion, and entered an order dismissing these counts of the complaint as to defendant.
On September 19, 2007 a consent order was entered, dismissing without prejudice counts six through ten of the complaint as to the Burns-Kull defendants. On December 7, 2007 a settlement agreement with the Burns-Kull defendants as to the remaining counts of the complaint, which had been entered into on June 14, 2007, was approved by the court. The plaintiff Moroz and the "settlement class" settled with the Burns-Kull defendants for $1.25 million. Paragraph 5 of the December 7, 2007 order provides for: (1) $412,500 counsel fees; (2) $123,033 litigation costs, and (3) $169,381 administrative costs.
On January 10, 2008 plaintiff filed a notice of appeal from the orders of July 21, 2006, May 25, 2007, July 20, 2007, and August 17, 2007, and from paragraphs 2 and 6 of the order of March 1, 2007.
These are the relevant transactional facts. Defendant is a cooperative of new car dealers who are shareholders of the cooperative. It provides dealers with products and services, such as office supplies, equipment, and after-market programs. One of the after-market programs offered for sale by defendant to its members was the WLPS.
The WLPS package consisted of several components. First, the package provided six stencils that physically etched a unique identification number onto a car's front, side, and rear windows. Second, the package provided two warning decals for placement on the car's front-side windows, which stated that the car was protected by the WLPS. Third, the package provided a toll-free number etched into the stencils that the police could use to contact defendant.
The package included a guarantee that, in the event the car was stolen and either not recovered or recovered but declared a total loss, defendant would pay the owner a certain sum of money, the amount of which was determined by the type of package purchased. The parties differed in their characterization of this guarantee. Plaintiff contended that the guarantee was the only item actually purchased and was a form of theft insurance. Defendant contended that the WLPS was a loss deterrent system that consisted of the stencils, the decals, and the toll-free phone number, and that the guarantee was merely a warranty issued to implement this product. This dispute is the basis for the first issue on this appeal and was the subject of the first two summary judgment motions.
A car dealer would make two separate purchases from defendant. The first was the window stencils and the second was the warranty. The dealer would pay for the stencils when ordered but would be given blank warranty registration forms at no charge. Defendant would be told that a customer had purchased the warranty only when the dealer submitted a warranty registration form to defendant on behalf of the customer. At that point, the dealer then paid for the warranty portion of the WLPS, and defendant would enter the etch number into its internal database. If a car was stolen and the police called defendant's toll-free number, defendant would be able to locate the customer's name from this database.
On April 21, 2004 plaintiff purchased a 2004 Hyundai from Burns Pontiac GMC Truck, one of the car dealerships that was part of the Burns-Kull group of defendants. As part of the sale, plaintiff purchased the WLPS for $99.50.
At the time of purchase, the window decals and stencils had already been pre-installed on plaintiff's car. Peter Lanzavecchia, an executive vice-president of Burns Buick Pontiac-GMC Hyundai, admitted that Burns pre-etched all of its cars, i.e., prior to the sale of the car to a customer. However, he was clear that Burns did not sell the etching as a separate product without the warranty. That is, if a customer declined the $99.50 fee and chose not to purchase the theft deterrent system, the car would still have the etching on it but would not be registered anywhere. In such a case, Burns would "eat the loss," which consisted of the price it paid to defendant for the window stencils plus the cost of its labor in doing the etching.
Lanzavecchia explained that it was administratively easier for the dealership to have all cars etched when they arrived on the lot and to have the price of the WLPS pre-printed on the order forms. If a customer elected not to purchase the system, the computer put "X's" through the price. This practice also insured that a sales representative would present the option to the prospective buyer, though it did not guarantee a sale. For the relevant period, Burns's dealerships sold 28,000 WLPS systems, or about 55% of the cars it sold. Lanzavecchia also thought that the pre-etching was required by defendant and that it allowed the dealers' cars to be protected against theft while still on the lot.
Plaintiff alleged that no one at the dealership ever discussed the WLPS with him; he was simply given a "whole bunch" of documents to sign. Although he checked off the box to purchase the WLPS, he did not recall any "big discussion" regarding it. He thought all the etchings and decals on his car windows were advertisements for the glass manufacturer.
Lanzavecchia claimed that Burns's customers were given information at three separate times about the option of purchasing the WLPS. The first time was on the bill of sale, the second was on the warranty registration form, and the third was on the customer acknowledgement form. Burns used a version of the warranty registration form that did not include the price for the WLPS, even though defendant had modified its form in 2001 to include price as a line item.
Without dispute, plaintiff signed a document entitled "Customer Acknowledgement Re Purchase of Auto Theft Registration Protection," and this document stated that the dealer had advised him the purchase of this protection was voluntary. Although plaintiff also signed a warranty registration form, he claimed this form was not explained to him by the dealer.
Plaintiff bought the WAS-2 package. This package provided that if, within three years, the vehicle either was stolen and not recovered or recovered but declared a total loss, defendant would pay plaintiff $1000 directly. An additional $1000 would be paid jointly to him and the dealer, which was to be used towards the purchase of another vehicle. Defendant also sold two other packages, the WAS-5 and the WAS-25, which provided for different terms and levels of pay-out. Those packages were never offered by Burns and are not at issue here. That additional payment forms the basis for Issue Two on this appeal, and was the subject of defendant's third summary judgment motion. Lanzavecchia claimed that, because Burns believed in customer satisfaction, he would endorse a two-party check even if the customer planned to buy a new car from another dealer. However, he was not aware if that ever had occurred.
The actual warranty, as printed on the warranty registration form, provided as follows:
The Wasco Loss Prevention System, which is permanently installed on the vehicle windows, includes two (2) warning decals affixed to the driver and passenger windows, guarantees to the above name purchaser/lessee of the described vehicle that the system installed will be an effective theft deterrent. In the event the system fails, and the described Vehicle is stolen and not recovered, or stolen, recovered and declared a total loss (see exclusions), the above registered owner will receive $1,000.00 for out of pocket expenses. In addition $1,000.00 will be sent to the originating dealer, crediting the registered owner upon purchase of a vehicle. The maximum benefit covered by this guarantee shall not exceed $2,000.00. You may obtain window etching from a person of your choice. The window etching program is not required to obtain credit.
Plaintiff's car was never stolen; he never asserted any warranty claim against defendant. Rather, he sought damages in the amount he paid for the WLPS, because it was something he did not need and something that was not explained to him correctly. He did not have any complaints about the WLPS per se. Plaintiff never spoke to anyone from defendant.
According to Susan Tassitano, defendant's president since 1990, defendant first started selling an etching program to car dealers when it purchased the program from another company, ECP, Inc. Although defendant did not have a marketing department, it employed one salesperson for a period of six months who sold the program to all car dealerships, not just members of defendant cooperative. The program never really prospered and defendant never got any benefit from it. After this salesperson was terminated, defendant continued to supply the etch system, but it did not have any representatives in the field to solicit customers. Essentially, the program was available if dealers wanted it.
In March 1998 defendant started selling its own etch program, which became known as the WLPS. Defendant admitted that in October 1998, at a board of directors meeting, the board used the term "insurance" to refer to the new program. However, Tassitano claimed that this term was used "loosely" to cover any product that had a warranty pursuant to which the company had to pay claims. She said that neither she nor the board members were insurance experts and that they did not always use the correct terminology. Defendant also admitted that in November 1998, at an annual stockholder meeting, it announced it had started its own insurance company.
To sell the program, defendant first tried to form its own insurance company in Bermuda. However, the Bermuda Insurance Board rebuffed defendant's attempts because of concerns that defendant would be paying out more in claims than it would be charging for the program. Defendant then entered into an agreement with a Bermuda company, Atlantic Security Management, also known as a "rent-a-captive" company. This company was not a subsidiary of or related to defendant.
Essentially, a portion of what defendant charged to dealers for each WLPS contract was paid to the Bermuda company as a premium to insure defendant's performance in paying claims. Defendant paid all claims prior to sending any money to Bermuda. Pursuant to the agreement, if the amount of the claims exceeded the funds remitted, then the Bermuda company would pay the difference. However, that never happened.
Defendant initially paid $250,000 to set up this rent-a-captive company. Over time, portions of that "deposit" were returned to defendant. By the time of this litigation, the deposit had been completely returned.
In 2002 defendant looked to obtain a reinsurance policy on the WLPS program in case the funds in Bermuda ran out. Ultimately, defendant purchased a reinsurance, or stop-loss, policy from Universal. Defendant was considered the "insured" under this policy and Universal was the insurer. The coverage was considered vehicle theft protection insurance on an occurrence basis. It corresponded exactly to the terms of defendant's guarantee under the WLPS program. Defendant paid Universal a set premium per contract.
WLPS was marketed to dealers in New Jersey until September 2004. Defendant stopped selling the WLPS in September 2004 because of concerns regarding liability, i.e., not being able to pay claims. Defendant then entered into an agreement with Vanguard Dealer Services in which Vanguard agreed to sell the etch program to defendant's dealers beginning in September 2004 and to pay defendant a specific dollar amount for each contract. Defendant also entered into a memorandum of understanding and agreement with Dealers Assurance Company, wherein Dealers agreed to reinsure the "run-off" risk, i.e., the liability on any pre-September 2004 claims that had not yet been submitted. Defendant paid a one-time premium of $40,000 for this protection.
Except for one or two dealers, all of the dealers to whom defendant sold the WLPS were members of defendant cooperative. All nine directors of defendant's board were also members of defendant. To become a member, a dealer purchased stock in defendant.
Defendant's shareholders received both a stock dividend and a patronage dividend from defendant each year. The profits earned from the etch program, which was one of sixty-six product lines that defendant carried, were included in the line item for after-market products. That is, there was no separate payment to members from the etch program. Historically, defendant paid its members about 90% to 95% of its profits each year.
Tassitano admitted that defendant never filed any application with any State insurance department to be licensed as an insurance carrier, producer, or seller, and that it never sought an opinion as to whether the WLPS constituted insurance under New Jersey law. However, defendant was aware that the state of New York considered WLPS to be insurance. Tassitano claimed that an independent consultant hired by defendant had informed defendant that finance reserve service contracts, such as etch gap insurance, were not regulated as insurance.
In March 2006, a lawyer representing automotive retailers in New Jersey asked the New Jersey Department of Banking and Insurance (Department) for guidance as to whether "the sale of window etching in conjunction with a financial commitment to the product's efficacy as a theft-deterrent" constituted the sale of insurance in New Jersey. According to plaintiff, this letter was solicited by the settling defendants' counsel after this litigation started. According to the attorney's inquiry, the window etching materials were supplied by defendant, and "[a]t no additional charge to the consumer, each customer who purchased the window etching was also registered in the WASCO Vehicle Identification Loss Prevention System." This system "essentially reinforce[d] the product as an effective-theft-deterrent." According to counsel:
This product was in no way meant to provide insurance coverage nor supplant the coverage provided by auto-theft insurance. Neither [defendant] nor our clients assumed the risk of theft of their customers' vehicles, which typically cost between 10 and 20 times the maximum value of the product. Further, the loss is not distributed among a large group bearing similar risks as part of a general "risk shifting" scheme. [Defendant]'s willingness to financially support etching products is intended to underscore the efficacy of the product, and was meant to demonstrate that [defendant] believed in the product. In the event that a vehicle with the window etching enrolled in the ...