Filed: Aug. 04, 1994
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit 8-4-1994 J&R Ice Cream Corp. v. California Smoothie Licens. Corp. Precedential or Non-Precedential: Docket 93-5516, 93-5547 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994 Recommended Citation "J&R Ice Cream Corp. v. California Smoothie Licens. Corp." (1994). 1994 Decisions. Paper 102. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/102 This decision is bro
Summary: Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit 8-4-1994 J&R Ice Cream Corp. v. California Smoothie Licens. Corp. Precedential or Non-Precedential: Docket 93-5516, 93-5547 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994 Recommended Citation "J&R Ice Cream Corp. v. California Smoothie Licens. Corp." (1994). 1994 Decisions. Paper 102. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/102 This decision is brou..
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Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
8-4-1994
J&R Ice Cream Corp. v. California Smoothie
Licens. Corp.
Precedential or Non-Precedential:
Docket 93-5516, 93-5547
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
Recommended Citation
"J&R Ice Cream Corp. v. California Smoothie Licens. Corp." (1994). 1994 Decisions. Paper 102.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/102
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 93-5516 and 93-5547
J & R ICE CREAM CORPORATION,
a Corporation of the State of Florida
v.
CALIFORNIA SMOOTHIE LICENSING CORPORATION,
a Corporation of the State of New Jersey;
CALIFORNIA SMOOTHIE INTERNATIONAL, INC.,
a Corporation of the State of New Jersey,
Defendants/Third-Party
Plaintiffs
v.
JEFFREY K. BAUGHER;
RICHARD ROSSETTI,
Third-Party Defendants
California Smoothie Licensing Corporation
and California Smoothie International, Inc.,
Appellants-Cross-Appellees
J & R Ice Cream Corporation,
Appellee-Cross-Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 89-4638)
Argued June 23, 1994
BEFORE: GREENBERG and STAPLETON, Circuit Judges,
and FARNAN, District Judge*
(Filed: August 4, 1994)
1
* Honorable Joseph J. Farnan, Jr., United States District Judge
for the District of Delaware, sitting by designation.
Samuel B. Santo, Jr. (argued)
Gregory B. Reilly
Lowenstein, Sandler, Kohl,
Fisher & Boylan
65 Livingston Avenue
Roseland, N.J. 07068
Attorneys for Appellants-
Cross-Appellees
California Smoothie
Licensing Corp. and
California Smoothie
International, Inc.
Brian P. Sullivan (argued)
Jay M. Zuckerman
Smith, Stratton, Wise, Heher &
Brennan
600 College Road East
Suite 4200
Princeton, N.J. 08540
Attorneys for Appellee-
Cross-Appellant J & R
Ice Cream Corporation
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. FACTUAL AND PROCEDURAL HISTORY
A. Factual History
This appeal arises from an unsuccessful attempt of a
franchisee to operate a restaurant in Florida. The appellants-
cross-appellees are California Smoothie International, Inc.
(CSI) and its wholly-owned subsidiary, California Smoothie
2
Licensing Corporation (CSLC). As a matter of convenience, we
sometimes will refer to CSI and CSLC singularly as "California
Smoothie". CSI owns and operates California Smoothie
restaurants, and CSLC franchises California Smoothie restaurants.
The appellee-cross-appellant is J & R Ice Cream Corporation, the
franchisee, which Jeffrey Baugher and Richard Rossetti founded in
1984. We note that in the business, restaurants sometimes are
called "stores" and thus we will use that term.
We recite the facts taken from the perspective of J & R
Ice Cream as the verdict winner. Baugher and Rossetti are
longtime friends who decided in the 1980's to open an ice cream
shop together. Soon after incorporating J & R Ice Cream for that
purpose, they decided that to secure a desirable location and
financing, they would try to acquire a franchise. They initiated
preliminary discussions with a number of franchisors, including
Frusen Gladje and Steve's Ice Cream. However, during the summer
of 1985, Robert Keilt, a childhood acquaintance of the Baugher
and Rossetti families who was the president of CSI and CSLC,
learned from Baugher's brother that Baugher and Rossetti were
considering acquiring a franchise. Subsequently, Joseph Kennedy,
vice president of franchising and development for CSLC, contacted
Baugher and suggested that they consider acquiring a California
Smoothie franchise in the Boca Town Center in Boca Raton,
Florida. Baugher agreed to attend a meeting at California
Smoothie's headquarters in Clifton, New Jersey, to discuss that
possibility. Prior to the meeting, California Smoothie sent
Baugher brochures regarding California Smoothie franchises which
3
contained representations concerning California Smoothie's
expertise in site selection.
The first meeting regarding the acquisition of a
California Smoothie franchise by Baugher and Rossetti was on
August 8, 1985. On that date, Baugher met first with Kennedy,
then with Keilt, and then with Kennedy again. According to
Baugher, in their initial discussions Kennedy told him that the
average California Smoothie franchise accrued $300,000 in sales
per year, that a store at the Boca Town Center would produce at
least that level of sales and probably more, and that all
existing stores were earning between 18 and 20 percent profit.
Baugher then met with Keilt who reiterated Kennedy's
representations. Finally, when Baugher met with Kennedy again
after speaking with Keilt, Kennedy gave Baugher documents
containing sales and profit figures for California Smoothie
company-owned stores earning substantial profits. Some of the
documents contained a "disclaimer" stating that prospective
franchisees should not rely on the figures. Nonetheless, Kennedy
told Baugher to ignore the disclaimer because it was merely a
legal requirement. Kennedy also told Baugher that the
distribution of the documents containing sales and profit figures
to prospective franchisees violated FTC regulations and
California Smoothie policy. Moreover, he gave Baugher CSLC's
Uniform Offering Circular, which included the following
statement:
[t]he Franchisor does not disclose to
prospective Franchisees the actual, average
or projected sales, profits or earnings of
4
existing California Smoothie restaurants. In
the event that a prospective Franchisee
should obtain such information, it should not
be relied upon, since any information
pertaining to sales, profits, or earnings is
intended for internal use only as a basis for
the Franchisor's management decisions.
Uniform Offering Circular § 19, app. at 105.
The second meeting regarding the acquisition of a
California Smoothie franchise by Baugher and Rossetti involved
Rossetti and California Smoothie representatives, James Skouras
and Gary Goddard. Goddard assured Rossetti that he and Baugher
could match the profit and sales figures on certain documents
Goddard showed him. There was a third meeting on August 26,
1985, when Baugher met with Keilt and Skouras who suggested that
Baugher consider the Pompano Fashion Square Shopping Center site
in Pompano Beach, Florida, for a franchise and indicated that a
store at that site would have sales in excess of $300,000 per
year.
In September 1985, Baugher and Rossetti submitted
franchise applications to California Smoothie, expressing
interest in acquiring a franchise at the Boca Raton site. On
November 22, 1985, California Smoothie notified Baugher and
Rossetti that their applications had been approved. However,
shortly thereafter California Smoothie informed them that Keilt
had decided not to locate a "full-line-menu" restaurant at the
Boca Town Center due to the lease economics of the site.0
0
California Smoothie Restaurants served items including pita
sandwiches, yogurt and blended fruit drinks. Their menus varied,
however, from full-line menus including the greatest variety of
products, to menus limited almost exclusively to the California
Smoothie blended fruit drinks.
5
Meanwhile, in November 1985, CSI leased space in the food court
scheduled to open at the Pompano Fashion Square Shopping Center
some time in 1986. In late December 1985, Keilt and Skouras
contacted Baugher and Rossetti and told them that a store at the
Pompano mall would produce at least $300,000 in sales per year.
Moreover, Keilt told Baugher that California Smoothie had
conducted a full investigation of the Pompano mall site,
including studies of demographic information.
Baugher and Rossetti retained an accountant, Thomas
Maniscalo, to evaluate the Pompano mall site and to help them get
financing should they choose to acquire a California Smoothie
franchise. Maniscalo had several conversations with Keilt and
another representative of California Smoothie, who indicated to
him the level of gross sales and expenses associated with a
franchise. In these discussions, the California Smoothie
representatives understated the expenses and failed to mention
that certain California Smoothie restaurants were operating at a
loss or had closed due to financial failure. Based on the
misleading information he received, Maniscalo advised Baugher and
Rossetti to acquire the Pompano mall California Smoothie
franchise.
On January 28, 1986, Baugher and Rossetti entered into
a site selection agreement with CSLC, and made a $5,000
downpayment on CSLC's $25,000 franchise fee. Subsequently, on
February 21, 1986, Baugher and Rossetti paid the remaining
$20,000 of the franchise fee and executed a franchise agreement
and a sublease entitling and obligating them to operate a
6
California Smoothie Restaurant at the site leased by CSI in the
food court at the Pompano mall. Prior to executing these
agreements, Baugher and Rossetti expressed concern that the lease
negotiated by CSI with the Pompano mall's landlord did not
contain a cap on the common area maintenance fees. Indeed,
California Smoothie's guidelines indicated that common area
maintenance fees for a food court should not exceed two per cent
of gross sales. Keilt responded to their concern by stating that
he and the landlord had reached an oral agreement providing that
common area maintenance fees would not exceed three percent of
gross sales.
Baugher and Rossetti opened their California Smoothie
restaurant at the Pompano mall on June 8, 1986, and on August 6,
1986, they assigned their rights in the franchise agreement to J
& R Ice Cream. By the end of 1986, the franchise was operating
at a loss. Baugher and Rossetti complained to CSLC about their
gross sales and about the level of the food court maintenance
fees which the mall collected from food court tenants.0 These
fees totaled more than the promised three percent of the
restaurant's gross sales. After unsuccessfully seeking a
reduction in the fees from the agent representing the mall's
landlord, CSLC filed a lawsuit against the landlord and its agent
in a Florida state court, alleging that the agent had made
material misrepresentations to CSI during the lease negotiations.
0
The mall's landlord assessed CSI for the food court maintenance
fees, and then CSI assessed Baugher and Rossetti for them
pursuant to the sublease.
7
At that time, CSI began making reduced rent payments to the
landlord and, in turn, began collecting reduced rent payments
from J & R Ice Cream.
However, in October 1988, when settlement negotiations
between CSI and the landlord proved unsuccessful, CSLC demanded
that J & R Ice Cream pay the full amount owed under the sublease,
including all past-due amounts. But J & R Ice Cream refused to
pay the full amount due and continued to make reduced rent
payments. J & R Ice Cream incurred losses in 1987, 1988, and
1989. On November 6, 1989, J & R Ice Cream brought suit against
CSI and CSLC. Subsequently, in December 1989, CSLC terminated J
& R Ice Cream's franchise, and in February 1990, J & R Ice Cream
gave CSLC notice of its intent to abandon the premises and cease
operations, and it did so by March 1990.
B. Procedural History
As we have indicated, J & R Ice Cream filed the
complaint in this diversity of citizenship action on November 6,
1989. The complaint alleged violations of the Florida Franchise
law, the Florida Business Opportunity Law, the Florida Deceptive
and Unfair Trade Practices Act, the New York Consumer Protection
from Deceptive Practices Act, and the New Jersey Consumer Fraud
Act. See app. at 6-10, 12-15. The complaint also contained an
equitable fraud count and a count alleging that California
Smoothie was negligent in its selection of the Pompano mall site
and its negotiation of the lease there. Id. at 11-12, 15-17. At
a settlement conference in early August 1991, the district court
8
indicated that it would entertain choice-of-law motions, but not
motions for summary judgment. Later that month, the parties
filed choice-of-law motions and ultimately the court ruled that
New Jersey law governed the action. Thus, the claims under
Florida and New York law were dismissed. In September 1992, the
parties consented to a jury trial before a magistrate judge. The
trial began in the district court on May 3, 1993. Before the
court submitted the case to the jury, J & R Ice Cream decided to
forego its equitable fraud claim, and thus the court submitted
only the New Jersey Consumer Fraud Act claim and the negligence
claim to the jury.
On May 19, 1993, the jury found that CSI and CSLC
violated the New Jersey Consumer Fraud Act by: (1) representing
to J & R Ice Cream, without a reasonable basis in fact, that J &
R would accrue gross sales of no less than $250,000 in its first
year of operation at the Pompano location, and was likely to
accrue more than $300,000 in gross sales; (2) representing,
without a reasonable basis in fact, that they had acquired
expertise in selecting profitable locations for franchises and
had utilized that expertise in selecting the Pompano mall site;
and (3) representing, without a reasonable basis in fact, that
the food court common area maintenance fees at the Pompano mall
would not exceed three percent of gross sales. Moreover, as
noted above, the jury also found that CSI and CSLC had been
negligent in the manner in which they selected the Pompano mall
location and in the manner in which they negotiated the terms of
the lease for that location.
9
Based on its findings, the jury awarded J & R Ice Cream
$200,000 for California Smoothie's violations of the New Jersey
Consumer Fraud Act, and $55,000 for California Smoothie's
negligent conduct. The $200,000 verdict was a lump sum which did
not distinguish among the liability theories under the Consumer
Fraud Act. The court trebled the damages for the New Jersey
Consumer Fraud Act violations pursuant to N.J. Stat. Ann. § 56:8-
19 (West 1989), and, in a post-trial hearing, the court awarded J
& R Ice Cream $287,455.83 in attorney's fees and costs. However,
the court struck the jury's award of $55,000 on the negligence
count and refused to award J & R Ice Cream prejudgment interest
on the verdict. Thus, the total award to J & R Ice Cream as
reflected in the court's order of judgment, was $887,455.83. CSI
and CSLC appeal from the judgment entered on July 20, 1993, on
the jury's verdict, and J & R Ice Cream cross-appeals from the
court's denial of prejudgment interest and its decision to strike
the jury's award of negligence damages.
II. DISCUSSION
A. An Overall View
The district court's jurisdiction was based upon 28
U.S.C. § 1332. Plaintiff J & R Ice Cream is a citizen of
Florida, with its principal place of business in that state, the
defendants CSI and CSLC are citizens of New Jersey with their
principal places of business in that state, and the amount in
10
controversy exceeds $50,000.0 Our jurisdiction is based on 28
U.S.C. § 636(c)(3) and 28 U.S.C. § 1291 inasmuch as this is an
appeal from a final order of judgment in a trial presided over by
a magistrate judge pursuant to 28 U.S.C. § 636(c)(1).
California Smoothie challenges the jury's verdict on
six grounds: (1) that the court erred in admitting testimony by
unrelated former California Smoothie franchisees as to
misrepresentations California Smoothie made to them; (2) that the
court erred in applying the New Jersey Consumer Fraud Act to the
sale and acquisition of a franchise; (3) that the proof that
California Smoothie falsely represented that it had acquired
expertise in selecting profitable locations for franchises and
that it had utilized that expertise in selecting the Pompano mall
site did not establish a violation of the Consumer Fraud Act; (4)
that the evidence did not support the jury's finding that
California Smoothie represented to Baugher and Rossetti that
"they could expect gross sales of $250,000 and likely in excess
of $300,000";0 (5) that the court erred in admitting parol
0
The complaint stated that CSLC had "a" principal place of
business in New Jersey, leaving open the possibility that it had
"its" principal place of business in Florida. Thus, the
complaint did not properly plead diversity jurisdiction. See
Hunt v. Acromed Corp., 961 F.2d 1079, 1080, 1082 n.7 (3d Cir.
1992). However, letters and supporting material submitted to
this court indicate that at the time the complaint was filed,
CSLC's principal place of business was in New Jersey. Therefore,
we regard the jurisdictional problem as cured. See 28 U.S.C.
§1653. Baugher and Rossetti, who were additional defendants on a
counterclaim, are citizens of New York and Florida, respectively.
0
The quotation which we take from California Smoothie's brief is
a paraphrase of J & R Ice Cream's complaint and of an
interrogatory to the jury.
11
evidence of one of the three misrepresentations allegedly made by
California Smoothie; and (6) that the court erred in concluding
that California Smoothie had a duty to select a franchise site
and negotiate a lease for Baugher and Rossetti.
For reasons which we set forth below, we conclude that
the district court abused its discretion by permitting J & R Ice
Cream to introduce the testimony by former California Smoothie
franchisees who were unrelated to J & R Ice Cream and its
founders. Moreover, we find that the introduction of this
evidence was prejudicial with regard to the Consumer Fraud Act
count, a conclusion that standing alone would require a new trial
on that count.
However, as we noted above, California Smoothie argues
that the Consumer Fraud Act does not apply to the sale and
acquisition of a franchise. We agree. Therefore, we will not
remand for a new trial on the Consumer Fraud Act count. Rather,
we will remand the matter for entry of a judgment for California
Smoothie on that count. Nevertheless, we will remand this case
to the district court for a hearing to determine whether J & R
Ice Cream is entitled to a new trial on its equitable fraud
claim, as J & R Ice Cream contended at oral argument before us
that it only abandoned this cause of action after learning that
the district court would not entertain motions for summary
judgment and after it reasonably concluded that California
Smoothie did not intend to challenge the Consumer Fraud Act's
12
applicability to this case.0 If the district court agrees with
these factual contentions, it may deem it appropriate to
reinstate the equitable fraud claim. We will reinstate the
jury's verdict against California Smoothie on the negligence
count, as the testimony by former California Smoothie franchisees
did not taint the judgment on this count, and the district court
was correct in concluding that California Smoothie had a duty to
select a franchise site and negotiate a lease for Baugher and
Rossetti.
In its cross-appeal, J & R Ice Cream challenges the
district court's denial of prejudgment interest on the Consumer
Fraud Act damages and the court's decision to strike the jury's
award of negligence damages because they were duplicative of the
Consumer Fraud Act damages. In light of our decision that the
district court's admission of testimony by former franchisees
requires reversal of the Consumer Fraud Act judgment and that the
0
We recognize that in view of our conclusion that the Consumer
Fraud Act does not apply to the sale of a franchise that we
probably could avoid deciding the admissibility of the testimony
of the former franchisees. Nevertheless we reach that question
because the evidence issue raises an important question of
federal law which we think that we should decide. In light of
our decision, however, we need not reach California Smoothie's
claims: that the proof that California Smoothie falsely
represented that it had acquired expertise in selecting
profitable locations for franchises and that it had utilized that
expertise in selecting the Pompano mall site did not establish a
violation of the Consumer Fraud Act; that the evidence did not
support the jury's finding that California Smoothie represented
to Baugher and Rossetti that "they could expect gross sales of
$250,000 and likely in excess of $300,000"; and that the court
erred under New Jersey law in admitting parol evidence of one of
the three misrepresentations allegedly made by California
Smoothie. None of these claims raise important federal
questions.
13
Consumer Fraud Act is inapplicable to the sale and acquisition of
a franchise, we need not reach these claims and we will dismiss
the cross-appeal as moot.0
Instead, we will vacate the district court's order
striking the negligence damages and remand with instructions to
reinstate the negligence damages, enter a judgment for them, and
award prejudgment interest on these damages. We follow this
course because the district court concluded that the damages
awarded on the negligence claim against California Smoothie
duplicated the damages awarded on the Consumer Fraud Act claim
against California Smoothie. It reached this conclusion as it
reasoned that "the damages which would proximately flow from a
misrepresentation as to expertise in site selection and failure
to utilize that expertise properly [are] the same damages which
would flow from a negligence claim" based on California
Smoothie's alleged negligence in selecting the site. See supp.
app. at 519. For this reason, the district court refused to
enter judgment on the $55,000 awarded by the jury on the
0
CSI and CSLC have filed proceedings under Chapter 11 of the
Bankruptcy Code but on November 29, 1993, they obtained an order
from the bankruptcy court permitting them to continue this
appeal. They contend that the order does not allow J & R Ice
Cream to prosecute its cross-appeal. We need not consider this
point because we are dismissing the cross-appeal. While we
recognize that we are requiring entry of a judgment in favor of J
& R Ice Cream on the negligence claim, we do not reach that
result by reversing on the cross-appeal. Rather, we are
remanding for entry of the judgment because we are reversing on
California Smoothie's appeal and a consequence of that reversal
is a reinstatement of the negligence verdict and the entry of a
judgment thereon. We do not regard that outcome as implicating
the automatic stay.
14
negligence count. Id. at 520; app. at 42-43 (order of judgment).
Thus, the negligence damages should be reinstated because, based
on our decision, they no longer are duplicative.0
Prejudgment interest should be allowed on the judgment
on the negligence claim pursuant to N.J. Ct. R. 4:42-11(b) which
provides that prejudgment interest shall be awarded in all but
"exceptional" circumstances. In reaching this conclusion, we
have considered the district court's reasoning in disallowing
interest on the Consumer Fraud Act judgment:
[u]nder the circumstances where a treble
damage award is made to a prevailing
plaintiff, . . . to additionally award
prejudgment interest would in effect provide
such a windfall and double recovery and this
does indeed constitute exceptional
circumstances.
As noted by counsel for plaintiff, the
purpose behind the rule is twofold; to
encourage settlement and to make the
plaintiff whole. In the situation where
treble damages are awardable, the treble
damages [are] more than adequate to make a
plaintiff whole; and indeed the prospect of
treble recovery is also more than adequate to
make a defendant focus on settlement and
encourage settlement.
See supp. app. at 522. But based on our decision that J & R Ice
Cream is no longer entitled to treble damages, the district
court's reasoning is no longer applicable. Thus, J & R Ice Cream
is entitled to prejudgment interest on the negligence damages
pursuant to the ordinary application of N.J. Ct. R. 4:42-11(b).
0
Of course, if the district court grants J & R Ice Cream a new
trial on its equitable fraud claim and enters judgment against
California Smoothie on this claim, a portion of the relief on the
fraud claim may be duplicative of the negligence damages.
15
B. The Testimony from Former Franchisees
California Smoothie objected to the admission of the
testimony of former California Smoothie franchisees on multiple
occasions. See e.g., supp. app. at 13 (motion in limine), id. at
283 (prior to testimony of former franchisees),
id. at 505
(charge conference),
id. at 517-18 (post-trial motion).
Nevertheless, J & R Ice Cream argues that we should not address
California Smoothie's claim that the district court erred in
admitting this testimony. In this regard, J & R Ice Cream
contends that even if the testimony was inadmissible for purposes
of its Consumer Fraud Act claim, California Smoothie is barred
from challenging the admission of this testimony on appeal,
because the evidence was admissible for purposes of its equitable
fraud claim and California Smoothie failed to request a limiting
or curative instruction after J & R Ice Cream voluntarily
dismissed its equitable fraud claim. See br. at 23. However,
the record indicates that California Smoothie continued to object
to the admission of the testimony after J & R Ice Cream dismissed
its equitable fraud claim, see supp. app. at 505 (charge
conference), that the district court continued to hold that the
testimony was admissible,
id. at 505 (charge conference), 517-18
(post-trial motion), and that J & R Ice Cream capitalized on the
admission of the testimony by arguing in its closing that the
former franchisees's testimony regarding misrepresentations made
to them by California Smoothie was evidence that California
Smoothie made misrepresentations to Baugher and Rossetti,
id. at
16
509.0 Thus, California Smoothie is not barred from challenging
the admission of this testimony on appeal.
The district court allowed J & R Ice Cream to introduce
testimony by two former California Smoothie franchisees, Jean
Dunlop and Charles McRae, both of whom testified that California
Smoothie made representations to them regarding the sales and
profits a franchise would produce. See id. at 280-355. Although
California Smoothie objected to this testimony, the district
court ruled that it was admissible as evidence of "intent" and a
"common plan or scheme."
Id. at 283, 307, 517-18. Subsequently,
during argument on the post-trial motions, the court stated that
"it became clear at the charge conference" that intent was not an
element of a Consumer Fraud Act violation, but it reiterated that
the testimony of the two former franchisees was admissible as
evidence of California's common plan or scheme or business
0
Moreover, although J & R Ice Cream's brief refers to its non-
statutory fraud claim as a common law fraud claim, the complaint
identifies it as an equitable fraud claim. The testimony of the
former franchisees was inadmissible for purposes of J & R Ice
Cream's equitable fraud claim because although "[a] plaintiff
asserting a claim of legal fraud must show that the defendant
acted with scienter, . . . a plaintiff advancing a claim of
equitable fraud need not demonstrate scienter." Lightning Lube,
Inc. v. Witco Corp.,
4 F.3d 1153, 1182-83 (3d Cir. 1993)
(citations omitted) (applying New Jersey law). Thus, for
purposes of J & R Ice Cream's equitable fraud claim, the
testimony of the former franchisees was not admissible as
evidence of California Smoothie's intent. Finally, our
discussion below concluding that the testimony was not admissible
as evidence of a "common plan" or "scheme" for purposes of the
Consumer Fraud Act claim applies with equal force to the
equitable fraud claim. Thus, J & R Ice Cream's contention that
the testimony of the former franchisees was admissible at the
time it was introduced because J & R Ice Cream was still
prosecuting its equitable fraud claim lacks merit.
17
practice of representing sales and profit figures to potential
franchisees. Id. at 517.
We review the district court's decision to admit
testimony by former California Smoothie franchisees regarding
California Smoothie's prior "bad acts" for abuse of discretion.
See United States v. Console, 13 F.3d 641, 659 (3d Cir. 1993),
cert. denied,
114 S. Ct. 1660 (1994). As we indicated in
Console,
13 F.3d at 659 (quoting United States v. Sampson,
980 F.2d 883,
886 (3d Cir. 1992)):
[f]our guidelines set forth by the Supreme
Court govern the admission of prior 'bad
acts': '(1) the evidence must have a proper
purpose under Rule 404(b); (2) it must be
relevant under Rule 402; (3) its probative
value must outweigh its prejudicial effect
under Rule 403; and (4) the court must charge
the jury to consider the evidence only for
the limited purpose for which it is
admitted.'
Rule 404(b) provides that:
[e]vidence of other crimes, wrongs, or acts
is not admissible to prove the character of a
person in order to show action in conformity
therewith. It may, however, be admissible
for other purposes, such as proof of motive,
opportunity, intent, preparation, plan,
knowledge, identity, or absence of mistake or
accident.
The testimony given by Dunlop and McRae was not
admissible as evidence of "intent" because, as the district court
recognized subsequent to its initial ruling on the evidence,
intent is not an essential element of a Consumer Fraud Act
violation consisting of an affirmative act. See Fenwick v. Kay
American Jeep, Inc., 371 A.2d 13, 16 (N.J. 1977); D'Ercole Sales,
Inc. v. Fruehauf Corp.,
501 A.2d 990, 996 (N.J. Super. Ct. App.
18
Div. 1985). There is no doubt that the alleged Consumer Fraud
Act violations in this case consist of affirmative
misrepresentations.
Moreover, the testimony was not admissible as evidence
of a "common plan or scheme."
Ordinarily, when courts speak of 'common plan
or scheme,' they are referring to a situation
in which the charged and the uncharged . . .
[acts] are parts of a single series of
events. In this context, evidence that the
defendant was involved in the uncharged . . .
[act] may tend to show a motive for the
charged . . . [act] and hence establish the
commission of the . . . [act], the identity
of the actor, or his intention.
Government of the Virgin Islands v. Pinney, 967 F.2d 912, 916 (3d
Cir. 1992) (citing Edward W. Cleary et al., McCormick on Evidence
§ 190, at 559 (3d ed. 1984)). Alternatively a "common plan or
scheme" may consist of "incidents [that] were sufficiently
similar to earmark them as the handiwork of the same actor," and
thus constitute "'signature evidence'" of identity. Id.0 "With
the possible exception of prosecutions for conspiracy, plan or
design is not an element of the offense; therefore, evidence that
0
This method of proving identity through the use of other bad
acts is "sometimes labelled proof of 'modus operandi'" and
distinguished from the use of a common plan or scheme to prove
identity. See 22 Wright and Graham, Federal Practice and
Procedure § 5244, at 501 (1978).
19
shows a plan must be relevant to some ultimate issue in the
case." See 22 Wright and Graham, Federal Practice and Procedure
§ 5244, at 500-01 (1978).
Dunlop and McRae testified that California Smoothie
made representations to them regarding the sales and profits they
would achieve if they acquired franchises. This testimony was
not relevant to an ultimate issue in this case, such as motive,
identity or intent. These issues were not in dispute. See
Pinney, 967 F.2d at 917. Furthermore, the testimony was not
germane to the negligence count. Therefore, the evidence was
admitted for "exactly the purpose Rule 404(b) declared to be
improper,"
id., namely to establish the defendants' propensity to
commit the charged act. See United States v. Jemal, No. 93-5172,
slip op. at 8 (3d Cir. June 21, 1994). The district court
acknowledged that it admitted the former franchisees' testimony
for this purpose, stating: "in the context of this case, I
believe that it was proper to show that it was more likely that
representations of sales figures were made to . . . [J & R Ice
Cream] by demonstrating that the officials of California Smoothie
had a practice of making such representations." See supp. app.
at 518. Thus, the district court abused its discretion in
admitting this testimony for an improper purpose.
Although J & R Ice Cream contends that the testimony
was harmless because it was cumulative and accounted for only
half an hour of a two-week trial, see br. at 28-29, we conclude
that the testimony was prejudicial because it portrayed
California Smoothie as an organization engaged in a large-scale
20
scheme to defraud prospective franchisees by using
misrepresentations to persuade them to acquire franchises.0
Although the testimony of the former franchisees only addressed
representations made by California Smoothie regarding the sales
and profits that a franchise would produce, we are satisfied that
the testimony prejudiced California Smoothie on the two aspects
of the Consumer Fraud Act verdict which the testimony did not
address directly, the representations with respect to California
Smoothie's expertise in site selection and the representation
regarding the limitation on the maintenance charges. We take
this view because we believe that the jury could have used the
highly prejudicial, indeed almost inflammatory evidence to
conclude that California Smoothie used misrepresentations in
multiple aspects of its sales efforts. At the very least, we
cannot say with any confidence that it is highly probable that
the error did not substantially affect California Smoothie's
rights on all the Consumer Fraud Act issues. See Lippay v.
Christos, 996 F.2d 1490, 1500 (3d Cir. 1993). Thus, the district
court's abuse of discretion requires reversal of the judgment
against California Smoothie on the Consumer Fraud Act count.
0
Moreover, as we noted above, J & R Ice Cream used the testimony
of the former franchisees to support this inference in its
closing argument, stating, "Did Mr. Keilt make representations to
them that they would make specific numbers, whether it be 320 to
350, which I believe was Miss Dunlop's testimony and I think Mr.
McRae would make $300,000. That's all that's relevant. From
that you can deduce that he probably made the same or similar
representations to Mr. Baugher and Mr. Rossetti." See supp. app.
at 509.
21
The admission of this testimony does not, however,
require reversal of the judgment against California Smoothie on
the negligence count because the evidence of California
Smoothie's alleged misrepresentations was quite distinct from the
evidence supporting the jury's determination that California
Smoothie was negligent in its selection of a franchise site and
negotiation of a Pompano mall lease. We also point out that
there was sufficient evidence supporting this determination.0
C. Applicability of the Consumer Fraud Act
California Smoothie argues that the district court
erred in applying the New Jersey Consumer Fraud Act to the sale
and acquisition of a franchise because: (1) purchasers of a
franchise are not the "ordinary consumers" that the Act was
intended to protect, and (2) a sale of a franchise does not
qualify as either a sale of real estate or a sale of merchandise,
the only two types of transactions to which the Act applies. J &
R Ice Cream answers that California Smoothie should be barred
from challenging the applicability of the New Jersey Consumer
Fraud Act to this case because "[t]he first time this issue was
raised was by way of post-trial motion." See br. at 15.
However, we are satisfied that California Smoothie
preserved its objection to the applicability of the Act. As the
0
Moreover, in determining that the district court was correct in
finding that California Smoothie assumed the duty to select a
franchise site and negotiate a lease for Baugher and Rossetti, we
do not rely on the evidence of California Smoothie's
misrepresentations to other former franchisees.
22
district court declined to entertain motions for summary
judgment, California Smoothie objected to the Act's application
to the case in its trial brief, see trial br. at 34 n.9, and
cited its trial brief as the basis for its motion for a judgment
as a matter of law at the conclusion of J & R Ice Cream's case.
Moreover, at the post-trial motions hearing, the district court
rejected on the merits California Smoothie's argument that the
Consumer Fraud Act improperly was applied to the case, stating to
counsel for J & R Ice Cream, "your waiver argument . . . is made
very clear. I just, in fact, preferred to decide this on the
merits rather than dealing with the waiver issue." Thus, its
treatment of the argument suggests that the district court did
not believe that California Smoothie had waived the argument. See
Griffiths v. CIGNA Corp., 988 F.2d 457, 468 n.8 (3d Cir.)
("because the district court acknowledged during oral argument on
the appellants [sic] post-trial motions that the 'contention
about the, but for charge, I think that was reasonably well
preserved' . . . , we will consider the appellants' exception to
the retaliatory discharge instruction on the merits"), cert.
denied, 114 S. Ct. 186 (1993); see also Lippay v.
Christos, 996
F.2d at 1497 n.8 ("we are satisfied from our review of the record
that . . . [appellant] objected on the ground of hearsay at the
time of the testimony. Furthermore, the district court noted in
its opinion denying . . . [appellant's] motion for a new trial
that although 'defendant's counsel objected somewhat belatedly to
23
the admission of this testimony, [he] nevertheless preserved his
objection on the record'").0
The Consumer Fraud Act provides in relevant part that:
[t]he 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. Stat. Ann. § 56:8-2 (West 1989). The Act defines
"merchandise" to include "any objects, wares, goods, commodities,
services or anything offered, directly or indirectly to the
public for sale." See N.J. Stat. Ann. § 56:8-1(c) (West 1989).
It defines "person" to include "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,
0
We also point out that the district court's case management
techniques with respect to declining to entertain motions for
summary judgment may have interfered with California Smoothie's
ability to raise its objection to the applicability of the
Consumer Fraud Act. Furthermore, it is possible that inasmuch as
we are reversing the judgment on the Consumer Fraud Act claim
because the court erroneously admitted prejudicial evidence from
the former franchisees, California Smoothie might have been able
to raise the issue of the applicability of the Act on remand if
we ordered a new trial.
24
associate, trustee or cestuis que trustent thereof." See N.J.
Stat. Ann. § 56:8-1(d) (West 1989).
The parties have not cited any Supreme Court of New
Jersey cases addressing the application of the Act to the sale
and acquisition of franchises. In fact, we are aware of only one
case, Morgan v. Air Brook Limousine, Inc., 510 A.2d 1197 (N.J.
Super. Ct. Law Div. 1986), which has addressed the question
explicitly. Morgan involved an agreement between Air Brook
Limousine and Morgan, providing that Morgan would lease a
limousine from Air Brook and accept only limousine rides referred
to him by Air Brook. Morgan later filed suit against Air Brook,
alleging inter alia, that Air Brook violated the Consumer Fraud
Act. Air Brook moved for summary judgment, arguing that the Act
applied only to retail consumer sales or advertising and that a
franchise did not qualify as merchandise under the Act.
However, the court rejected these arguments and held
that the Act applied to the agreement. The court concluded that
because the Act's definition of "person" includes business
entities and the Act contains no "retail restriction" or
definition of the term "consumer," the "Act is not restricted to
retail consumer consumption transactions and its protective sweep
includes transactions in which a person, like Morgan, makes an
investment rather than a consumption purchase." Morgan, id. The
court also concluded that "[a]lthough the term 'franchise' is not
included within § 1(c)'s definition of 'merchandise,' it is
subsumed within the terms 'commodities', 'services' or 'anything
25
offered, directly or indirectly to the public for sale.'" Id. at
1204.
We also consider a second inferior court case, Kugler
v. Koscot Interplanetary, Inc., 293 A.2d 682 (N.J. Super. Ct. Ch.
Div. 1972), which involved practices used by a cosmetics
manufacturer to recruit distributors for the cosmetics and to
promote the sale of distributorships. The Koscot court held the
"referral or pyramid sales practice" employed by the cosmetics
manufacturer violated the Consumer Fraud Act as did the
misrepresentations made to prospective cosmetics distributors.
Id. at 691-92. Thus, the Koscot court applied the Consumer Fraud
Act to the sale and acquisition of cosmetics distributorships.
However, the court did so without analysis of the definition of
"merchandise" under the Act or reference to the Act's underlying
purpose.
We are exercising plenary review over the legal issue
of whether the Consumer Fraud Act is applicable. Nonetheless,
"'in the absence of any indication that the highest state court
would rule otherwise,'" we must attribute "'significant weight'"
to the decisions by the lower state courts. Nationwide Mut. Ins.
Co. v. Budd-Baldwin, 947 F.2d 1098, 1101 n.6 (3d Cir. 1991)
(quoting Wisniewski v. Johns-Manville Corp.,
759 F.2d 271, 273-74
(3d Cir. 1985)). In this case, however, we see many indications
that the Supreme Court of New Jersey would not adopt the
reasoning in Morgan or apply the result in Koscot, and thus we
reject a construction of the Consumer Fraud Act's definition of
"merchandise" that would include franchises. See Dillinger v.
26
Caterpillar, Inc., 959 F.2d 430, 435 n.11 (3d Cir. 1992) ("In
deciding this case [under Pennsylvania law] we must give due
consideration to the decisional law of inferior state courts but
we need not give those decisions binding effect. A decision of
'an intermediate appellate state court . . . is a datum for
ascertaining state law which is not to be disregarded by a
federal court unless it is convinced by other persuasive data
that the highest court of the state would decide otherwise'")
(quoting West v. American Telephone & Tel. Co., 311 U.S. 223,
237,
61 S. Ct. 179, 183 (1940)). See also Blanding v.
Pennsylvania State Police,
12 F.3d 1303, 1306 (3d Cir. 1993).
As the Supreme Court of New Jersey stated in Daaleman
v. Elizabethtown Gas Co., 390 A.2d 566, 568 (N.J. 1978), the
Consumer Fraud Act was "aimed basically at unlawful sales and
advertising practices designed to induce consumers to purchase
merchandise or real estate." "[T]he legislative concern
[underlying the Act] was over sharp practices and dealings in the
marketing of merchandise and real estate whereby the consumer
could be victimized by being lured into a purchase through
fraudulent, deceptive or other similar kind of selling or
advertising practices."
Id. at 569. Based on this understanding
of the purpose of the Act, the court in Daaleman held that the
Act did not apply to a privately owned public utility company's
alleged overstatement of the costs and quantity of gas it
purchased, although the overstatement was reflected in the
monthly bills sent to its customers. We recognize that, as J & R
Ice Cream points out, this holding also was based on the court's
27
conclusion that inasmuch as the utility operated under the
jurisdiction of the Board of Public Utility Commissioners of the
State of New Jersey (the "PUC"), "the subject matter of
plaintiff's complaint . . . [was] within the exclusive
jurisdiction of PUC." Id. at 570. This distinction, however,
does not undercut the Supreme Court's conclusion that the Act was
designed to protect consumers.
Moreover, in an earlier case holding that house-to-
house sales of books at an "exorbitant price" was "a fraud . . .
within the contemplation" of the Consumer Fraud Act, Kugler v.
Romain, 279 A.2d 640, 653-54 (N.J. 1971), the Supreme Court cited
the following statement from the legislative history of the Act:
[t]he purpose of this bill is to permit the
Attorney General to combat the increasingly
widespread practice of defrauding the
consumer. The authority conferred will
provide effective machinery to investigate
and prohibit deceptive and fraudulent
advertising and selling practices which have
caused extensive damage to the public.
Id. at 653 (emphasis added). This statement of the Act's purpose
and the Supreme Court's reading of the Act in Daaleman both
indicate that although the Consumer Fraud Act does not define the
term "consumer" or contain an explicit "retail restriction," it
was intended to protect persons engaging in "consumer"
transactions, not those acquiring businesses.
The New Jersey Superior Court, Appellate Division,
adopted this reading of the Act in Neveroski v. Blair, 358 A.2d
473 (N.J. Super. Ct. App. Div. 1976), abrogated by Arroyo v.
Arnold-Baker & Assocs., Inc.,
502 A.2d 106 (N.J. Super. Ct. Law
28
Div. 1985) (abrogating Neveroski in light of the 1976 amendment
adding "the sale or advertisement of . . . real estate" to the
provisions of N.J. Stat. Ann. § 56:8-2 (West 1989)). Neveroski
involved a suit by a home buyer against his real estate broker,
the seller of his home, and the termite exterminator, all of whom
allegedly concealed the termite damage at the home he purchased.
At the time of the sale, the Consumer Fraud Act did not include
the term "real estate," and thus the Neveroski court was
confronted with the question of whether the term "merchandise"
included real estate. The court held that the phrase "anything
offered, directly or indirectly, to the public for sale", which
is included in the Act's definition of "merchandise," was not a
"catch-all phrase" which included real estate, but instead should
be "construed under the doctrine of ejusdem generis as a
comprehensive definition intended to incorporate other products
or services similar in nature to those enumerated by the specific
words" which precede it. Id. at 480.
The court based its holding in part on its
considered opinion that the entire thrust of
the Consumer Fraud Act is pointed to products
and services sold to consumers in the popular
sense. Such consumers purchase products from
retail sellers of merchandise consisting of
personal property of all kinds or contract
for services of various types brought to
their attention by advertising or other sales
techniques. The legislative language
throughout the statute and the evils sought
to be eliminated point to an intent to
protect the consumer in the context of the
ordinary meaning of that term in the market
place.
29
Id. (first emphasis added). Moreover, construing the definition
of the term "merchandise" under the doctrine of ejusdem generis,
the court concluded that real estate did not qualify as
"merchandise" under the Act because it "is not included in the
definition of the products encompassed by the act, nor is it a
commodity which can be considered included within the more
general statutory language" of the definition.
Id. at 481. The
court concluded that real estate was not covered by the phrase
"anything offered, directly or indirectly, to the public for
sale," because "[r]eal estate is wholly foreign to any of the
listed examples specifically referred to in the definition."
Id.
at 480.
Like the Supreme Court in Daaleman and Romain, and the
Appellate Division in Neveroski, we conclude that the term
"merchandise" must be construed in light of the overriding
purpose of the Act, which was "to protect the consumer in the
context of the ordinary meaning of that term in the market
place." Neveroski, 358 A.2d at 480 (emphasis added). The
ordinary meaning of the consumer in the marketplace does not
include a purchaser of a franchise. Moreover, like "real
estate," "franchises" are not included expressly in the Act's
definition of "merchandise" and are "wholly foreign to any of the
listed examples specifically referred to in the definition."
Id.
It is true that on January 19, 1976, the New Jersey Legislature
amended section 2 of the Consumer Fraud Act to bar the enumerated
practices "'in connection with the sale or advertisement of any
merchandise or real estate.'"
Id. at 479 n.3 (emphasis added).
30
See Arroyo v. Arnold-Baker & Assocs., Inc., 502 A.2d at 107-08.
However, the legislature has not amended the Act to cover
franchises. Thus, we hold that J & R Ice Cream is not entitled
to a new trial on its Consumer Fraud Act claim because the Act
does not apply to the sale and acquisition of a franchise.0
We realize that, as the court in Morgan noted, the
Consumer Fraud Act's definition of "person" includes business
entities. Thus, as the court concluded in BOC Group, Inc. v.
Lummus Crest, Inc., 597 A.2d 1109, 1112-13 (N.J. Super. Ct. Law
Div. 1990), "[i]t is clear that a corporation may qualify as a
person under the Act when it finds itself in a consumer oriented
situation,"
id., such as when it acts as the purchaser of a tow
truck, D'Ercole Sales, Inc. v. Fruehauf Corp.,
501 A.2d 990, 996-
97 (N.J. Super. Ct. App. Div. 1985), as the purchaser of a yacht,
Perth Amboy Iron Works, Inc. v. American Home Assur. Co.,
543
A.2d 1020, 1024-25 (N.J. Super. Ct. App. Div. 1988), aff'd,
571
A.2d 294 (N.J. 1990), or as the purchaser of computer
0
In its brief J & R Ice Cream argues without citation of
authority that "[s]ince the inducement of [J & R Ice Cream by
California Smoothie] also involved inducing [J & R Ice Cream]
into taking the lease for real property at Pompano, this stands
as an independent justification for application of the Act to
this transaction." Br. at 37 n.6. While there is authority for
the application of the Act to a lease, 316 49 St. Assocs. Ltd.
Partnership v. Galvez,
635 A.2d 1013, 1019 (N.J. Super. Ct. App.
Div. 1994), in our view this authority is not applicable here
because the sublease was merely incidental to the basic
relationship between the franchisee, J & R Ice Cream, and the
franchisor, California Smoothie. Thus, if J & R Ice Cream had
not acquired a franchise there would not have been a sublease.
See BOC Group, Inc. v. Lummus Crest, Inc.,
397 A.2d 1109, 1112
(N.J. Super. Ct. Law Div. 1990) (services collateral to sale of
technology not subject to Act).
31
peripherals, Hundred East Credit Corp. v. Eric Schuster Corp.,
515 A.2d 246, 247-49 (N.J. Super. Ct. App. Div.), certif. denied,
526 A.2d 146 (N.J. 1986). See also Coastal Group, Inc. v. Dryuit
Systems, Inc., A.2d , No. A-5028-92T5 (N.J. Super. Ct.
App. Div. June 23, 1994) (purchase by corporation of
prefabricated panels for exterior wall system for condominium
project subject to Consumer Fraud Act). However, we conclude
that when an individual or a corporation purchases a franchise,
it is not a person in a "consumer oriented situation," and thus
the transaction is not covered by the Act. In short, it is the
character of the transaction rather than the identity of the
purchaser which determines if the Consumer Fraud Act is
applicable. See, e.g.,
Daaleman, 390 A.2d at 570 (concurring
opinion) (a utility may be subject to Consumer Fraud Act when it
sells merchandise though it is not subject to the Act in making
computations for monthly service bills).
The BOC Group court's decision that a corporation that
purchased technology and certain support services through an
"Engineering Services Agreement and Licensing Agreement" was not
protected by the Consumer Fraud Act in that transaction supports
our decision. The court based its decision on the "'need to
place reasonable limits upon the operation of the Act . . . so
that its enforcement properly reflects legislative intent,'" id.
at 1112 (quoting DiBernardo v. Mosley,
502 A.2d 1166, 1167 (N.J.
Super. Ct. App. Div.), certif. denied,
511 A.2d 673 (N.J. 1986)),
and the conclusion that the term "merchandise" did not apply to
32
the technology and services acquired in BOC Group, id. at 1112-
13.
The court determined that the technology and services
acquired in BOC Group were not merchandise because they were not
"available to the public at large and sold in large quantities"
or "mass produced." Id. at 1113. The court also based its
conclusion on the rules promulgated by the New Jersey Division of
Consumer Affairs pursuant to the Consumer Fraud Act, N.J. Stat.
Ann. § 56:8-4 (West 1989). See BOC
Group, 597 A.2d at 1113. "In
developing these rules, the Division of Consumer Affairs
identified 21 types of consumer transactions for goods and/or
services ranging from defective automobile parts to the sale of
meat and health club services."
Id. See N.J. Admin, Code tit.
13, § 45A-1, et seq. Construing the rules under the doctrine of
ejusdem generis, the court concluded that the technology and
services acquired in BOC Group bore "no similarity whatsoever to
any of these 21 comprehensive definitions," and thus were not
covered by the Act.
Id.
We conclude that even where franchises or
distributorships are available to the public at large in the same
sense as are trucks, boats or computer peripherals, they are not
covered by the Consumer Fraud Act because they are businesses,
not consumer goods or services. They never are purchased for
consumption.0 Instead, they are purchased for the present value
0
As the court in Hundred East Credit Corp. stated, the "generally
recognized meaning [of the term 'consumer'] is 'one who uses
(economic) goods, and so diminishes or destroys their
utilities.'" 515 A.2d at 248 (quoting Webster's New
33
of the cash flows they are expected to produce in the future and,
like the technology and services acquired in BOC Group, bear no
resemblance to the commodities and services listed in the
statutory definition of "merchandise" or the rules promulgated by
the Division of Consumer Affairs.0 Thus, J & R Ice Cream is not
entitled to a new trial on its Consumer Fraud Act claim.
D. The Negligence Count
The district court deferred ruling on a motion in
limine regarding whether California Smoothie had a duty to select
a franchise site and negotiate a lease for Baugher and Rossetti.
See supp. app. at 12. Subsequently, the district court ruled
that California Smoothie had assumed this duty,0 and instructed
the jury accordingly, see id. at 511-12. While California
Smoothie, citing Rustay v. Consolidated Rail Corp.,
775 F. Supp.
161, 163 (D.N.J. 1991), concedes that the court was required to
International Dictionary, 2d edition). Under this definition,
the purchaser of a franchise does not qualify as a "consumer"
because its use of the franchise does not "diminish" or "destroy"
the franchise's "utilities." We point out, however, that some
consumer goods may not be diminished or destroyed through use and
that our result is not dependent on the acceptance of this
definition.
0
In BOC Group the court suggested that the sale of "franchises"
could be subject to the Consumer Fraud
Act. 597 A.2d at 1112.
But this statement was not necessary to its opinion and
apparently the court included it because it had cited Morgan
which it did not find controlling. Thus, we do not find the
reference to franchises in BOC Group to be significant.
0
Neither party has pointed us to the precise point in the record
reflecting this ruling, but both parties proceed on the basis
that the court made it.
34
determine whether it had the duty, it urges that the court erred
in its conclusion.
California Smoothie makes a strong paper argument that
its relationship with Baugher and Rossetti, and thus with J & R
Ice Cream as their assignee, was primarily contractual as it was
based on the Site Selection Agreement and the Franchise
Agreement. See br. at 42-43. The Site Selection Agreement
provides that California Smoothie grants Baugher and Rossetti
"the right to obtain a Franchise to establish and operate a
Restaurant if . . . [they] (a) identif[y] a specific location for
the restaurant within the Assigned Area and (b) obtain[] the
Franchisor's approval of the site." See app. at 179-80. Thus,
Baugher and Rossetti were contractually responsible for proposing
a site, and California Smoothie retained the right to reject the
proposed site based on certain criteria identified in the
agreement. The agreement also provides that within 30 days of
California Smoothie's approval of the site, Baugher and Rossetti
must negotiate a lease for the site, and that this lease must be
approved in writing by California Smoothie. Id. Finally, the
agreement provides that upon request from Baugher and Rossetti,
California Smoothie will provide "any additional guidelines and
reasonable site selection assistance and counseling."
Id. Thus,
the Site Selection Agreement does not impose a duty on California
Smoothie to select a site for Baugher and Rossetti or to
negotiate a lease for their site.
However, even where a relationship is "essentially
contractual [in] nature," a party may be "subject to a negligence
35
action if the 'act complained of was the direct result of duties
voluntarily assumed . . . in addition to the mere contract.'"
Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 562 A.2d 208,
221 (N.J. 1989) (quoting Brown's Tie & Lumber v. Chicago Title
Co.,
764 P.2d 423, 426 (Idaho 1988)); see also Gudnestad v.
Seaboard Coal Dock Co.,
99 A.2d 201, 204 (N.J. Super. Ct. App.
Div. 1953), aff'd in part and rev'd in part on other grounds,
104
A.2d 313 (N.J. 1954) ("[i]t is undoubtedly the established rule
of law that one who in the absence of a legal obligation to do so
voluntarily undertakes to render a service for the protection of
the safety of another may become liable to him for the failure to
perform or the failure to exercise reasonable care in the
performance of that service, although the volunteer is not the
owner or in control of the property with respect to which the
service is to be performed"). As the district court concluded,
the record indicates that the site selection and lease
negotiation processes did not follow the pattern described in the
Site Selection Agreement. California Smoothie concedes that it
already had selected the Pompano mall site and negotiated a lease
for the site prior to the execution of the Site Selection
Agreement. See br. at 43 n.42.
Moreover, the evidence indicates that when California
Smoothie selected and leased the Pompano mall site: (1)
California Smoothie intended to sublease it to a prospective
franchisee, see supp. app. at 137; and (2) already had begun
negotiations with Baugher and Rossetti regarding their
acquisition of a franchise in Florida and suggested the Pompano
36
mall site to them. The evidence also indicates that Keilt made a
deliberate decision not to include Baugher and Rossetti in
negotiations for the lease, see supp. app. at 383-84. Thus, we
conclude that the district court did not err in holding that
California Smoothie assumed a duty to select the Pompano mall
site for Baugher and Rossetti and to negotiate the lease for
them. As a result, we will affirm and reinstate the jury's
verdict on the negligence count and will remand the matter to the
district court to enter judgment against California Smoothie on
that count.
III. CONCLUSION
In view of the foregoing discussion, we will reverse
the judgment of July 20, 1993, in favor of J & R Ice Cream on the
Consumer Fraud Act count and will remand the matter to the
district court for entry of a judgment in favor of CSI and CSLC
on that count and for entry of a judgment for $55,000 in favor of
J & R Ice Cream on the negligence count with prejudgment interest
up to and including July 20, 1993.0 Thereafter interest shall
accrue on the judgment. See Fed. R. App. P. 37. On the remand,
0
In its brief, California Smoothie does not ask for any relief
with respect to the attorney's fee awarded in the judgment
entered July 20, 1993, to J & R Ice Cream under N.J. Stat. Ann.
§56:8-19 (West 1989). Consequently, we do not deal with those
fees even though the basis for them has been eliminated. Of
course, we do not preclude California Smoothie from moving under
Fed. R. Civ. P. 60(b) for an order vacating the fees. We also
note that California Smoothie indicates that "[a]s a result of
the jury's finding, the jury was not permitted to consider CSLC's
counterclaims, which were dismissed." CSLC does not seek a
reinstatement of the counterclaims, and thus we do not consider
them.
37
J & R Ice Cream may move for reinstatement of its equitable fraud
claim. J & R Ice Cream's cross-appeal from the denial of
prejudgment interest on the Consumer Fraud Act judgment and from
the striking of its judgment based on negligence is dismissed as
moot. The parties will bear their own costs on this appeal.
38
