The Franchise Protection Act provides that every “motor vehicle franchisor shall reimburse each motor vehicle franchisee for such services as are rendered and for such parts as are supplied, in an amount equal to the prevailing retail price charged by such motor vehicle franchisee.” N.J.S.A. § 56:10-15(a). Because retail prices in New Jersey are generally higher than in other states, New Jersey dealers are often reimbursed for warranty products and services at higher rates than their counterparts in other states.

To counteract these increased costs, Ford Motor Company initially imposed a surcharge on New Jersey dealers which was determined by the actual amount of warranty claims submitted by the dealer; the more warranty claims by a dealer, the greater the surcharge. This program was found to violate the Act because it left dealers no choice, but to bear the full cost of retail-rate warranty reimbursements without an ability to mitigate the increased costs imposed. See Liberty Lincoln, Inc. v. Ford Motor Co. (Liberty II), 134 F.3d 557, 564 (3d Cir. 1998). Thereafter, Ford imposed a new cost-recovery program which applied “a flat surcharge for every wholesale vehicle sold in New Jersey, rather than a varied surcharge between Dealers.” The result is a proportionate increase based on “the number of vehicles the Dealer purchased, regardless of how many warranty repairs the dealer submitted to Ford.”

A group of New Jersey dealers claimed Ford’s new cost-recovery system violated the Franchise Protection Act. The Third Circuit held that Ford’s new cost-recovery system is a bona fide wholesale price increase, which “the text of the [Franchise Protection Act] clearly permits.” The court clarified that the Act “regulates warranty reimbursements but does not impose limitations on wholesale vehicle transactions”—an important distinction to ensure permissibility of a motor vehicle franchisor’s cost-recovery system. To otherwise “read a restriction against wholesale price increases into the statute would improperly establish a rule unsupported by [] statute.” As such, because the new cost-recovery system requires a flat surcharge assessed on all wholesale vehicles sold in New Jersey, it allows dealers to choose to purchase from Ford—thereby mitigating the increased costs—and retain control over the volume, timing, and profitability of those vehicles.

Motor vehicle manufacturers/franchisors should be aware of the Third Circuit’s decision in Liberty Lincoln and other decisions which have reached similar conclusions. See Acadia Motors v. Ford Motor Co., 44 F.3d 1050 (1st Cir. 1995). To ensure that they do not run afoul of the requirements of the New Jersey Franchise Protection Act and similar statutes in other states, motor vehicle franchisors should structure their cost-recovery programs as wholesale price increases so that individual dealers have the ability to mitigate the increased costs imposed.

Jonathan D. Klein is an Associate in the Gibbons Business & Commercial Litigation Department.

Plaintiff Alpha Beauty Distributors is owned by Bebert Azran. After purchasing Alpha from Noel and Reid Kleinman, Azran discovered fraud and breaches of fiduciary duty, and sued the Kleinmans in Federal District Court on behalf of himself and Alpha . The federal action centered on allegations that the Kleinmans had damaged Alpha and Azran “through a course of self-dealing and conversion of corporate assets.” Among other things, the federal complaint alleged that the Kleinman’s had given certain of Alpha’s customers improper credits, but it did not encompass any claims against such customers for the improper credits.

While the federal action was awaiting trial, Alpha commenced an action against several former customers, including two that were mentioned in the federal complaint, for unpaid book accounts. Finding out about the related federal action, the customer successfully moved to dismiss under the Entire Controversy Doctrine.

Reversing the trial court’s dismissal, the Appellate Division held that “the claims asserted in this action did not lie at the core of the federal action.” While the Appellate Division conceded that there are “facts common” to both actions, they are not part of the same “core controversy.” Although the federal action discussed “improper discounts” that had been given to customers, and therefore the state-court book account action “may have been part of the anticipated ripples caused by the Kleinman’s misconduct,” the book account claims did not “lie at the heart of the federal controversy.” Thus, the “tangentially-related claims” were not required to be included in the federal action and were not precluded in a subsequent case.

An important consideration for the Appellate Division was that the customer defendants “might have been prejudiced by being required to appear for proceedings [in the federal court action] of no particular interest to them.” Noteworthy is that the Appellate Division conceded that the customer defendants had an “indirect interest in the federal action” as an outcome in the Kleinman’s favor would have “dampened Alpha’s likelihood of recovery” against the customer defendants. However, because the federal action was essentially a shareholder dispute, those claims should be resolved separately from this customer collection dispute.

The Alpha Beauty decision is noteworthy in that while a factual nexus is required to apply the Entire Controversy Doctrine, see, e.g., Garvey v. Twp. of Wall, 303 N.J. Super. 93, 100 (App. Div. 1997), the presence of that factual nexus is not dispositive, and the courts are willing to examine the related actions in great depth to find if the claims are related to the same “core controversy” or if they are merely “tangentially-related.” While these adjective-laden terms will surely allow for a subjective application of the Entire Controversy Doctrine by the trial courts, this is only further evidence of the Appellate Division’s preference to have matters adjudicated on the merits, rather than as a result of a mechanical application of the Entire Controversy Doctrine.

Kevin W. Weber is an Associate in the Gibbons Business & Commercial Litigation Department.

The Third Circuit affirmed the District Court of New Jersey’s decision denying AHS insurance coverage for a claim that was “submitted” under two separate claims-made policies issued by National Union. About three months prior to the expiration of the first policy, AHS received a letter enclosing a draft complaint alleging various anti-trust violations. The complaint was filed about two months later, and prior to the expiration of the first policy. In its renewal application submitted to National Union during their first policy-period, AHS answered several questions that indicated it was involved in on-going litigation. Thereafter, the first policy expired and a renewal policy was issued by National Union. On July 23, 2004, after expiration of the first policy, AHS sent a “First Notice of Loss” letter to National Union to request coverage under its current renewal insurance policy. National Union denied this claim because the renewal applications indicated that AHS had notice of the underlying claim before the renewal policy began, and therefore could not be considered as a claim made against AHS during the renewal policy period. AHS then submitted a second letter entitled “First Report of a New Loss” to National Union under the first policy. National Union also rejected this request for coverage because the first policy had already expired and because notice wasn’t given within the 30-day notice period under the express policy terms for reporting a claim.

The Third Circuit found that under New Jersey’s insurance law, “strict adherence to the claims reporting provisions in a claims-made policy is essential.” Because the express terms of the first policy required that notice of a claim be submitted to a specific address, the court found that submission of information regarding the litigation in the renewal application to a different address, while clearly indicating that the case was on-going during the first policy period, was insufficient to satisfy the express terms of the notice requirements. The Third Circuit also concluded that under New Jersey law the course of performance among parties is relevant to the interpretation of ambiguous policy language. Accordingly, the Third Circuit rejected AHS’ argument that the District Court improperly considered AHS’s and National Union’s prior and subsequent course of performance as evidence that AHS understood how to properly submit claims to National Union.

This decision confirms that it is essential for any insured to submit an insurance claim in strict compliance with the letter of the policy’s notice and reporting provisions in order to secure coverage under the applicable policy for any claim submitted, or risk having the claim rejected and retaining liability for any defense costs and indemnity payments.

Nikaela B. Jacko Redd is an Associate in the Gibbons Business & Commercial Litigation Department.

However, in the absence of a stipulation that the arbitration agreement is “silent” on class arbitration, what constitutes “silence” where an arbitration provision makes no reference to class arbitration, and contains no class waiver precluding collective actions? The Third Circuit tried to answer that question in its April 3, 2012 precedential opinion in Sutter v. Oxford Health Plans LLC.

In Sutter, the parties’ arbitration agreement stated:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the Rules of the American Arbitration Association with one arbitrator.

When a dispute arose, the plaintiff physician filed an action in New Jersey state court. The court, on a motion to compel arbitration filed by the defendant, referred the putative class action to arbitration, and ordered that the arbitrator would decide whether the matter would proceed as a class arbitration. The arbitrator ruled that the arbitration provision allowed for class arbitration, which was then challenged by the defendant in the District Court of New Jersey. The District Court upheld the arbitrator’s decision.

Affirming the District Court, the Third Circuit held that “Stolt-Nielsen did not establish a bright line rule that class arbitration is allowed only under an arbitration agreement that incants ‘class arbitration’ or otherwise expressly provides for aggregate procedures.” Sutter rejected the argument that the arbitration clause was “silent” in the same way as the agreement in Stolt-Nielsen, noting that, unlike in Stolt-Nielsen, the parties had not stipulated that the agreement was silent. Rather, Sutter found that the arbitrator had a contractual basis for his decision to order class arbitration, i.e., “the phrase ‘no civil action . . . shall be instituted in any court’ meant that a class action may not be instituted in a court of law. ‘All such disputes’ must go to arbitration.” Thus, Sutter concluded that “[w]ithout a conclusive statement of the parties’ intent or clear evidence of arbitral overreaching, we must conclude that the arbitrator performed his duty appropriately and endeavored to give effect to the parties’ intent.”

The lesson from Sutter is that where “the parties’ intent with respect to class arbitration is in question, the breadth of their arbitration agreement is relevant to resolution of that question.” While Stolt-Nielsen prohibits an arbitrator from ‘inferring parties’ consent to class arbitration solely from their failure to preclude that procedure, the “lack of an express exclusion” may be “corroborative of” an arbitrator’s finding that a broad arbitration clause authorizes class arbitration.

Class arbitration waivers provide conclusive indicia of the parties’ intent regarding class arbitration and, following the United States Supreme Court decision in AT&T Mobility LLC v. Concepcion, will most likely be enforced by courts absent some independent basis to reject the arbitration agreement. As a result, prudent parties seeking to avoid the potential for class arbitration should strongly consider including class waivers in their arbitration provisions. In the absence of a class waiver, however, the Sutter decision makes clear that defendants should be cautious about seeking to compel arbitration of a class action. Even where the arbitration provision may appear “silent” on the issue, if you move to compel arbitration without a class waiver, you may wind up in class arbitration, which may be less favorable than litigating a class action in court.

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department. Damian V. Santomauro, a Director in the Gibbons Business & Commercial Litigation, co-authored this post.

The Ninth Circuit’s ruling would have prohibited manufacturers and distributors of consumer products from attempting to take advantage of the Supreme Court’s recent pro-arbitration rulings, including AT&T Mobility v. Concepcion, involving MMWA consumer warranty claims. According to the original majority opinion in Kolev, to the extent the MMWA precludes arbitration clauses, class waivers in such clauses, which Concepcion rendered immune from invalidation under state laws, would thus likewise be unenforceable in MMWA actions, providing a complete end-run around Concepcion.

The panel decision prompted a stinging dissent by Judge Smith, who characterized the panel decision as “a departure from Supreme Court precedent, the prevailing view of our sister circuits, and applicable statutes, [which] . . . nullifies nearly every binding, non-judicial warranty dispute remedy adopted by private parties in this circuit.” The Kolev majority in fact parted company with the Fifth and Eleventh Circuits, which had concluded that the MMWA does not overcome the Federal Arbitration Act’s presumption that courts should enforce arbitration agreements. See Walton v. Rose Mobile Homes LLC; Davis v. S. Energy Homes, Inc.

On April 11, 2012, the Ninth Circuit in Kolev reversed itself by entering an Order withdrawing its prior opinion. The withdrawal of the original panel decision came as the circuit court was considering dueling petitions for rehearing en banc by both parties. By withdrawing the opinion, the petitions were rendered moot, and the court stated that the parties could file petitions for rehearing en banc after a new decision by the court. The April 11, 2012 Order also held that “submission of this case is vacated pending the issuance of a decision by the California Supreme Court in Sanchez v. Valencia Holding Co. LLC, No. S199119,” where the California high court is reviewing a decision invalidating an arbitration clause, with a class action waiver, in a car dealer’s sales contract.

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department.

In Walid, purchasers of a retail business claimed that they were fraudulently induced into buying the business when the seller misrepresented the business’s historical revenues. The seller claimed that the integration clause in the purchase agreement, which provided that the buyers were not relying on any representations not contained in the written agreement, precluded the buyers’ fraud claim. While acknowledging that the parol evidence rule generally prevents reliance upon extrinsic evidence to alter or vary the terms of an integrated written agreement, the Appellate Division, borrowing from New York law, held that the parol evidence rule does not preclude extrinsic evidence of fraud if: (1) the misrepresented facts are “peculiarly within [the disclosing] party’s knowledge” and 2) the facts were intentionally misrepresented by the disclosing party. Because both elements existed in Walid, the Appellate Division found that the parol evidence rule did not preclude the buyers’ fraud claim.

The Appellate Division also found that the buyers’ reliance on the seller’s representations was reasonable, despite the trial court’s finding that the buyers would have discovered the misrepresentations had they retained a business consultant with some expertise in the type of business being acquired. Admitting that a party cannot claim fraud when the falsity of a misrepresentation is “obvious” to that party, the Appellate Division held that the knowledge of an expert in the subject matter of a transaction cannot be imputed to a party in determining whether a misrepresentation would be “obvious” to that party. Instead, the court must consider what is actually known by the party, unless the party in fact retains a consultant with expertise in the field. Because the buyers in Walid did not retain a consultant and because they could not have been expected to discover the fraud by themselves, their reliance on the seller’s misrepresentations was reasonable and justified.

Walid should make it easier for defrauded parties to sustain fraudulent inducement claims in the face of an integration clause because it expressly permits them to avoid the preclusive effect of such a clause if they can show that the misrepresented fact was peculiarly within the disclosing party’s knowledge, which is often the case in fraud claims, and that the disclosing party intentionally misrepresented the fact, which is an element of every fraud claim. The opinion should also assist unsophisticated fraud claimants by allowing them to rely upon their actual knowledge.

Christopher Walsh is a Director in the Gibbons Business & Commercial Litigation Department.

Janice Quilloin was employed by Hahnemann University Hospital during two separate stints. At the beginning of each, she signed a one-page “Employee Acknowledgement” form providing that arbitration would be the sole and exclusive remedy for any dispute with her employer. During her second stint, Quilloin filed a putative collective action under the Fair Labor Standard Act and a class action under state law against Tenet Healthcare Corporation and two of its subsidiaries.

The District Court denied a motion to stay or dismiss the action and compelling arbitration, finding that genuine issues of material fact existed as to whether the arbitration agreement was substantively and procedurally unconscionable under state law. The District Court found that the agreement might be substantively unconscionable in one of three ways: (1) by prohibiting the recovery of attorneys’ fees, (2) by precluding class arbitrations, or (3) by allowing Tenet to “run out the clock” on the statute of limitations by requiring the parties to engage in several procedures before seeking arbitration. With respect to procedural unconscionability, the District Court simply deferred ruling on the issue until the issues of substantive unconscionability were ripe for resolution.

The Third Circuit reversed the District Court and compelled arbitration, finding that no substantive or procedural unconscionability existed which rendered the arbitration agreement unenforceable. The Third Circuit agreed with the District Court that the agreement was ambiguous as to the recovery of attorneys’ fees but found that such ambiguity did not warrant denial of Tenet’s motion to compel arbitration. Rather, the issue of attorneys’ fees, which the court stated was not truly a question of arbitrability, was for the arbitrator to decide. Consequently, the court found that the ambiguity concerning the availability of attorneys’ fees required it to compel arbitration, stating “rather than speculate as to whether a certain interpretation of an ambiguity might render an arbitration agreement unenforceable, the proper course is to compel arbitration.”

On the issue of class waiver, the court found that, even if the arbitration agreement was construed to preclude class arbitrations, any state law declaring such a class waiver to be unconscionable would be preempted by the Federal Arbitration Act under the Supreme Court’s decision in ATT Mobility LLC v. Concepcion. Thus, the existence of a class waiver would not be a valid basis for finding the arbitration agreement unconscionable.

The court rejected the third possible basis for substantive unconscionability—the possibility of Tenet’s “running out the clock”—finding that there was no danger that Tenet could do so because Quilloin was always free to move to compel arbitration if she thought the statute of limitations on her claims was in danger of expiring. The court also noted that there was nothing unconscionable about a process that allows an employer the full amount of time under the law to respond to an employee’s grievance, even if the employer is given merely guidelines, rather than strict rules, on responding.

Finally, the court ruled that there was no genuine dispute as to procedural unconscionability, which requires a showing that the party lacked a meaningful choice in entering the agreement. Although Quilloin was the weaker party to the agreement, the court concluded that she did not lack a meaningful choice inasmuch as she was college educated and had signed the same agreement during her first stint with the hospital. Thus, the arbitration agreement could not have been an unfair surprise to her when she signed it the second time.

Consistent with federal policy favoring arbitration, Quilloin v. Tenet HealthSystem Philadelphia, Inc. suggests that Third Circuit courts will not hesitate to compel arbitration, despite potentially unconscionable clauses in the arbitration agreement, if the question is one for the arbitrator in the first instance, and will continue to follow the Supreme Court’s AT&T Mobility LLC v. Concepcion decision in favoring arbitration agreements over state laws barring class action waivers.

Eugene H. Kim is an Associate in the Gibbons Business & Commercial Litigation Department.

The Nutley Sun published an article with a “teaser headline” reading “Local men arrested in ‘pump and dump’ scheme.” But neither of the two subjects of the article had ever been arrested; rather they had been named as defendants in a civil SEC enforcement action, alleging they were involved in a “pump and dump” scheme. The “teaser” referred readers to an otherwise correct news story on page 11 which contained the headline “Local men charged in stock scheme” and described the $9 million civil fraud charge. The Nutley Sun’s editor, who was responsible for drafting the teaser headline, testified in a deposition that he had read an accurate article in another paper before drafting the headline, but could not recall why he chose to use the word “arrested”. While admitting that he had made a mistake, the editor testified he did not recall having any doubts about the headline’s accuracy when he wrote it.

The trial court granted summary judgment in favor of the Nutley Sun because of an absence of proof that the paper had acted with actual malice in publishing the headline. The Appellate Division affirmed.

The New Jersey Supreme Court affirmed as well, finding that the plaintiffs were required to establish that a reasonable jury could have concluded by clear and convincing evidence that Nutley Sun’s editor published the erroneous teaser with actual malice. In reviewing the summary judgment record, the Court concluded that the editor was “…undoubtedly careless,” but that the facts supported the view that the editor was guilty of nothing more than a mistake: the SEC complaint bespoke of criminality; the editor had a busy work schedule, including reading hundreds of pieces of correspondence each week; and the editor wrote the “teaser” during the most hectic night of the week because of the need to meet the printer’s deadline. Finally, plaintiffs were not named in the teaser. Their names surfaced only after a reader turned to page 11 and read the article. Based on this record, the Supreme Court concluded that there was insufficient evidence of actual malice to support a conclusion that a reasonable jury could find the existence of same by clear and convincing evidence.

The Court aptly noted that the defendants “can only take grim satisfaction with the outcome,” given the obviously careless reporting present. Notwithstanding this admonition, the Defendants and all media can take great satisfaction that the Court strongly affirmed the principle that mistakes, as opposed to calculated falsehoods, are inevitable in the area of free speech and that those mistakes, when the speech concerns public officials, public figures and matters of public interest and concern, should not give rise to liability lest all speech be chilled.

Justices Hoens and LaVecchia dissented, asserting that the majority opinion failed to appreciate the role of a front page teaser; failed to apply the ordinary standard for summary judgment of viewing the evidence in a light most favorable to the non-moving party and created a new standard raising even higher the bar a plaintiff must overcome to sustain such a claim.

Thomas J. Cafferty is a Director in the Gibbons Business & Commercial Litigation Department. Nomi I. Lowy, Counsel to the Gibbons Business & Commercial Litigation Department, and Lauren James-Weir, an Associate in the Gibbons Business & Commercial Litigation Department, co-authored this post.

The plaintiffs alleged that Synapse duped its subscribers into continuing subscriptions by sending misleading automatic renewal notices. But they admitted that, since they were no longer Synapse customers, they were not presently subject to Synapse’s automatic renewal policy. The District Court twice denied certification, first, finding plaintiffs’ claims for monetary relief could not be certified for lack of predominance, and second, finding that their proposed injunctive-relief-only class lacked cohesion. (You can read the District Court’s decisions denying class certification here and here.)

On appeal of the District Court’s denial of an injunctive-relief-only class, the Third Circuit addressed the threshold issue of the plaintiffs’ standing. The plaintiffs argued that the threat of future injury — a standing requirement where prospective relief is sought — was “sufficiently real and immediate” because the plaintiffs may become Synapse subscribers subject to Synapse’s allegedly fraudulent practices inasmuch as Synapse (i) is the leading magazine marketer in the U.S., (ii) makes “compelling deals” but fails to identify itself, and (iii) designs its automatic renewal notices so as to fool customers into discarding them. Attempting to prove their point, the plaintiffs also argued that they have already accepted Synapse’s offers on multiple occasions.

But the Third Circuit refused to accept that the plaintiffs would not learn from their mistakes: “Perhaps they may accept a Synapse offer in the future, but, speaking generally, the law accords people the dignity of assuming that they act rationally, in light of the information they possess.” Even if the plaintiffs did unwittingly accept a future Synapse offer, the Court reasoned, “they would only be harmed if they were again misled by Synapse’s subscription renewal techniques, which would require them to ignore their past dealings with Synapse.” The Court refused to apply the “capable of repetition yet evading review” doctrine — which the District Court apparently accepted — for the same reason, i.e., the “inescapable fact” that they cannot credibly show that they will be subject to the same allegedly offending conduct on a repeat basis. As well, the Court rejected the plaintiffs’ argument insofar as it was based on “a lack of self restraint” in refusing Synapse’s “compelling offers,” noting that such conduct “may elicit sympathy but it will not typically invoke the jurisdiction of a federal court.”

Though the Third Circuit’s holding in McNair seems narrow at first blush, the underlying rationale could prove to be a powerful weapon for defendants. Courts in the Third Circuit may be willing now more than ever to reject the claims of would-be consumer class action plaintiffs where, like in McNair and as often seems to be the case, they are premised on the assumption that consumers routinely fail to take into account all available information, including their own experience, when making purchasing decisions.

Melissa DeHonney is an Associate in the Gibbons Business & Commercial Litigation Department.

The “first filed rule” typically surfaces where parties have engaged in a “race to the courthouse,” filing similar lawsuits in different jurisdictions that they perceive to be most friendly to their cause. Based on traditional principles of comity, the rule provides that “a New Jersey court should not interfere with a similar, earlier-filed case in another jurisdiction that is capable of affording adequate relief and doing complete justice,” Sensient Colors, Inc. v. Allstate Ins. Co., but allows for certain exceptions, such as where “the presence of special equities may lead a court to disregard the traditional deference paid to the first-filed action.”

In CTC the litigants were parties to contracts requiring that they engage in both mediation and arbitration prior to filing suit. On June 8, 2010, the plaintiff, CTC, served the requisite demand for mediation on certain defendants (collectively, “Balfour”) in New Jersey. Approximately two weeks later, Balfour filed suit in Pennsylvania seeking a declaratory judgment against CTC. CTC subsequently filed suit in the New Jersey Superior Court seeking a declaration regarding the propriety of its demand for contractual mediation. At trial in CTC’s lawsuit, the New Jersey Superior Court entered an Order compelling Balfour to engage in mediation and arbitration, as required by the parties’ contracts.

Balfour appealed, arguing, among other things, that the trial court erred in hearing the case at all, rather than deferring to the Pennsylvania action, which Balfour claimed was “first filed” for the purposes of the first filed rule. CTC contended that its original demand for mediation in New Jersey actually constituted the “first filed” action. Considering the strong public policy favoring alternative dispute resolution, the Appellate Division found “no principled reason for viewing a demand for mediation or arbitration, contractually stipulated as a means for resolving disputes, as something that has no value or less value in [a comity] analysis than a complaint filed in civil court.” The court went further, specifying that, even if CTC’s demand for mediation did not constitute the “first filed” action in itself, Balfour’s attempt to litigate in Pennsylvania despite CTC’s previous demand for alternative dispute resolution in New Jersey “represented an untoward attempt to move the situs of th[e] dispute, giving rise to special equity that warrants a disregarding of the Pennsylvania action.”

Regardless of the rationale employed, the result is the same: once a party demands contractually-mandated mediation or arbitration, New Jersey courts will likely not give credence to later-filed litigation when conducting a comity analysis.

Timothy J. Duva is an Associate in the Gibbons Business & Commercial Litigation Department.