On March 29, in Marshall v. Verde Energy USA, Inc., Judge John Vazquez of the United States District Court for the District of New Jersey dismissed a plaintiff’s putative class action lawsuit against Verde Energy, finding, in part, that the plaintiff failed to state a claim under the New Jersey Consumer Fraud Act (“CFA”). Marshall v. Verde Energy USA, Inc., No. 18-cv-1344, 2019 WL 1254562 (D.N.J. Mar. 19, 2019). In so holding, Judge Vazquez bolstered existing caselaw on an under-utilized defense to CFA claims. The Court held that an alleged breach of contract, standing alone, is insufficient to support a CFA claim. In order to state a cognizable CFA claim premised on a contractual relationship, the plaintiff must also allege, in addition to the contract breach, “substantial aggravating circumstances.”

Since its enactment in 1960 and subsequent amendment in 1971, the CFA in New Jersey has consistently ranked amongst the most lethal statutes employed by consumer and customer plaintiffs seeking to assert claims against businesses and other entities. Indeed, the CFA has been referred to as “Kafkaesque,” as its “confusing nature and ever-expanding boundaries have aided attorneys eager to expand their practice or get an upper hand in negotiations since no business owner wants to be branded a fraudster.” See Judicial Hellholes 2016-17, p. 28, American Tort Reform Foundation (last visited Apr. 29, 2019). Remedies under the CFA include actual damages, treble damages, and attorneys’ fees. Given the breadth of the statute and its available remedies, the CFA’s popularity among New Jersey plaintiffs has shown no sign of slowing down. It is a common claim made against financial services institutions, quite often asserted as a counterclaim in foreclosure proceedings or other litigation arising out of lending relationships.

Designed “to promote the disclosure of relevant information to enable the consumer to make intelligent decisions in the selection of products and services,” Suarez v. E. Int’l Coll., 428 N.J. Super. 10, 32, 50 (App. Div. 2012) (quoting Div. of Consumer Affairs v. Gen. Elec. Co., 244 N.J. Super. 349, 353 (App. Div. 1990)), a claim under the CFA requires that the plaintiff allege that: (1) the defendant committed an unlawful practice; (2) the plaintiff suffered an ascertainable loss as result of the unlawful act; and (3) there exists a causal relationship between the unlawful practice and the ascertainable loss. Dabush v. Mercedes-Benz USA, LLC, 378 N.J. Super. 105, 114 (App. Div. 2005). An “unlawful practice” is further defined in the statute to include the “act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate.” N.J.S.A. 56:8-2.

With respect to what constitutes an “unconscionable commercial practice” in violation of the CFA, the Supreme Court of New Jersey explained in Kugler v. Romain, 58 N.J. 522, 279 A.2d 640 (1971), that unconscionability is “an amorphous concept obviously designed to establish a broad business ethic.” Accordingly, across the state and over decades, consumer plaintiffs have asserted a variety of conduct that they deem constitutes an “unconscionable commercial practice” in violation of the CFA. Indeed, many CFA claims asserted in the state against financial institutions look no different than prototypical breach of contract or good faith and fair dealing claims, which was the issue in Marshall before Judge Vazquez. However, a mere contractual breach does not trigger CFA liability.

The New Jersey Supreme Court held in Cox v. Sears Roebuck & Co., 138 N.J. 2, 18, 647 A.2d 454, 462 (1994), that “a breach of warranty, or any breach of contract, is not per se unfair or unconscionable … and a breach of warranty alone does not violate a consumer protection statute.” Cox, 138 N.J. at 18 (quoting D’Ercole Sales Inc. v. Fruehauf Corp, 206 N.J.Super. 11, 25, 501 A.2d 990 (App.Div. 1985)). The Supreme Court explained that New Jersey’s “Legislature must have intended that substantial aggravating circumstances be present in addition to the breach” to trigger CFA liability. At least one court has held that “[u]nconscionable conduct has been defined as conduct that is monstrously harsh, that is shocking to the conscience.” Heritage Bank, N.A. v. Ruh, 191 N.J. Super. 53, 71 (Ch. Div. 1983).

In Marshall v. Verde Energy USA, Inc., decided earlier this year, Judge Vazquez held that the plaintiff’s CFA claim failed as a matter of law because the plaintiff failed to allege “substantial aggravating circumstances” in addition to any conduct that would breach the underlying contract. See Marshall v. Verde Energy USA, Inc., No. 18-cv-1344, 2019 WL 1254562, at *4 (D.N.J. Mar. 19, 2019). In other words, a party’s diversion from its obligations under a contractual agreement is not enough to expose it to liability under the CFA.

In the context of financial services and mortgage servicing, the District of New Jersey applied the same analysis in Dautrich v. Nationstar Mortgage, LLC, granting summary judgment for the defendant mortgage servicer on the plaintiffs’ CFA claim, despite allegations by the plaintiffs/mortgagors that the mortgage servicer failed to implement a loan modification agreement and perform other obligations under the loan documents. See Dautrich v. Nationstar Mortg., LLC, No. 15-cv-8278, 2018 WL 3201786 (D.N.J. June 29, 2018). In dismissing the CFA claim, Judge Renee Bumb held that the mortgagors failed to allege “substantial aggravating circumstances” that would elevate the mere alleged contractual breaches to the status of an “unlawful practice” in violation of the CFA.

In summary, fewer than one hundred decisions in New Jersey’s state and federal courts appear on Westlaw applying this underutilized yet powerful defense to the CFA. All defendants should evaluate CFA complaints to assess whether the defense is available to them.

Troutman Sanders regularly represents clients across a broad spectrum of industries, including financial services, in the defense of New Jersey Consumer Fraud Act claims in state and federal courts, at both trial and appellate levels.