Consumer Fraud Act Does Not Apply to 'Learned Professionals'

In Lemelledo, the Supreme Court held individuals engaged in certain loan packing practices were subject to the Consumer Fraud Act because enforcement under the Consumer Fraud Act would not conflict with the regulatory scheme of the Department of Banking and Insurance. The Supreme Court in Macedo rejected such a “preemption” analysis, stating that the initial issue should have been whether the Consumer Fraud Act applied to learned professionals at all. In Macedo, the Court held unequivocally that the Consumer Fraud Act did not.

In response to Macedo, the Legislature is presently considering an amendment to the Consumer Fraud Act that would subject doctors, lawyers and other licensed professionals to the act. The Assembly has passed A-2088 and the Senate is presently considering S-1259. The bills recognize in their text the potential conflict between legislation regulating lawyers’ advertising and Supreme Court regulation on that subject.

Dickerson & Son, Inc. v. Ernst & Young, 179 N.J. 500 (2004), dealt with a limitation on professional liability with respect to accountants. Plaintiffs were 17 food service corporations that were also shareholders of Twin County Grocers, Inc., a corporation that fashioned itself as a “cooperative.” Twin County was the victim of fraud by its management, which drove Twin County into bankruptcy and liquidation.

The plaintiffs alleged they generally relied on the audit of Ernst & Young, and brought an action for accounting negligence against the firm. The Supreme Court affirmed the Appellate Division in permitting Ernst & Young to use N.J.S.A. 2A:53A-25 as a full shield against the common law claim. This statute limits liability of an accountant to third parties for negligence except when there is a ‘privity’ (or at least close-to-’privity’) relationship. Plaintiff corporations argued that in light of the ‘cooperative’ nature of Twin County, they really were the clients of Ernst & Young, and not third parties. The Supreme Court rejected the argument, holding the corporations were no different from any other shareholders and their “general reliance” on Ernst & Young’s annual audits was not in any event sufficient to satisfy the specific transaction requirement of the statute.

Restrictive Covenants

In Maw v. Advanced Clinical Communications, Inc., 179 N.J. 439 (2004), the majority of the Supreme Court eschewed an opportunity to alter dramatically New Jersey restrictive covenant law. The Appellate Division ruled that an employee discharged for refusing to sign a restrictive covenant stated a claim under the Conscientious Employee Protection Act, N.J.S.A. 34:19-1, et seq. (CEPA). The Plaintiff claimed terminating an employee for refusing to sign a restrictive covenant states a claim because restrictive covenants implicate public policy, and therefore, could turn out to be contrary to public policy.

As a practical matter, the Appellate Division decision turned a somewhat unpredictable area of the law into a complete ‘crapshoot.’ In other words, a company seeking to require restrictive covenants in order to protect its perceived legitimate interests would bear the risk that an employee could in the future successfully challenge the legitimacy of the covenant and hold the employer liable for damages under CEPA.

The Supreme Court majority rejected the notion that restrictive covenants constitute a clear mandate of public policy with respect to CEPA. Referring to prior Supreme Court restrictive covenant cases, the Maw Court stated:

The Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing parties and entities be identified, but also, those interests must be gauged for reasonableness and legitimacy. The application of that test here, and as a general matter, simply does not evoke the type of a “clear mandate of public policy” that was contemplated by N.J.S.A. 34:19-3c(3) [CEPA].

We are informed by the amici that non-compete agreements are a common part of commercial employment. We do not accept as a premise that employers, in large numbers, are engaging in a practice that is “indisputably dangerous to the public health, safety or welfare.” Maw, 179 N.J. at 447-448. (Cits. omitted).

Justices James Zazzali and Virginia Long dissented, and would have gone far in radically changing New Jersey business practice with respect to restrictive covenants. In that regard, Justice Zazzali wrote:

I am aware of the concern by some that allowing the cause of action in these and similar circumstances might have a chilling effect on employers’ legitimate use of non-compete agreements, but that argument is unavailing. The approach I propose would have the salutary effect of encouraging employers to enter into agreements that comply with, rather than flout, sound public policy. Id. at 459.