Third Circuit Confirms Prospective Application of New Jersey Supreme Court’s Shelton Decision, Dooming Underlying Class Action

In a recent precedential decision, the Third Circuit, in Bohus, et al. v. Restaurant.com, held that the New Jersey Supreme Court’s Shelton decision — responding to a question of law certified by the Third Circuit as to the proper interpretation of the Truth in Consumer Contract, Warranty, and Notice Act (“TCCWNA”) — may be applied prospectively, thus defeating the class claims and leaving only two individual claims for a $100 penalty.

Plaintiffs’ complaint (in the matter entitled Shelton and Bohus v. Restaurant.com) alleged that plaintiffs purchased certificates from Restaurant.com, which provided a coupon or credit for the purchase of food and beverages at select restaurants. Though plaintiffs did not allege that they were denied the ability to use the certificates, they claimed that the certificates violated the TCCWNA because they stated that the certificates expired in one year “except in California and where otherwise prohibited by law,” and the Gift Certificate Act prohibited gift certificates from expiring within two years. Further, it was argued that the certificates violated the TCCWNA’s prohibition against language stating “that any of its provisions is or may be void, unenforceable or inapplicable in some jurisdictions without specifying which provisions are or are not void, unenforceable or inapplicable within the State of New Jersey.” The District Court granted Restaurant.com’s Motion to Dismiss, finding that the complaint failed to plead an ascertainable loss under the Consumer Fraud Act (“CFA”) and that, because the certificates provided intangible, contingent rights to a discount, they were not “property” and the plaintiffs were not “consumers” within the meaning of the TCCWNA.

On the first appeal, the Third Circuit certified a question to the New Jersey Supreme Court as to whether the TCCWNA was intended to cover both tangible and intangible property, and the New Jersey High Court concluded that “[t]he statute as drafted . . . covers the certificates in question.” The Circuit then affirmed dismissal of the CFA claim and remanded the TCCWNA claim to the district court.

On remand, Restaurant.com moved to dismiss the complaint on the ground that the Supreme Court’s Shelton decision should be applied prospectively only because it represented a clear change in the law. The District Court agreed, finding that Shelton clearly established a new rule of law and that retroactive application of that rule would produce “substantial inequitable results.” The District Court noted specifically that the record established that none of the plaintiffs had suffered any actual loss, and the entire lawsuit was an attempt to secure class-wide windfall damages and attorneys’ fees. As such, the Court found that prospective application of the new rule of law was entirely appropriate, and plaintiffs appealed again.

The Third Circuit agreed with the District Court’s reasoning as to the prospective application of Shelton. First, the panel rejected plaintiffs’ arguments that Shelton actually addressed the question of retroactivity, either directly or by implication. The Supreme Court could only address the precise legal question presented on certification, and was not, and could not be, called upon to fashion a remedy or decide this case. “In answering the certified question, the [Court] was not applying the law to the facts of this case in the sense that it was resolving a dispute among litigants.” Second, the panel rejected plaintiffs’ arguments that Shelton did not constitute a “new rule,” finding that it “was not foreshadowed by an unambiguous reading of the text of the statute or by other state court decisions[,]” as was clear by the need for certification on this issue. Third, the court agreed with Restaurant.com that equitable considerations weighed in favor of prospective application because common sense indicated that Restaurant.com relied on a contrary, but reasonable interpretation of the TCCWNA. Further, the panel agreed that the impact of a fully retroactive application would be widespread, affecting any internet retailers that market intangible property to consumers in New Jersey. Thus, the purpose of the new rule would not be best served by giving it full retroactive effect. However, because the New Jersey legislature had provided for statutory damages for violations of the TCCWNA, the court permitted the named plaintiffs’ individual claims to proceed because it was their litigation efforts that helped produce the result of the changed law.

Going forward, internet retailers should be advised of the Supreme Court’s explanations of the bounds of the TCCWNA and how the statute affects their consumer contracts. In addition, as class action plaintiffs become craftier in bringing proposed class actions, so too should class action defendants, by using innovative defense strategies, such as the rarely-used motion for prospective application.

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department. Caroline E.Oks, an Associate in the Gibbons Business & Commercial Litigation Department, co-authored this post.
Restaurant.com. is a client of Gibbons P.C. The firm and specifically, the authors of this blog post, were actively involved in the litigation mentioned. Prior results do not guarantee a similar outcome.
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