New Jersey Law Blog
New Jersey Supreme Court "Splits the Baby" on the Entire Controversy Doctrine
In any complex litigation, there are potentially numerous claims that could be asserted against an even greater number of parties. For example, a Condominium Association could bring a construction defect claim against a developer. The developer, in turn, could have claims against the subcontractors it used, its insurance carrier, its suppliers and its consultants. Those parties could then have their own claims against any number of other parties. If left unchecked, there could be a staggering number of separate lawsuits involving the same issues and parties, all transpiring at the same time. As a result, the “Entire Controversy Doctrine” has evolved to require that all of the parties with claims regarding the same transaction or event must litigate the matter in one comprehensive lawsuit.
Rule 4:5-1(b)(2) of the New Jersey Rules of Court enforces the Entire Controversy Doctrine, by imposing a continuing obligation upon litigants to identify all parties to pending or contemplated legal actions, which are related to the matter in controversy. If a party fails to comply with that requirement in a first lawsuit, and then files a second lawsuit against a different party, the Court may dismiss that second lawsuit if “the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.”
The New Jersey Supreme Court recently addressed this issue under the Consumer Fraud Act. In Kent Motor Cars, Inc. d/b/a Honda of Princeton v. Reynolds and Reynolds, Co. (A-102/103-09), the Defendant, a printer (“Reynolds”), sold pre-printed "Buyer's Order" forms to the Plaintiff automotive dealerships (collectively, the “Dealerships”). The Dealerships were named defendants in a class action lawsuit that alleged, among other things, violations of the Consumer Fraud Act (“CFA”). Even though the Dealerships knew that the class action lawsuit involved the Buyer’s Order forms that they purchased from Reynolds, they did not comply with Rule 4:5-1(b)(2) by identifying their potential claim against Reynolds.
After settling the class action lawsuit, the Dealerships filed a complaint against Reynolds under the CFA because its Buyer's Order forms violated regulations. Notably, violations of the CFA can result in treble (3X) damages.
The Supreme Court held that the Dealerships’ failure to comply with Rule 4:5-1(b)(2) in the class action lawsuit was inexcusable. It also held that allowing the matter to proceed against Reynolds under the CFA would result in “substantial prejudice” to Reynolds because:
If Reynolds had been joined in [the class action lawsuit], its liability would have been limited to a portion of damages, trebled under the CFA, and a portion of counsel fees associated with the claim against Reynolds for a regulatory violation. By ignoring [Rule 4:5-1(b)(2)] and filing a successive CFA claim, the Dealerships seek from Reynolds all of their damages and counsel fees incurred in Wilson, and they seek trebling of both under the CFA. The Court cannot endorse a plan to permit trebling of damages already trebled.” [Emphasis added]
Therefore, the Supreme Court prohibited the Dealerships from pursuing the CFA claim against Reynolds. However, the Court permitted the Dealerships to pursue their claim for a contribution from Reynolds toward the damages they incurred in the class action lawsuit because in that scenario:
The Dealerships must prove what parts of the [class action] settlement and attorneys' fees are attributable to Reynolds' [Buyer’s Order] form. Thus, although the violation of Rule 4:5-1(b)(2) was inexcusable and it would have been more efficient to address the contribution claim in [the class action lawsuit], to the extent that its form violated regulations, dismissal of the entire complaint would unjustly allow Reynolds to avoid any responsibility.
The Court’s decision clearly seeks to balance the injustice of allowing the Dealerships to recoup three-times their damages against Reynolds under the circumstances; while also seeking to hold Reynolds liable to the extent that their Buyer’s Order forms were deficient. Even though the Court essentially “split the baby,” this case should serve as a reminder to any party involved in complex litigation (including commercial litigation, condominium transition litigation, construction litigation, etc.) that it has a continuing obligation to identify related parties. The more ominous message from the New Jersey Supreme Court is that by failing to join those related parties, litigants run the risk of permanently waiving their rights to pursue the damages that they could otherwise recover.
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