Princeton Health Care System v. Netsmart New York Inc., A-3533-10T4; Appellate Division; opinion by Skillman, J.A.D., retired and temporarily assigned on recall; decided and approved for publication October 21, 2011. Before Judges Grall, Alvarez and Skillman. On appeal from the Law Division, Mercer County, L-2611-09. DDS 11-2-4032 [11 pp.]

Plaintiff Princeton Health Care System (PHCS), a nonprofit corporation that provides health-care services, decided to upgrade the computer and medical billing system at Princeton House Behavioral Health Facility, a PHCS satellite facility. It distributed a detailed request for proposals to a number of companies, including Netsmart New York Inc. Several companies, including Netsmart, submitted proposals.

During Princeton House’s lengthy evaluation of these responses, its representatives met with Netsmart and visited other health-care facilities that use computer systems supplied by Netsmart. The parties also engaged in negotiations regarding the terms of a proposed contract, in which PHCS’s computer consultant and its legal counsel were active participants.

Eventually, Princeton House entered into a contract with Netsmart that spelled out Netsmart’s obligations with respect to the installation and integration of its computer system into the system at Princeton House.

Substantial delays occurred in the implementation of the Netsmart system and efforts to resolve the parties’ differences were unsuccessful. Ultimately, Princeton House deemed Netsmart to be in default and terminated the contract.

PHCS then filed this action asserting claims for, inter alia, breach of contract and violation of the Consumer Fraud Act, N.J.S.A. 56:8-1 to -20. The trial court granted partial summary judgment to plaintiff on the issues of its standing to sue under the CFA and the act’s applicability to the commercial subject matter of this suit. The Appellate Division denied Netsmart’s motion for leave to appeal from this order, but the Supreme Court granted it, remanding to the Appellate Division for consideration on the merits.

Held: A heavily negotiated contract between corporations for the installation and implementation of a complex computer software system does not constitute a “sale of merchandise” under the Consumer Fraud Act and therefore cannot provide a basis for a CFA claim.

The CFA prohibits the use of any unconscionable commercial practice, deception, fraud, misrepresentation, or knowing concealment or omission of any material fact with intent that others rely on such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate. A corporation may maintain an action for a violation of the CFA as a “person” under the act.

However, the panel says not every contract entered into by a corporation may be the subject of a CFA claim. The act defines “merchandise” as including “any objects, wares, goals, commodities, services or anything offered, directly or indirectly to the public for sale.” “The public” refers to the public at large. Thus, the character of the transaction, not the identity of the purchaser, determines whether the CFA is applicable.

The panel says the contract between Princeton House and Netsmart did not constitute a simple purchase of computer software sold to the public at large. It did not provide for simply the installation of a standardized computer software program but rather the design of a custom-made program to satisfy Princeton House’s unique needs and Netsmart’s active participation in implementation of this program. Moreover, before awarding the contract to Netsmart, Princeton House engaged in lengthy negotiations over its terms with Netsmart. This kind of heavily negotiated contract between two sophisticated corporate entities does not constitute a sale of merchandise under the CFA.

The panel therefore reverses the grant of partial summary judgment to PHCS regarding the CFA claim and the denial of Netsmart’s motion to dismiss that claim. It remands the matter for further proceedings on the other counts of PHCS’s complaint and on Netsmart’s counterclaim.

— By Judith Nallin

For appellant — Robert J. Donaher (Walder, Hayden & Brogan; Thomas J. Spies of counsel). For respondent — Patrick J. Dwyer (Smith, Stratton, Wise, Heher & Brennan; Dwyer, Thomas E. Hastings and William H. Hofmann on the brief).