Stockroom Inc. v. Dydacomp Development Corp., No. 11-6220; U.S. District Court (DNJ); opinion by Walls, S.U.S.D.J.; filed publication April 24, 2013. DDS No. 11-7-xxxx [13 pp.]

Plaintiff Stockroom Inc. is a retailer of adult-themed products and clothing. Defendant Dydacomp Development Corporation is a software company that sells an order processing system for online merchants called Multichannel Order Manager (MOM). Stockroom began to use MOM to process its retail transactions in 1999. Defendant Plug & Pay Technologies Inc. processes credit-card transactions for online merchants in conjunction with MOM. Stockroom started using it in 2004.

In 2010 Stockroom discovered credit-card transactions where money was not deposited in its bank account and customer refunds were issued in error. It alleges that defendants are responsible for the problem.

Stockroom’s first amended complaint asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, violation of the New Jersey Consumer Fraud Act, and breaches of express warranty, implied warranty of merchantability, and warranty of fitness for a particular purpose. All claims were dismissed, most as time-barred. For equitable tolling to apply, Stockroom was instructed to plead with specificity how Dydacomp actively concealed its alleged wrongdoing. The CFA claim was not pleaded with sufficient particularity.

Stockroom filed a second amended complaint. Dydacomp again moves to dismiss for failure to state a claim.

Held: Because Stockroom failed to allege sufficient facts of fraudulent concealment for equitable tolling to apply, any claims of breach of contract or breach of warranty stemming from the original installation are barred by the four-year statute of limitations. However, any claims of breach of warranty and breach of contract that accrued within four years of filing suit are not time-barred. Dydacomp’s motion to dismiss the CFA claim is denied because Stockroom has alleged a plausible claim for omission. Dydacomp’s motion to dismiss the common-law fraud claim is granted.

In the second amended complaint, Stockroom provides more details about Dydacomp’s alleged fraudulent concealment. It argues that the faulty credit-card transactions were caused by MOM issuing improper authorization codes, on which it reasonably relied as a sign that the transactions were legitimately processed. Stockroom claims Dydacomp must have been aware of the problem because one of its employees created the software code that caused MOM to generate the faulty codes. Dydacomp allegedly misrepresented and concealed the flaws in MOM in several respects: (1) the hypothetical programmer who created the faulty software program and concealed the error; (2) each faulty code constitutes a misrepresentation regarding the transaction; and (3) Dydacomp’s sales and promotional materials misrepresented that the software could reliably process credit-card transactions.

The court rejects these arguments. That some hypothetical Dydacomp programmer knew about the problem and concealed it is sheer conjecture. Each code generated by MOM cannot constitute a misrepresentation for equitable tolling purposes; the doctrine requires an act of concealment or trickery beyond the original act of wrongdoing. To complain that a program did not work properly does not mean that each error it generated is a misrepresentation. Lastly, Dydacomp’s promotional and sales materials may not have revealed the MOM error, but they do not amount to trickery or inducement for Stockroom to miss the filing deadline. More specific acts of trickery are typically required.

The court says Stockroom does make a case that it could not have discovered the faulty credit-card transactions earlier than it did, but that is beside the point. The discovery doctrine does not apply to breach-of-contract claims governed by the Uniform Commercial Code. The discovery rule and the equitable tolling doctrine are distinct. Stockroom has not alleged sufficient facts of concealment or trickery on Dydacomp’s part for equitable tolling to apply with respect to the initial installation of MOM.

However, there have been several upgrades, each with a new license agreement and a 30-day express warranty and disclaimer, since MOM was installed. These agreements were entered into within four years of the filing of this suit. The claims of breach of contract and breach of warranty relating to these contracts are not barred by the statute of limitations.

As to the CFA claims, the court says that New Jersey courts have held that the CFA applies to the sale of merchandise for use in business operations and that a business entity can be, and frequently is, a consumer in the ordinary meaning of that term and that the sale of a computer system consisting of hardware and custom programmed software falls under the CFA.

The court concludes that Stockroom, a retailer whose business is wholly unrelated to computer software and programming but which needed a system that could reliably process retail transactions and credit-card billing was a consumer. Therefore, the CFA applies.

As to the sufficiency of plaintiff’s pleading in the SAC, the court concludes that Stockroom has alleged a plausible claim for omission under the CFA. Since the original installation, Dydacomp has required Stockroom to purchase and install several upgrades, which were done according to Dydacomp’s instructions. Throughout this period, Stockroom alleges that about 3 percent of the credit-card transactions were faulty. It further alleges that Dydacomp’s agents were aware of the faulty programming and concealed the problem. Rule 9(b) does not require more than this at the pleadings stage.

As to the claim for common-law fraud added by the second amended complaint, the court concludes that while silence can be fraudulent under common law in circumstances where there is a duty to disclose, Stockroom does not satisfy the first element of common-law fraud — a statement of material fact that is false. That MOM malfunctioned by issuing faulty codes is an alleged fact; it is not a material misrepresentation of a fact. Missing is any specific allegation that Dydacomp knowingly lied to Stockroom about the malfunction with the intent of inducing it to purchase the faulty product.

Stockroom’s omission argument under common-law fraud also fails. A fraudulent omission under the common law requires a duty to disclose. Stockroom alleges that Dydacomp had a duty to disclose due to a "fiduciary obligation." But in its opposition brief, Stockroom agrees to dismiss its claim for breach of fiduciary duty, effectively waiving the argument that its contracts with defendants created a fiduciary relationship. Absent such relationship, there is no duty to disclose and Dydacomp’s silence does not amount to fraud.