Insights

On June 23, 2010, the New Jersey Appellate Division reiterated the long-established concept that principals of a company who personally participate in the violation of a regulation can be held individually liable for the regulatory violations of their company under the New Jersey Consumer Fraud Act (the "Consumer Fraud Act")^[1], even without a showing of knowledge about the alleged unlawful practice. The court held that principals of a company are presumed to be familiar with the regulations affecting their company and that plaintiffs do not have to prove intent in order for there to be individual liability.

In Allen v. V and A Brothers, Inc., 2010 N.J. Super. LEXIS 109 (App.Div. June 23, 2010), plaintiffs brought suit against a landscaping company and its principals for improper construction of a retaining wall and substitution of inferior backfill, resulting in failure of the wall and substantial property damage. Plaintiffs sued the company and two of its principals, individually, for breach of contract and under the Consumer Fraud Act for regulatory violations for failing to execute a written contract for the work. The plaintiffs prevailed against the company on both the breach of contract and Consumer Fraud Act claims. However, the trial court dismissed the plaintiffs' Consumer Fraud Act claims against the individual principals. The precise issue before the appellate court was whether the individual defendants could be held personally liable under the Consumer Fraud Act for the regulatory violations of their company.

A violation of the Consumer Fraud Act occurs when a "person" commits an "unlawful practice." As defined in the legislation, a "person" can be an individual or a business entity. The court in Allen found that the Consumer Fraud Act provides sufficient statutory authority to impose individual liability on corporate principals and employees. The Allen court identified the three recognized categories of what may constitute an "unlawful practice" under the Consumer Fraud Act, including 1) an affirmative act; 2) a knowing omission; or 3) a regulatory violation. The court emphasized that for violations of regulations, courts will impose strict liability, meaning that plaintiffs are not required to prove that there was intent to commit a violation of a regulation. The court reasoned that "[t]he parties subject to the regulations are assumed to be familiar with them, so that any violation of the regulations, regardless of intent or moral culpability, constitutes a violation of the [Consumer Fraud] Act." Thus, if individual corporate officers or employees personally participate in the regulatory violation, whether knowingly or unknowingly, they can be found personally liable under the Consumer Fraud Act.

What this means for company officers and employees

This case serves as a reminder that it is critical for businesses to be proactive about maintaining compliance with the laws and regulations that govern their businesses. Courts will assume that individual corporate officers and employees are familiar with these laws and regulations and may hold individuals personally liable for company violations, regardless of whether such individuals were aware that violations were occurring.

Should you have any questions or concerns about the Consumer Fraud Act or how this decision may affect your company, please do not hesitate to contact one of the authors of this alert.