Bailey Employment System, Inc. v. Hahn, Civ. No. B-79-210.

• Citation: 545 F. Supp. 62
• Decision Date: 26 April 1982
• Docket Number: Civ. No. B-79-210.
• Court: United States District Courts. 2nd Circuit. United States District Court (Connecticut)
• Parties: BAILEY EMPLOYMENT SYSTEM, INC., Plaintiff, v. Clifford HAHN, et al., Defendant.

545 F. Supp. 62

BAILEY EMPLOYMENT SYSTEM, INC., Plaintiff, v. Clifford HAHN, et al., Defendant.

Civ. No. B-79-210.

United States District Court, D. Connecticut.

April 26, 1982.

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Madeleine F. Grossman, New Haven, Conn. (Wiggin & Dana, New Haven, Conn., of counsel), for defendant Clifford Hahn.

Dion W. Moore, Bridgeport, Conn. (Pullman, Comley, Bradley & Reeves, Bridgeport, Conn., Donald Wetmore, Wetmore & Martin, Huntington, Conn., of counsel), for plaintiff Bailey Employment System, Inc.

MEMORANDUM OF DECISION

DALY, District Judge.

In May, 1979, Bailey Employment Systems, Inc. commenced this action seeking payment of a $10,000 note. The defendant, Clifford Hahn, admitting the existence and execution of the note, counterclaimed against Bailey and its president Sheldon Leighton alleging misrepresentation and fraud as well as violations of the Connecticut Unfair Trade Practices Act ("CUTPA"), Conn.Gen.Stat. § 42-110a et seq., by Bailey in connection with the sale of a franchise to Hahn.

The case was tried to this Court on September 25 and 26, 1980, and the Court subsequently ruled that Hahn had failed to demonstrate a claim for misrepresentation and fraud. With regard to Hahn's claim under the Unfair Trade Practices Act, the Court, relying on Naylor v. Case and McGrath, 585 F.2d 557 (2d Cir. 1978), in which the Second Circuit ordered this Court to abstain from interpreting CUTPA in the absence of state judicial authority, declined to rule on the CUTPA claims. (Memorandum of Decision, December 12, 1980, pp. 1-2). Consequently judgment was entered for Bailey on the original complaint.

Hahn appealed this ruling to the Second Circuit, Bailey Employment System v. Hahn, 655 F.2d 473 (2d Cir. 1981). The Court of Appeals, distinguishing Naylor, supra, remanded the case to this Court with instructions to construe CUTPA despite the lack of Connecticut authority, and to apply the statute to the facts adduced at trial. Id. at 478. The Court of Appeals, noting § 110b(b) of CUTPA,¹ directed that, in interpreting the state statute this Court should be guided by rulings of the Federal Trade Commission and the federal courts respecting § 5(a)(1) of the Federal Trade Commission Act (FTCA)² and by relevant cases from other states as well as by existing Connecticut authority. It is to that task that the Court now applies itself.

The Connecticut Unfair Trade Practices Act provides in pertinent part:

"(a) No person shall engage in unfair methods of competition and unfair and deceptive acts or practices in the conduct of any trade or commerce.

* * * * * *

d) It is the intention of the legislature that this chapter be remedial and be so construed."

Conn.Gen.Stat. § 42-110b.

The statute prohibits any "person" from engaging in unfair or deceptive acts or practices in the conduct of any "trade or commerce." The terms "person" and "trade or commerce" are defined very broadly:

"(3) `Person' means a natural person, corporation, trust, partnership, incorporated or unincorporated association, and any other legal entity; and

(4) `Trade' and `commerce' means the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state."

Conn.Gen.Stat. § 42-110a.

A franchise, as a form of license or privilege to do business under another's name or pursuant to another's marketing plan or system,³ is certainly a "commodity or thing of value". Thus, the sale of a franchise would appear to clearly fall within the statutory definition of "trade or commerce." Bailey, as a corporation engaged in business, as well as its president, Sheldon Leighton, co-defendant on the counterclaim, equally clearly are encompassed within CUTPA's definition of "person."⁴

Subsequent to the trial in this case, the Connecticut Supreme Court construed CUTPA for the first time in Hinchliffe v. American Motors Corp., 43 Conn.L.J.No. 3 at p. 14, ___ Conn. ___, 440 A.2d 810 (July 21, 1981). Ruling that the Act is remedial and goes beyond the scope of common law actions for fraud and misrepresentation, the highest court of Connecticut stated:

"The act proscribes a broader range of conduct than did the common law for innocent misrepresentation. In deciding what constitutes an unfair or deceptive act or practice, courts of this state are encouraged to look to interpretations of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1), rendered by both the federal trade commission and the federal courts. For the plaintiff victimized by such conduct, CUTPA provides an action more flexible and a remedy more complete than did the common law."

Cf. F. T. C. v. Sperry & Hutchinson, 405 U.S. 233, 243-44, 92 S.Ct. 898, 904-905, 31 L.Ed.2d 170 (1972), (the unfair trade practices condemned by § 5(a)(1) of the Federal Trade Commission Act are not confined to those that are illegal under the common law.)

Under the common law in Connecticut, a person who claims he has been the victim of fraud or misrepresentation must show

1) that a representation as to a factual matter was made and the representation was false;

2) that the representation was known to be false by the party making it;

3) that the representation was made to induce the recipient to act upon it to his detriment; and 4) that the recipient did so act.

Paiva v. Vaneck Heights Construction Co., 159 Conn. 512, 514, 271 A.2d 69 (1970). In addition, the misrepresentation generally must relate to an existing or past fact.⁵ Id.

In contrast the Connecticut Supreme Court has established in Hinchliffe, supra, that a party alleging a violation of CUTPA need not prove that he relied on the representation, nor that it was a basis of the bargain:

"The increased flexibility of the statutory action stems from the absence of certain obstacles to recovery under the common law action. The CUTPA plaintiff need not prove reliance or that the representation became part of the basis of the bargain."

Hinchliffe v. American Motors Corp., supra, 43 Conn.L.J.No. 3 at 17, ___ Conn. at ___, 440 A.2d 810. See also Slaney v. Westwood Auto, Inc., 366 Mass. 688, 322 N.E.2d 768 (1975); (Supreme Judicial Court of Massachusetts similarly construing the Massachusetts unfair practices law which in substance is identical to CUTPA).

In addition, federal precedents have established that for a representation to be unlawfully deceptive, it is not necessary that the seller have intended to deceive. See, e.g., Porter & Dietsch Inc. v. F. T. C., 605 F.2d 294, 308-9 (7th Cir. 1979); Beneficial Corp. v. F. T. C., 542 F.2d 611, 617 (3d Cir. 1976), cert. denied 430 U.S. 983, 97 S.Ct. 1679, 52 L.Ed.2d 377 (1977); F. T. C. v. Sterling Drug, 317 F.2d 669, 674 (2d Cir. 1963); Gimbel Bros. v. F. T. C., 116 F.2d 578, 579 (2d Cir. 1941).

Moreover, federal courts have held that a statement which is literally true may, nonetheless, be unlawfully deceptive.

"The courts are no longer content to insist simply upon the `most literal truthfulness' ... for we have increasingly come to recognize that `Advertisements as a whole may be completely misleading although every sentence separately considered is literally true. This may be because things are omitted that should be said, or because advertisements are composed or purposefully printed in such a way as to mislead.'"

F. T. C. v. Sterling Drug, Inc., supra, 317 F.2d at 675 (citations omitted).

Finally, the FTC and federal courts, as well as a number of state courts, have ruled that a failure to disclose pertinent information may be as deceptive an act as an affirmative misrepresentation, and that it is often necessary for a seller to disclose unfavorable facts to avoid misleading purchasers. See, e.g., Simeon Management Corp. v. F. T. C., 579 F.2d 1137, 1145 (9th Cir. 1978); Warner-Lambert Co. v. F. T. C., 562 F.2d 749, 759 (D.C.Cir.1977); GerRo-Mar v. F. T. C., 518 F.2d 33 (2d Cir. 1975). See also Heller v. Silverbranch Construction Corp., 376 Mass. 621, 382 N.E.2d 1065 (1978); Slaney v. Westwood Auto, Inc., 366 Mass. 688, 322 N.E.2d 768 (1975).

The standard established by the F. T. C. and the federal courts to determine if an act or practice is deceptive is whether it has a tendency or capacity to deceive. See, e.g. Trans World Accounts, Inc. v. F. T. C., 594 F.2d 212, 214 (9th Cir. 1979); Beneficial Corp. v. F. T. C., 542 F.2d 611, 617 (3d Cir. 1976), cert. denied, 430 U.S. 983, 97 S.Ct. 1679, 52 L.Ed.2d 377 (1977). An identical standard has been suggested by a Connecticut Superior Court in Covenant Radio Corp. v. Ten Eighty Corp., 35 Conn.Sup. 1, 390 A.2d 949 (1977). And, in evaluating that tendency or capacity, it is "not to the most sophisticated readers but rather to the least" that the courts should look. Exposition Press, Inc. v. F. T. C., 295 F.2d 869, 872 (2d Cir. 1961). As the U. S. Supreme Court has noted, under unfair practices statutes

"There is no duty resting upon a citizen to suspect the honesty of those with whom he transacts business. Laws are made to protect the trusting as well as the suspicious."

F. T. C. v. Standard Education Society, 302 U.S. 112, 116, 58 S.Ct. 113, 115, 82 L.Ed. 141 (1937).

CUTPA directs the courts of Connecticut to be guided by the interpretations given to the Federal Trade Commission Act by the F. T. C. and the Federal courts. This Court, sitting in diversity, is bound like any other state court to follow the statute's directives. That being so, the Court turns now to apply these general principles to the facts of this case, and in particular, to defendant's counterclaim which alleges that plaintiff-corporation and its president engaged in unfair and deceptive practices in violation of the Connecticut unfair practices statute.

A review of the record indicates that there were a number of misleading statements of fact and failures to disclose pertinent...