What must be alleged to state causes of action under the Computer Fraud and Abuse Act and the New Jersey Consumer Fraud Act?

In 2006, the law firm of Kalow & Springnut, LLP (“Kalow”) brought a class action lawsuit against software developer Commence Corporation (“Commence”) to recover damages sustained due to the failure of Commence’s computer software.  Kalow & Springnut, LLP v. Commence Corp., No. 07-3442, 2009 WL 44748 (D.N.J. 2009).

Seven years prior, Kalow purchased software from Commence for use in its law practice.  After that software failed, Kalow filed a class action lawsuit against Commence on behalf of purchasers of Commence’s software.  Kalow alleged violations of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. §1030 (for Commence’s intentional transmission of a software code causing damage to Kalow’s computer systems); violations of the New Jersey Consumer Fraud Act (“NJCFA”), N.J.S.A. §56:8-2, (for Commence’s deceptive and misleading practices in marketing its software); and violations of various consumer fraud acts in every state where Commence did business in anticipation of class certification.

The CFAA provides sanctions and punishments for any person “who knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct intentionally causes damage without authorization, to a protected computer.”  18 U.S.C. §1030(a)(5)(A)(I).  In its pleadings, Kalow alleged that, “because computer software does not ‘wear out or fail like a mechanical device … for software to stop working, it must either have been intentionally designed to stop working, or the environment in which it is operating must have been altered, either as a result of the change in other software running on the same computer, or as a result of a change in the computer itself.’”  Id. at *2.  Kalow further alleged that it had not altered its computer system immediately before the software stopped working, so the software must have been intentionally designed to stop working by way of a “time-bomb” in the software.  Id.  The court held these allegations sufficient to state a claim under the CFAA and denied Commence’s motion to dismiss Kalow’s claim under that Act.

The Court then turned to the NJCFA claim. It held that to state such a claim, Kalow had to allege: 1) unlawful conduct by Commence; 2) an ascertainable loss by Kalow; and 3) a causal relationship between Commence’s unlawful conduct and Kalow’s ascertainable loss.  Under the NJCFA “when the alleged consumer fraud consists of an omission, the plaintiff must show that the defendant acted with knowledge, and intent is an essential element of the fraud.”  Id. at *3.  Kalow alleged that Commence “designed its software to fail on a predetermined date, concealed that it had designed the software to fail on that date, that the software did fail on that date, and when the software failed it proximately caused Kalow and the class members to be injured.”  Id. at *4.  The court held these allegations sufficient to allege a causal relationship between Commence’s knowing omission of the inclusion of a “time-bomb” in its software and Kalow’s ascertainable loss because Kalow asserted it would not have purchased Commence’s software if it was aware it contained a “time-bomb.”  As a result, the court denied Commence’s motion to dismiss Kalow’s NJCFA claim.

The court dismissed Kalow’s other claims, which were brought under the consumer fraud acts of other states.  The court reasoned that it could not conclude that the elements of consumer fraud in those other states mirrored the elements required to establish consumer fraud in New Jersey.  Kalow also did not allege facts establishing that other consumers made claims under any other state statute.  In conclusion, Kalow was permitted to proceed to trial on its claims that Commence violated the CFAA and the NJCFA.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC