     11-4430-cv
     Schlessinger v. Valspar Corp.
 1
 2                                   UNITED STATES COURT OF APPEALS
 3                                          For the Second Circuit
 4                                    _______________________________
 5
 6                                                August Term, 2011
 7
 8         (Submitted: March 29, 2012                                               Decided: July 10, 2012)
 9
10                                           Docket No. 11-4430-cv
11                                     _______________________________
12
13                                     LORI SCHLESSINGER, BRENDA PIANKO,
14
15                                                                                           Plaintiffs-Appellants,
16
17                                                       —v.—
18
19                                             VALSPAR CORPORATION,
20
21                                                                                            Defendant-Appellee.
22
23                                     _______________________________
24
25                  Before: STRAUB, POOLER, Circuit Judges, and KORMAN, District Judge.*
26                                 _______________________________

27           On appeal from an Order dated September 23, 2011 by the United States District Court
28   for the Eastern District of New York (Denis R. Hurley, Judge) granting Defendant-Appellee’s
29   motion to dismiss for failure to state a claim upon which relief can be granted. Plaintiffs brought
30   this putative class action alleging that they purchased furniture maintenance agreements
31   containing a termination clause that runs afoul of New York General Business Law § 395-a.
32   Plaintiffs brought a breach of contract claim on the theory that because the provision violated §
33   395-a, it should be struck from the contract. The defendant would then be in breach of the
34   remaining terms, which required defendant to service plaintiffs’ furniture. Plaintiffs also alleged
35   that defendant had committed a deceptive business practice in violation of General Business Law
36   § 349 by misleading them about the substance of their legal rights. The District Court dismissed
37   both claims, holding that neither action was maintainable because there was no implied cause of
38   action under § 395-a. Because the determination of this case requires the resolution of two novel
39   issues of state law, we CERTIFY two questions to the New York Court of Appeals: (1) May
40   parties seek to have contractual provisions that run contrary to General Business Law § 395-a

     *
      The Honorable Edward R. Korman, District Judge, United States District Court for the Eastern District of New
     York, sitting by designation.
                                                            1
 1   declared void as against public policy? and (2) May plaintiffs bring suit pursuant to § 349 on the
 2   theory that defendants deceived them by including a contractual provision that violates § 395-a
 3   and later enforcing this agreement?                 _________________________________
 4
 5                          DANIEL A. EDELMAN, Cathleen M. Combs, Edelman, Combs, Latturner &
 6                                Goodwin, LLC, Chicago, IL, Lawrence Katz, Law Offices of
 7                                Lawrence Katz, Cedarhurst, NY, for Plaintiffs-Appellants.
 8
 9                          PAULA J. MORENCY, Aphrodite Kokolis, Jeannice D. Williams, Schiff
10                                Hardin LLP, Chicago, IL, David Jacoby, Schiff Hardin LLP, New
11                                York, NY, for Defendant-Appellee.
12                          _________________________________
13
14   STRAUB, Circuit Judge:

15          Plaintiffs-Appellants Lori Schlesssinger (“Schlessinger”) and Brenda Pianko (“Pianko”)

16   (collectively “plaintiffs”) appeal from a judgment of the United States District Court for the

17   Eastern District of New York (Denis R. Hurley, Judge), dismissing their complaint for failure to

18   state a claim upon which relief can be granted. Plaintiffs argue that they purchased a furniture

19   maintenance agreement from Defendant-Appellee Valspar Corporation (“Valspar”) that

20   contained a termination provision that runs contrary to New York General Business Law § 395-

21   a, which prohibits the termination of maintenance agreements except for specified reasons. They

22   brought suit for common law breach of contract and for deceptive business practices under New

23   York General Business Law § 349. The District Court held that both causes of action were

24   unavailable because § 395-a provided for no implied private right of action and plaintiffs could

25   not use breach of contract and § 349 claims as a vehicle for asserting violations of § 395-a. For

26   the reasons below, because we find that resolution of this appeal depends upon novel issues of

27   state law, we certify questions to the New York Court of Appeals.




                                                      2
 1                                             BACKGROUND

 2          Schlessinger and Piakno both separately purchased furniture from Fortunoff department

 3   store (“Fortunoff”). They also opted to purchase a furniture protection plan (“the Plan”).

 4   Defendant Valspar Corporation (“Valspar”), acting under the trade name “Guardsman,” sold the

 5   plans to Fortunoff, which in turn sold them to Schlessinger and Pianko.

 6          Pursuant to each Plan, Valspar agreed to repair or replace the covered furniture in the

 7   event that it suffered certain kinds of damage. In carrying out its obligations under the Plan,

 8   Valspar could provide service ranging from providing a cleaning kit to refunding the purchase

 9   price in the form of store credit or cash. Each Plan also contained a clause providing as follows:

10          If Guardsman determines that the reported stain or damage is covered under this
11          Protection Plan, Guardsman will perform one or more of the following: . . .
12                  If the particular store location where you originally purchased your
13                  furniture (“Store”) has closed, no longer carries Guardsman as a supplier,
14                  changed ownership, or has stopped selling new furniture since your
15                  purchase, Guardsman will give you a refund of the original purchase price
16                  of this Protection Plan.
17   Plaintiffs refer to this provision as the “store closure provision.”

18          Since plaintiffs purchased these plans, Fortunoff has filed for bankruptcy and ceased

19   operations. Pianko’s furniture has since been damaged in a manner she claims is covered by the

20   Plan, and she made a claim on approximately April 14, 2010. Valspar rejected the claim, citing

21   the store closure provision.

22          Although the complaint does not specify, it appears that Schlessinger has not attempted to

23   file a claim under her Plan or had any further contact with Valspar. It also appears that she has

24   not received a refund for the purchase price of her Plan, even though Valspar presumably would

25   refuse to fix or replace her furniture if she were to make such a claim. Schlessinger asserts a

26   claim under § 349, but does not assert a breach of contract claim.
                                                     3
 1          Plaintiffs brought this putative class action in the Eastern District of New York. They

 2   allege that the store closure provision violates New York General Business Law § 395-a, which

 3   generally prohibits service providers from terminating maintenance agreements with certain

 4   narrow exceptions. It provides:

 5          2. No maintenance agreement covering parts and/or service shall be terminated at
 6          the election of the party providing such parts and/or service during the term of the
 7          agreement unless prior to or upon delivery of a copy of the agreement the buyer is
 8          notified in writing that the agreement may be cancelled for:
 9                  a. non-payment; or
10                  b. use of the item primarily for commercial purposes, unless the agreement
11                  so provides. When a maintenance agreement is terminated because of use
12                  of the item primarily for commercial purposes, the party providing the
13                  parts and/or service must reimburse the buyer on a pro rata basis for the
14                  remaining period of time or mileage for the unused portion of the
15                  maintenance agreement less the cost of any parts and/or service already
16                  provided from the date of termination; or
17                  c. change in the buyer’s residence beyond the disclosed service area,
18                  except where the buyer provides transportation or shipping to and from the
19                  site of service. When a maintenance agreement is terminated because of a
20                  change in the buyer’s residence beyond the disclosed service area, either
21                  the buyer or the party providing the parts and/or service may terminate the
22                  maintenance agreement. Reimbursement to the buyer shall be made on a
23                  pro rata basis for the remaining period of time or mileage for the unused
24                  portion of the maintenance agreement from the date of notice of change in
25                  the buyer’s residence.
26   N.Y. Gen. Bus. Law § 395-a(2). The statute allows the New York Attorney General to institute

27   an action for enforcement of this section and provides that “a violation . . . shall be punishable by

28   a civil penalty of not more than three hundred dollars.” Id. § 395-a(4).

29          Plaintiffs brought two causes of action. First, they alleged that Valspar breached the

30   terms of the service agreement. They argue that the store closure provision violated § 395-a

31   because it allowed Valspar to terminate the Plan for a reason that does not fit into § 395-a’s

32   narrow grounds for termination. The language, according to plaintiffs, should therefore be

                                                      4
1    excised from the contract. Valspar would then be in breach of the remaining terms of the Plan

2    because it did not service Pianko’s furniture as required. Second, plaintiffs allege that Valspar

3    violated General Business Law § 349, which prohibits deceptive business practices aimed at

4    consumers. They argue that by including the store closure provision in the Plan, Valspar misled

5    them about their rights under New York law. They also argue that denying the claims based on

6    the store closure provision was itself a deceptive practice.

7             Valspar moved to dismiss the complaint, arguing that § 395-a does not provide for a

8    private cause of action. Valspar argued that because § 395-a specifically provides the Attorney

9    General the right to bring suit, the statute impliedly forecloses private parties from doing so.

10   Valspar further argued that plaintiffs could not bring suit under either a breach of contract or a §

11   349 theory where the theories incorporate § 395-a. The District Court agreed with Valspar on

12   each point and granted its motion to dismiss in full.

13                                               DISCUSSION

14            On an appeal from a grant of a motion to dismiss, we review de novo the decision of the

15   district court. Capital Mgmt. Select Fund Ltd. v. Bennett, 680 F.3d 214, 219 (2d Cir. 2012). We

16   accept all factual allegations in the complaint as true, drawing all reasonable inferences in favor

17   of the plaintiff. Tiberio v. Allergy Asthma Immunology of Rochester, 664 F.3d 35, 36 (2d Cir.

18   2011). “To survive a motion to dismiss, a complaint must contain sufficient factual matter,

19   accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.

20   662, 678 (2009) (internal quotation marks omitted).

21       I.      Breach of Contract

22            Plaintiffs argue that the store closure provision violates § 395-a and must be struck from

23   the contract. Once the contract is reformed in this manner, Valspar is in breach of the remaining
                                                        5
 1   terms because it did not service Pianko’s furniture. Valspar argues that to allow such a remedy

 2   violates the legislature’s clear intent to vest the Attorney General with sole responsibility for

 3   enforcing § 395-a. This issue lies at the intersection of two legal doctrines that lead to

 4   conflicting results: the doctrine that courts will not enforce illegal contracts and the doctrine that

 5   courts should follow clearly expressed legislative intent.

 6          As a general rule, New York courts will not enforce illegal contracts. See Stone v.

 7   Freeman, 82 N.E.2d 571, 572 (N.Y. 1948) (“It is the settled law of this State (and probably of

 8   every other State) that a party to an illegal contract cannot ask a court of law to help him carry

 9   out his illegal object, nor can such a person plead or prove in any court a case in which he, as a

10   basis for his claim, must show forth his illegal purpose.”)

11          The general rule is modified, however, where the illegality concerns the violation of a

12   regulatory statute:

13          [T]he violation of a statute that is merely malum prohibitum will not necessarily
14          render a contract illegal and unenforceable. If the statute does not provide
15          expressly that its violation will deprive the parties of their right to sue on the
16          contract, and the denial of relief is wholly out of proportion to the requirements of
17          public policy the right to recover will not be denied.
18
19   Benjamin v. Koeppel, 650 N.E.2d 829, 830 (N.Y. 1995). Under this rule, a court may enforce an

20   illegal contract if three requirements are satisfied: (1) the statutory violation is malum

21   prohibitum; (2) the statute that renders the contract illegal does not specifically require that all

22   contrary contracts be rendered null and void; and (3) the penalty imposed by voiding the contract

23   is “wholly out of proportion to the requirements of public policy.” Id. It is clear that here the

24   first two requirements are satisfied. It is less clear whether voiding the contractual provision is

25   “wholly out of proportion to the requirements of public policy.”



                                                        6
 1           The New York Court of Appeals has invoked the above rule when deciding whether to

 2   enforce a contract notwithstanding the fact that the plaintiff did not have the license necessary to

 3   enter into the contract. See, e.g., Benjamin, 650 N.E.2d 829; Richards Conditioning Corp. v.

 4   Oleet, 236 N.E.2d 639 (N.Y. 1968); John E. Rosasco Creameries, Inc. v. Cohen, 11 N.E.2d 908

 5   (N.Y. 1937); Johnston v. Dahlgren, 59 N.E. 987 (N.Y. 1901). In Benjamin, for example, the

 6   plaintiff was an attorney who was admitted to the bar, but failed to register with the Office of

 7   Court Administration. Benjamin, 650 N.E.2d at 830. He referred a case to another law firm in

 8   return for a share of any fees earned, and the law firm did not pay. Id. He sued the law firm, and

 9   the law firm argued that the fee-sharing agreement was invalid because the lawyer had not

10   complied with the registration requirements. Id. The New York Court of Appeals held that the

11   contract was enforceable. Id. at 832. The court found that the regulation at issue “more closely

12   resembles a revenue-raising measure than a program for ‘the protection of public health or

13   morals or the prevention of fraud,’” id. at 831 (quoting Galbreath-Ruffin Corp. v. 40th & 3rd

14   Corp., 227 N.E.2d 30, 34 (N.Y. 1967)), and that there existed adequate mechanisms to enforce

15   the regulation without imposing a civil forfeiture, id. at 832.

16           Benjamin and its kin are different from the case at bar in several key respects. The

17   illegality in the licensing cases arises from the fact that the plaintiff entered into the contract at

18   all. If the party seeking to enforce the contract had been properly licensed, the subject matter of

19   the contract would be perfectly legal. In contrast, here the legality of the contract does not turn

20   on the licensing of the party seeking enforcement. Rather, plaintiffs point to a particular

21   provision that they argue runs contrary to statute and seek to reform the rest of the contract

22   without the offending provision. Unlike in Benjamin, plaintiffs here do not seek to avoid the

23   entire contract; merely to excise the store closure provision.
                                                        7
1           Further, in the licensing cases, there is the potential that the defendant could receive a

2    windfall, essentially receiving service for free. “[T]he courts are especially skeptical of efforts

3    by clients or customers to use public policy ‘as a sword for personal gain rather than a shield for

4    the public good.’” Benjamin, 650 N.E.2d at 831 (quoting Charlebois v. J.M. Weller Assocs.,

5    Inc., 531 N.E.2d 1288, 1292 (N.Y. 1988)). If the contract here were to be reformed, plaintiffs

6    would merely receive the benefit of a maintenance agreement that complied with state law.

7    Conversely, the Benjamin plaintiff would lose something if the entire contract were voided,

8    specifically, the value of his services. Valspar here would lose only the right to invoke an illegal

9    contractual provision. This analysis suggests that the penalty imposed by voiding a contractual

10   provision that runs contrary to regulation is not wholly out of proportion to the requirements of

11   public policy.

12          At least one intermediate appellate court has adopted the procedure that plaintiffs

13   advance here. In Caruso v. Allnet Communication Servs., Inc., the plaintiffs argued that a

14   provision of an employment contract was void and sought to bring a breach of contract suit under

15   the remaining terms of the contract. Brief for Appellant at 26, Caruso v. Allnet Commc’n Servs,

16   Inc., 662 N.Y.S.2d 468, (N.Y. App. Div. 1st Dep’t 1997). The trial court dismissed this claim,

17   holding that the sole remedy for violation of the regulation at issue was an enforcement action by

18   the Commissioner of Labor. Id. The First Department reversed, stating, “Rather than consider

19   the illegal contract as void in toto, the better view is to sever the offending provision and

20   validate the basic agreement; under this approach, there is a cause of action for breach of the

21   valid remainder of the contract.” 662 N.Y.S.2d at 469-470.

22          Were we to end our analysis here, we could conclude that the offending store closure

23   provision should be read out of the Plan and that plaintiffs should be able to bring a suit for
                                                       8
1    breach of contract pursuant to the remaining terms of the Plan. But this outcome is in tension

2    with the outcome that is suggested by the law of implied causes of action. The law of implied

3    causes of action demands that we carefully consider legislative intent, and the evidence here

4    suggests that the New York legislature did not intend to create a private cause of action for

5    § 395-a.

6           At the outset, it should be noted that there is some question as to whether this body of law

7    is applicable at all. The doctrine speaks of an implied “private right of action.” See, e.g., Sheehy

8    v. Big Flats Cmty. Day, Inc., 541 N.E.2d 18, 22 (N.Y. 1989). The usual implied private right of

9    action case seeks to fashion a tort remedy from the violation of a statutory provision. In Sheehy,

10   for example, a minor was served alcohol and later injured while intoxicated. Id. at 19. She

11   brought suit pursuant to law prohibiting the sale of alcohol to minors, and the court held that this

12   regulation did not provide for the private right of action the plaintiff sought. Id. at 22. Strictly

13   speaking, this case is different because the common law of contracts provides the right of action.

14          Nonetheless, one intermediate appellate court has analyzed a similar case under the

15   doctrine of implied private right of action. Rhodes v. Herz, 920 N.Y.S.2d 11 (N.Y. App. Div. 1st

16   Dep’t 2011). In Rhodes, the court considered whether a contract should be deemed void because

17   one party did not comply with state licensing requirements. Id. at 13. Despite the fact that there

18   is a substantial body of law analyzing such cases under the doctrine of illegal contracts, the court

19   instead analyzed the case as an implied right of action and concluded that the only available

20   remedy was an administrative remedy. Id. at 15-16.

21          If this issue were to be analyzed as one of implied right of action, the proper conclusion

22   could be that the legislature did not evince the requisite intent to void provisions that were

23   contrary to § 395-a. In determining whether an implied private right of action exists under a
                                                       9
1    statute, the courts are to consider three factors: “(1) whether the plaintiff is one of the class for

2    whose particular benefit the statute was enacted; (2) whether recognition of a private right of

3    action would promote the legislative purpose; and (3) whether creation of such a right would be

4    consistent with the legislative scheme.” Sheehy, 541 N.E.2d at 20.

5            The District Court properly concluded that the first two factors are satisfied here. The

6    legislature intended to protect purchasers of maintenance agreements in enacting the statute, and

7    recognizing a private right of action would promote the purpose of protecting such purchasers.

8    But the legislature does not seem to have expressed an intent for there to be a remedy of voiding

9    contrary provisions. Section 395-a expressly provides that the Attorney General may bring suit

10   against those who violate its mandate, so a private right of action would not be consistent with

11   legislative intent.

12           As the New York Court of Appeals has recognized, the New York legislature specifically

13   amended § 349 of the General Business Law to provide for a private right of action. See Varela

14   v. Investors Ins. Holding Corp., 615 N.E. 2d 218, 219 (N.Y. 1993). In doing so, it evinced an

15   intent to exclude a private right of action in other portions of the General Business Law. Id.

16   Furthermore, the General Business Law is usually very specific in declaring that certain

17   contractual provisions are unenforceable as against public policy. See, e.g., NY. Gen. Bus. Law

18   § 23(b) (waiver of warranty for vehicles purchased at auction); id. § 198-a(i) (waiver of warranty

19   for a new motor vehicle); id. § 340(1) (agreements in restraint of trade); id. § 349-b(11) (waiver

20   of rights when purchasing telephone equipment); id. § 349-d (waiver of rights in contracts for

21   energy services); id. § 394-b (contracts for “physical or social skills . . . measured by the life of

22   the person receiving such instruction”); id. § 399-c (mandatory arbitration clauses in certain

23   consumer contracts); id. § 627 (waiver of rights in health club contracts). This is merely a
                                                       10
 1   sampling of the panoply of provisions in the General Business Law rendering certain contracts

 2   void. Given the absence of such a provision in § 395-a, it seems that the legislature did not

 3   intend to provide for an implied right to void provisions that run contrary to its dictates.

 4             If we were to consider either line of cases in isolation, we would reach contrary

 5   conclusions. Further, resolution of which doctrine (or another) applies could have implications

 6   for regulations beyond § 395-a. We thus believe that it is better for us to defer to the New York

 7   Court of Appeals for resolution of this important issue of state law.

 8       II.      General Business Law § 349

 9             Plaintiffs argue that by including the store closure provision in the Plan and later denying

10   Pianko’s claim on the basis of the store closure provision, Valspar committed a deceptive

11   business practice in violation of § 349.1 Although their legal theory is somewhat unclear,

12   plaintiffs appear to argue that through these actions, Valspar deceived them as to the substance of

13   their legal rights.

14             The District Court dismissed these claims, holding that it was bound by our prior

15   holdings in Conboy v. AT&T Corp., 241 F.3d 242, 258 (2d Cir. 2001) and Broder v. Cablevision

16   Sys. Corp., 418 F.3d 187, 199 (2d Cir. 2005). In Conboy, the plaintiff couched a violation of

17   General Business Law § 601—which prohibits the placement of debt collection phone calls at

18   inappropriate hours, but allows for no private right of action—as a deceptive business practice

19   under § 349. We held that “plaintiffs cannot thwart legislative intent by couching a Section 601

20   claim as a Section 349 claim.” Conboy, 241 F.3d at 258.2


     1
       New York General Business Law § 349(a) provides, “Deceptive acts or practices in the conduct of any business,
     trade or commerce or in the furnishing of any service in this state are hereby declared unlawful.”
     2
      Plaintiffs argue that we should limit Conboy and Broder to their facts. In both cases, the plaintiffs failed to allege a
     deceptive practice. In Conboy, for example, the plaintiffs argued that the defendants committed a deceptive practice
                                                               11
 1           After we decided Conboy and Broder, the Second Department considered a similar case

 2   and came to a different result. See Llanos v. Shell Oil Co., 866 N.Y.S.2d 309, 310-311 (N.Y.

 3   App. Div. 2d Dep’t 2008). In Llanos, the court considered whether a violation of the laws

 4   regulating gift cards could constitute a deceptive practice. Id. The court observed that, under

 5   established New York law, statutory remedies are generally considered to be cumulative of

 6   common law remedies, the assumption being that statutes will abrogate existing remedies

 7   expressly. Id. at 310. The court held that the same rule should apply for existing statutory

 8   remedies. Id. at 311. Because § 396-i did not expressly make an Attorney General action the

 9   exclusive remedy, § 349 remedies were still presumed to exist where the plaintiff alleged some

10   deceptive practice that also violated a regulatory provision. Id.

11           The Llanos court began its analysis by observing that it was not deciding whether a

12   violation of General Business Law § 396-i, which governs gift cards, contains an implied private

13   right of action. Id. at 310. It is therefore arguable that Llanos is distinguishable from the case

14   here, where it seems clear that plaintiffs could not bring suit alleging a violation of § 395-a

15   independent of a breach of contract or § 349 claim. But the language of Llanos suggests that

16   such a distinction is inappropriate. The Llanos court seems to hold that the existence of a private

17   right of action under § 396-i is irrelevant to whether plaintiffs may bring a § 349 claim.

18           As above, we believe it more appropriate for the New York Court of Appeals to resolve

19   this important issue of state law. The resolution of this issue turns on legislative intent, and we

20   believe that the Court of Appeals is in a better position to assess the intent of the New York

21   legislature. Accordingly, we certify a second question regarding this issue.

     by calling them at inappropriate times. In addition to holding that there could be no § 349 cause of action that
     incorporated another regulatory statute without a private right of action, we observed that this practice was not
     actually deceptive. Conboy, 241 F.3d at 258. Although both findings factored into our analysis, the better reading
     of Conboy is that each functioned as independent bases for decision.
                                                             12
 1                                             CONCLUSION

 2          For the foregoing reasons and pursuant to New York Court of Appeals Rule 500.27 and

 3   Local Rule 27.2 of this court, we respectfully CERTIFY to the Court of Appeals the following

 4   questions:

 5      1. May parties seek to have contractual provisions that run contrary to General Business
 6         Law § 395-a declared void as against public policy?

 7      2. May plaintiffs bring suit pursuant to § 349 on the theory that defendants deceived them
 8         by including a contractual provision that violates § 395-a and later enforcing this
 9         agreement?

10          “As is our practice, we do not intend to limit the scope of the Court of Appeals’ analysis

11   through the formulation of our question, and we invite the Court of Appeals to expand upon or

12   alter [these] question[s] as it should deem appropriate.” Joseph v. Athanasopoulos, 648 F.3d 58,

13   68 (2d Cir. 2011).

14          It is hereby ORDERED that the Clerk of this Court transmit to the Clerk of the New

15   York Court of Appeals this opinion as our certificate, together with a complete set of the briefs,

16   the appendix, and the record filed in this court by the parties. The parties shall bear equally all

17   fees and costs that may be imposed by the New York Court of Appeals in connection with this

18   certification. This panel will resume its consideration of this appeal after the disposition of this

19   certification by the New York Court of Appeals.




                                                       13
