Category Archives: Franchise

When is a Franchisor Required to Provide a 180-Day Notice of Termination of a Dealership Agreement Under the New York Franchised Motor Vehicle Dealer Act?

Compass Motors, Inc. (“Plaintiff”) was a franchised motor vehicle dealer for Volkswagen Group of America, Inc., (“Defendant”).  As a part of the dealership agreement, Plaintiff agreed to renovate its facilities pursuant to a Facility Renovation Agreement (the “Agreement”). The Agreement required Plaintiff to renovate its facilities in order to incorporate a Volkswagen-only showroom with a minimum of 1800 square feet and three offices. According to the Defendant, the Plaintiff failed to implement those required facility renovations. Id. at 284-285 As a result, the Defendant sent Plaintiff a 90-day notice of termination. The notice explained that if Plaintiff failed to cure the alleged breach within 90 days Defendant would terminate the dealership agreement between them.  Id.

Plaintiff commenced an action in the Supreme Court of New York (the “Court”), seeking a declaration that the notice of termination was invalid. Compass Motors, Inc. v. Volkswagen Group of America, Inc., 944 N.Y.S. 2d 845 (2012). Plaintiff argued that under the New York Franchised Motor Vehicle Dealer Act (the “Act”), particularly §463(2)(e)(3), Defendant was required to give it a 180-day, as oppose to a 90-day, notice to cure. In its analysis, the Court cited the relevant portions of the Act as follows:
¶463(2):
        (d) 

(1)  To terminate, cancel or refuse to renew the franchise of any franchised motor vehicle dealer except for due cause, regardless of the terms of the franchise. A franchisor shall notify a franchised motor vehicle dealer, in writing, of its intention to terminate, cancel or refuse to renew the franchise of such dealer at least ninety days before the effective date thereof, stating the specific grounds for such termination, cancellation or refusal to renew. In no event shall the term of any such franchise expire without the written consent of the franchised motor vehicle dealer involved prior to the expiration of at least ninety days following such written notice except as hereinafter provided.    

(e)
(3) The franchisor shall provide notification in writing to the dealer that the dealer has one hundred eighty days to correct dealer sales and service performance deficiencies or breaches and that the franchise is subject to termination under this section if the dealer does not correct those deficiencies or breaches. If the termination is based upon performance of the dealer in sales and services then there shall be no due cause if the dealer substantially complies with reasonable performance provisions of the franchise during such cure period and, no due cause if the failure to demonstrate such substantial compliance was due to factors which were beyond the control of such dealer.

Vehicle and Traffic Law, article 17-A §463 (emphasis added) 
The Court stated that subsection (2)(e)(3) which affords a breaching party notice that he or she has 180 days to cure prior to termination of the dealership agreement, by its plain terms, applies  only to notices to correct a dealer’s sales and service performance deficiencies or breaches. The Court explained that since Defendant’s notice of termination was based upon Plaintiff’s failure to properly renovate its facility in accordance with the Agreement, it had nothing to do with sales and service performance deficiencies or breaches. Therefore, the Court held that the 180-day notice requirement encompassed within §463(2)(e)(3) was not applicable. On this basis, the Court  concluded that the 90-day notice to cure was sufficient under the Act. Id. at 294-295.

When is a Franchise Agreement Unconscionable and Therefore Unenforceable as a Matter of Law?

When is a franchise agreement unconscionable and, therefore, unenforceable as a matter of law? Legal precedent from the United States Court of Appeals for the Seventh Circuit is illustrative on this point. We Care Hair Development, Inc. v. Engen, et. al., 180 F.3d 838 (7th Cir, 1999).

In that case, a group of franchisees filed a class action lawsuit in the circuit court of Madison County, Illinois (“state circuit court”) against We Care Hair Development, Inc. (“We Care Hair’) and others, claiming among other things, breach of fiduciary duty, fraud and violations of the Illinois Franchise Disclosure Act.  The state circuit court held that the arbitration clauses in the franchise agreements (“Agreement(s)”) were void and unenforceable.  However, the lower court (the Federal District Court for the Northern District of Illinois) upheld the Agreements and ordered the franchisees to arbitrate their claims, enjoining them from further action in the state court lawsuits.  The Franchisees appealed.

All the franchisees entered into Agreements that contained arbitration clauses as a “condition precedent to the commencement of legal action for all disputes arising out of or relating to the franchise agreement.” Id. at 2.  The franchise agreements provided that the laws of the State of Illinois would govern the Agreements.  The franchisees were required to sublease their premises from a leasing company, We Care Hair Realty (“Hair Realty”), an alter ego of We Care Hair.  Under the subleases, arbitration was not required, but the subleases allowed the leasing company to file eviction lawsuits against a franchisee for any breach of the sublease. See id.  There was a cross-default provision in every sublease. That meant that every breach of the Agreement would also be a “cross-default” precipitating a breach of the sublease.  The uniform offering circular for We Care Hair salons advised the prospective franchisees that the leasing company, Hair Realty, could terminate a sublease without We Care Hair also terminating the Agreement. See id.

On appeal, the franchisees contended that the District Court erred in failing to give full faith and credit to the Illinois State Circuit Court’s decision holding the arbitration clauses unenforceable.  They based this on the legal concept of  res judicata (claim preclusion) which states that if one court issues a ruling, a second court will be bound to apply that ruling if:

1) a final judgment or order on the merits has been entered by a court of competent jurisdiction;

2) the same causes of action were involved in both; and

3) the identical parties or their privies were litigants in both lawsuits.

Id. at 4.

The Appellate Court found that since the Illinois Circuit Court’s order was not a final order, res judicata did not apply. Therefore, the District Court did not err in independently finding that the arbitration clauses were enforceable.  See id. at 4.

Next, the franchisees claimed that the District Court ruling was in error because the arbitration clauses and the cross-default provisions in the subleases were unconscionable.  See id.   The franchisees stated that the clauses were unconscionable because they “required[d] the franchises to arbitrate their claims while permitting the franchisor to litigate its claims through eviction actions filed in the name of the alter ego leasing company.” See id.

However, as the Seventh Circuit noted, Illinois courts examine the circumstances existing at the time of the contract’s formation when assessing the enforceability of a contractual provision. See id.  This means that the bargaining positions of the parties were examined and a determination was made as to whether the provisions operation would result in unfair surprise. See id.  The Seventh Circuit found that the arbitration clauses did not create unfair surprise in that case.

The Seventh Circuit acknowledged that each franchisee was provided with a copy of the uniform offering circular before signing the Agreement and it clearly disclosed all of the terms and rights of the parties. See id. at 5. Furthermore, the Seventh Circuit felt that the franchisees were not unsophisticated or helpless consumers and were not forced into the Agreements.  See id. Ultimately, the Seventh Circuit affirmed the District Court’s holding, and held that the arbitration clauses, even when coupled with the cross-default provisions of the subleases, were not unconscionable.

Before invalidating an arbitration clause in a Franchise Agreement, a Court may consider the circumstances existing at the time of the parties’ transaction along with any other evidence displaying an unequal bargaining power between the parties.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Does the New Jersey Franchise Practices Act Invalidate Forum Selection Clauses in Franchise Agreements?

One of the key questions under the New Jersey Franchise Practices Act is whether it invalidates clauses in a contract mandating the place a lawsuit under that contract must be filed.  This is called a “forum selection clause”

This issue was addressed in the recent case of The Business Store, Inc., v. Mail Boxes Etc., et. al., Civ. Action No. 11-3662 (D.N.J. February 16, 2012). In that case the court found that the forum selection clause mandating California as the place for lawsuits to be brought would not be enforced. The Court found that the following factors weighed in favor of using New Jersey as the proper forum under the facts of that case:

  1. The parties’ preferences
  2. Whether the claim arose elsewhere, i.e., in a different forum
  3. The convenience of the parties and witnesses
  4. The location of books and records
  5. The public interest

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

How Far Does the Jurisdiction of the New York Franchise Act Reach?

Courts have traditionally interpreted a wide-ranging jurisdiction for the New York Franchise Sales Act (“NYSFA”). New York-based franchisors that offer and sell franchises anywhere in the world from their New York offices are required to comply with the statute’s provisions. N.Y. Gen. Bus. Law § 683. However, that scope could be getting smaller.

A recent case held that the NYFSA did not apply to an out of state franchisee. JM Vidal, Inc. v. Texdis USA Inc., 746 F.Supp.2d. 599 (S.D.N.Y. 2011).  In that case, the plaintiff, franchisee JM Vidal (“JMV”), purchased and operated an MNG by Mango (“Mango”) franchise store in Bellevue, Washington. After the retail store failed, JMV sued the defendant, franchisor Texdis USA (“Texdis”), under the NYFSA as well as the relevant Washington state statute, claiming they had violated the pertinent Franchise Agreement. JMV asserted six claims under each state’s statute, including claims that Texdis offered to sell a franchise without having registered the offer with the state; fraudulently misrepresented the likely sales of JMV’s prospective franchise; and breached its duty of dealing with JMV in good faith.

Among other defenses, Texdis argued that JMV’s claims under the NYSFA should fail because the New York statute did not apply to the sale of the franchise. The United States District Court for the Southern District of New York considered the language of the statute and determined that it only applied when a person offered to sell or sells a franchise in the state of New York. N.Y. Gen. Bus. Law § 683(1). An offer or sale is made in New York when:

1) an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state; or

 2) the offer either originated from this state or is directed by the offeror to this state and received at the place to which it is directed. An offer to sell is accepted in this state when acceptance is communicated to the offeror from this state.

Id. at § 681(12).

The Court determined that there was no evidence suggesting that the offer or sale of the Mango franchise occurred anywhere other than Washington. More importantly, the Court found that no part of the transaction between JMV and the Mango franchise occurred in New York. Thus, the Court held that NYSFA was not applicable since a New York statute “cannot have any effect whatsoever on the nationwide marketing of franchises if the franchisor elects to conduct his activities outside of this State and with non-residents.” Id. at 617 (citing Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F.Supp. 186, 191 (S.D.N.Y. 1984).

JMV’s lone argument for the application of the NYSFA was that the Franchise Agreement contained a choice-of-law provision that stated it would be “interpreted and construed under the laws of the State of New York.” Id. JMV argued that because the Agreement stated that it would take effect upon “execution by [Texdis],” which has its principal place of business in New York, the Agreement must have been signed in New York and thus should have been “deemed” to have been made in New York. Id. The Court rejected this argument, holding that to accept such an argument would allow the NYSFA to apply to every instance when the franchisor is a New York corporation. “But the NYSFA could easily have said as much, and it conspicuously does not,” the Court stated. Id.  “Instead, only the franchisee’s domicile matters for purposes of determining whether the statute applies.” Id. The Court granted Texdis summary judgment on all of the NYSFA claims.

The Court’s decision is slightly surprising. An article by David Kaufmann, former New York special deputy attorney general, in the October 25, 2011 edition of the “New York Law Journal” said the Court’s decision “appears to conflict with both the express language of the New York Franchise Act itself and with the constitutional precedent…advanced in the Mon-Shore decision.” Kaufmann, who wrote the NYSFA while serving as special deputy attorney general, said “the state of incorporation of a franchisor is entirely irrelevant to New York Franchise Act coverage.” It will be interesting to see if the other courts interpret the statute in a manner similar to the JM Vidal Court.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

When Can the New York Franchise Sales Act Be Used to Dispute a Termination?

In 1981, a New York insurance company, William J. Hofmann Agency (“Hofmann”), entered into an Agency Agreement (“Agreement”) with an insurance underwriter, Kemper. Both parties hoped the arrangement would prove mutually profitable, but those expectations were dashed when one party prospered and the other faced bleak profits. Hofmann enjoyed substantial growth in its volume of business while Kemper experienced high loss ratios.  This imbalance led to a rift between the business partners and Kemper sought to exercise his termination rights under the Agreement in order to sever the unprofitable relationship.

To preserve its revenue stream, Hofmann tried to mend the relationship woes.    But when those efforts failed, Hofmann claimed fraud under the New York Franchise Sales Act (the “Franchise Sales Act”) in order to dispute the alleged illegal termination, New York Franchise Sales Act, N.Y. Gen. Bus. Law § 680 et seq. (McKinney).

The Franchise Sales Act was enacted to combat abuses accompanying the growth of the franchising industry. See A.J. Temple Marble & Tile, Inc. v. Union Carbide Marble Care, Inc., 663 N.E.2d 890, 892 (1996). The Act requires that franchises comply with comprehensive disclosure and registration requirements. Id. In addition, it spells out an expansive antifraud provision as well as civil remedies specific to franchisors. Id.

However, before a business entity may recover under the Act, the business must be an actual franchise. Id. Also, any such claim must be brought within a three-year statute of limitations, which begins to run on the date the parties enter into the franchise agreement.  See N.Y. Gen. Bus. Law § 691(4) (McKinney); see also Zaro Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276, 287 (S.D.N.Y. 1991).

In the lawsuit involving these parties, Keeney v. Kemper National Insurance Co., the insurance company contended that because it made premium payments to Kemper, a franchise relationship had resulted. Keeney v. Kemper National Insurance Co., 960 F. Supp. 617 (E.D.N.Y. 1997). . However, the court dismissed the cause of action on the grounds that the Agreement was a “‘garden variety’ commercial contract,” not a franchise agreement under the Act as a matter of law.  Id.

The lesson here is that if a business entity seeks relief under the New York Franchise Sales Act, that entity must first ensure it is an actual franchise.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Can a New Jersey Car Dealer Compel its Franchisor to Transfer Ownership of the Dealership?

In the franchise industry, there are two key stakeholders: the franchisee and the franchisor.  Generally, both parties meet eye-to-eye when profits are made and payments are received on time. True, there are multiple provisions to any franchise agreement.  Even so, the basic franchise formula remains constant: the franchisee pays the franchisor for product that the franchisee then sells to the public. But what happens when that formula breaks down?

In VW Credit, Inc. v. Coast Automotive Group, Ltd., 346 N.J. Super. 326 (App. Div. 2002), Coast Automotive Group, Ltd. (“Coast”), a luxury car dealer, suffered a fire at its automobile dealership and found itself unable to pay its creditor. That creditor was VCI Credit, Inc., a wholly owned subsidiary of Volkswagen of America, Inc. (“VWOA”).  Id. at 331.  After filing for bankruptcy, Coast agreed to transfer its dealerships, associated vehicles, equipment and underlying real estate to a third party in exchange for a $5 million loan.  However, in a letter of disapproval, Coast’s franchisors, VWOA and Audi of America (“AOA”), rejected the transfer.

Under N.J.S.A. 56:10-6, Coast was required to provide written notice to VWOA and AOA of the proposed transfer.  Also, that same section “requires a franchisor to issue a letter of disapproval [within 60 days] if the franchisor objects to the proposed transferee as unqualified.”  Coast at 332.

However, if a franchisor rejects the transfer, it must do so in good faith. In the VW Credit case, the trial court deemed the disapproval letters to be “void and ineffective, because VWOA and AOA did not advise . . . [the third party transferee] of the conditions for franchise approval.”  Id. at 333.  As the trial court stated, “if a franchisor is entitled to reject a good faith but deficient application at the same time when it hasn’t fully disclosed its requirements for an acceptable application, then the Franchise Practices Act would have virtually no teeth . . .”  Id.  Therefore, VWOA and AOA “did not act in good faith when they withheld approval [of the transfer].” Id. 

Given this rationale, the trial court approved the transferee’s applications because it found that VWOA and AOA unreasonably withheld their approval.  Id. at 334.  The Appellate Division of the Superior Court of New Jersey affirmed the trial court’s decision.  Id.

In sum, under the right circumstances, a franchisee may compel a franchisor to consent to a transfer if the franchisor’s disapproval of that transfer is unreasonable or without good cause.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Is a NJ Franchisee Normally Entitled to Reimbursement of its Attorneys Fees When it Sues a Franchisor?

No one enters into a franchise assuming that someday, they will need to file a lawsuit to enforce their rights. Unfortunately, however, sometimes that need does arise. The first and foremost question at that point, from the franchisee’s perspective, is can I receive reimbursement for my legal fees and costs?

Fortunately, in limited circumstances, the law does provide just such a remedy. The New Jersey Franchise Act (N.J.S.A. 56:10-10) states:  “Any franchisee may bring an action against its franchisor for violation of this act in the Superior Court of the State of New Jersey to recover damages sustained by reason of any violation of this act and, where appropriate, shall be entitled to injunctive relief.  Such franchisee, if successful, shall also be entitled to the costs of the action including but not limited to reasonable attorney’s fees. “

The court in Westfield Centre Service, Inc. v. Cities Service Oil Company, 172 N.J. Super 196, 203 (Ch. Div. 1980) analyzed the need for this statutory provision from the perspective of the disparity in bargaining power between the franchisor and franchisee.  “Where such disparity exists the right to award counsel fees against the more powerful party is justifiable in an effort to maintain a reasonable balance between them.”  Id. Thus in order to level the playing field, a franchisee can usually recover his attorney fees in a successful suit against a franchisor.

The general rule of thumb is that when a statute includes an attorney’s fee reimbursement provision, the Legislature is seeking to encourage lawsuits that would further a public policy objective.  Essentially, the Legislature is hoping that private individuals and entities will litigate such matters and, therefore, discourage the very practices that the statute outlaws.  For example, in this case, the Legislature determined that it was in the public’s interest to encourage lawsuits by the franchisees against franchisors who might take advantage of the latter’s superior bargaining power and resources.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

What is the Definition of a Franchisee under the NJ Franchise Practices Act?

In Liberty Sales Associates, Inc. v. Dow Corning Corporation, 816 F. Supp. 1004 (D.N.J. 1993), the court reconsidered its previous decision dismissing Liberty Sales Associates, Inc.’s (“Liberty”) claim for wrongful termination under the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to 20 (the “Act”) in light of the New Jersey Supreme Court’s ruling in Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324 (1992).

The underlying facts were straightforward. In 1986, Liberty entered into an exclusive distribution contract with Dow Corning Corporation (“Dow”) to sell fire stop products bearing Dow’s trademark in Pennsylvania, Delaware and parts of New Jersey and New York.  Liberty asserted that Dow later allowed Hilti, Inc. to sell Dow-created unbranded fire stop products in the same restricted territory, which eventually led to the end of the relationship between Liberty and Dow.

In large part, the lawsuit concerned whether the relationship was wrongfully terminated. In order to determine that, the court first had to determine whether Liberty and Dow were a “franchise” as defined by the Act.   To be a franchise, (a) the relationship must have had  a “community interest,” (b) the franchisor must have granted a “license” to the franchisee to use its trademark or servicemark and (c) the agreement must have contemplated that the franchisee would have a “place of business” in New Jersey.

In Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324 (1992), the court determined that the Act overrides any contractual provision in which the parties agree to submit to a particular state’s governing law.  As such, even though the agreement in Liberty Sales Associates v. Dow Corning Corporation listed Michigan as the governing law, the New Jersey Act still applied.

The court next considered the “place of business” requirement. It determined that Liberty did not operate a place of business in New Jersey.  The Act provides that it applies to a franchise that “contemplates or requires the franchisee to establish or maintain a place of business within the State of New Jersey.”  N.J.S.A. 56:10-4.  Further, a “place of business” is defined as a “fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or offers for sale and sells the franchisor’s services.  Place of business shall not mean an office, a warehouse, a place of storage, a residence or vehicle.”   N.J.S.A. 56:10-3(f).

Liberty opened an office in New Jersey in 1976.  Therefore, Liberty had a New Jersey office at the time the contract was signed with Dow. The court thus inferred that Dow contemplated that Liberty would always have a New Jersey office. Nevertheless, the court was concerned that Liberty’s “place of business” was the Liberty president’s house.  The President would make sales calls from his home office and would store the Dow products in his garage.  Clients would pick up the products from the President’s house with most of the product demonstrations occurring at the client’s facilities. Therefore, the court determined that Liberty’s “place of business” was not a store or place used to sell Dow’s products.  Instead, it found that Liberty’s “place of business” was an office, warehouse, place of storage or residence.  Therefore, it did not come within the Act’s definition of a franchise.

The court also determined that Dow had not granted Liberty a license in the original agreement.  Under the Act, a franchisee must be granted a “license to use a trade name, trade mark, service mark or related characteristics.” N.J.S.A. 56:10-3. 

Admittedly, the court in Neptune T.V. & Appliance Serv., Inc. v. Litton Sys., Inc., 190 N.J. Super 153 (App. Div. 1983) found that a license could be found even when the franchisee merely relies on the franchisors goodwill to establish its business.  The goodwill must not only help the franchisee sell products but must attach to the entire business.  However, in this case, Dow sought to capitalize on the Liberty president’s reputation as a “foam man.”  Liberty’s customers bought Dow’s products not just because of the goodwill behind Dow’s trademark, but also because of the expertise of Liberty’s president.  Further, Liberty did not just sell Dow products.  It also sold Dow’s competitors’ products.

Under the Act, the franchisee must not merely utilize the franchisor’s trademarks, but also promote the franchisor’s trademarks.    In this instance, Liberty merely used Dow’s trademark to sell the products.  It did not use the mark to further promote Dow’s business or to create more goodwill for Dow. Since Liberty failed to meet either the “place of business” or “license” requirements of the Act, the court did not find it necessary to analyze the “community of interest” requirement.

In view of this, the court found that a franchise did not exist between Dow and Liberty, and thus reaffirmed its decision to grant summary judgment in favor of Dow.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Is Injunctive Relief Available to Enforce the NJ Franchise Practices Act?

Under the New Jersey Franchise Practices Act (“Act”), N.J.S.A. 56:10-1 et seq., a franchisor cannot terminate a franchise without good cause.   Specifically, the Act states “it shall be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause.”

When a franchisee believes that a franchisor is terminating without “good cause” the franchisee may seek an injunction, which is precisely what happened in Atlantic City Coin & Slot Service Company, Inc. v. IGT 14 F.Supp.2d 644 (D.N.J. 1998). 

In that case, IGT signed an initial agreement with Atlantic City Coin & Slot Service Company, Inc.  (“AC Coin”) in 1983 to distribute and promote electronic gaming devices.  Sales flourished, and in 1993, IGT and AC Coin entered into a new agreement.  However, in 1998 IGT sought to terminate its relationship with AC Coin for economic or business reasons.  Since a franchisor may not terminate the agreement without a good cause, AC Coin filed an action for a preliminary injunction under the Act to prevent IGT from terminating the 1993 agreement.

 In the Third Circuit, the standard for a preliminary injunction is as follows:

(1)   A reasonable probability of ultimate success on the merits;
(2)   That the movant will be irreparably injured if relief is not granted;
(3)   That the relative harm which will be visited up the movant by the denial of the injunction relief is greater than that which will be sustained by the party against who, relief is sought; AND
(4)   The public interest in the grant or denial of the requested relief, if relevant. 

Atlantic City Coin & Slot Service Company, Inc. v. IGT 14 F.Supp.2d 644 at 657 (1998).

Under the first prong, the court sought to determine whether a franchise relationship existed between the parties and whether the agreement was terminated for “good cause.”    After reviewing IGT and AC Coin’s relationship, the court determined there was reasonable probability that a franchise likely existed between the parties and that the agreement was not terminated for good cause.

The court next turned to the second prong, which was to determine whether AC Coin would be harmed if injunctive relief was withheld.  To prove it would be irreparably harmed, AC Coin had to prove that the harm caused could not be compensated by money.  It had to be some type of harm that once done could not be righted.

The Third Circuit has held that the termination of a longstanding business relationship can result in irreparable harm.   The court in Carlo C. Gelardi Corp. v. Miller Brewing Co., 421 F.Supp. 233, 236 (D.N.J. 1976), found that “the loss of business and good will, and the threatened loss of the enterprise itself, constitutes irreparable injury to the plaintiff sufficient to justify the issuance of preliminary injunction.”

The court found that if the relationship between AC Coin and IGT was severed, AC Coin would lose revenue because it would not have a supply of machines to sell, lease or license nor would it have machines to service.  Additionally, the termination of the relationship could potentially harm AC Coin’s goodwill in Atlantic City.  AC Coin had promoted and built IGT’s reputation to the point that casinos would not simply buy another manufacturer’s products.  The casinos believed that the IGT’s products were the superior.  If the relationship was terminated, AC Coin would have to fight that perception to sell its new product, even though, ironically, it was the one that created the goodwill.  For these reasons, the court found that AC Coin would suffer irreparable harm if the relationship was terminated.

The court then looked at the third prong to determine if the franchisor would be harmed by the injunction.  An injunction should not be granted if it will have a significant detrimental effect on the franchisor.  The court found that IGT did not assert how it would be harmed by an injunction other than the fact that it would lose the additional profits it would gain from dealing directly with the casinos.  Therefore, the court found that the loss of the additional profits was insufficient for the court to prevent the issuance an injunction.

Finally, the court analyzed the fourth prong or the public policy implications of granting or denying an injunction.  The court looked at the underlying public policy reasons for the Act to determine whether an injunction was appropriate.  As stated in Westfield Centre Serv., Inc. v. Cities Serv., Oil Co., 86 N.J. 453, 461 (1981), the public policy behind the Act is that “[w]hen enacted, the drafters of the Act recognized that although both parties to a franchise relationship may reap economic benefits therefrom, the disparity in their respective bargaining power may lead to unconscionable provisions in the franchise agreements… Franchisors are apt to draw contracts permitting them to terminate or refuse to renew franchise at will or for a wide variety of reasons including failure to comply with unreasonable conditions… The unfortunate result was that some franchisors terminated or refused to renew viable franchises, leaving franchisees with nothing in return for their investment,”

Further, Justice Sullivan in Shell Oil Co., v. Marinello, 63 N.J. 402 (1973), found that provisions of franchise agreements that allowed for termination without good cause were void as against public policy.  The court therefore found that the Act was meant to protect against the harm AC Coin would incur if an injunction was not granted.

As such, the court granted AC Coin’s request for a preliminary injunction to prevent IGT from terminating the agreement.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Motor Vehicle Franchises: The Relationship Between the Franchisor and the Franchisee

Most consumers that bring their vehicle in for service do not realize that the repair is being done by an independent franchisee rather than an employee of the company that advertises those services.  Indeed, there is an inherent tension between the legal obligations of the franchisee and the franchisor.  For example, if the franchisor does not supply sufficient parts and materials, the franchisee may not be able to perform the repairs.  Likewise, in the event that the franchisee does not undertake repairs to the vehicle in a comprehensive manner, that may be a violation of the franchisor’s warranty.

In essence, the franchisor and franchisee are essentially joined at the hip because a failure to serve the customer by one of them will inevitably undermine the customer’s relationship with the other.

New Jersey law has addressed this issue in a rather comprehensive manner.  Specifically, N.J.S.A. 56:10-15 provides an elaborate structure upon which the motor vehicle repair franchise rests.  Set forth below is the text of this statute.  We urge any franchisee or franchisor involved in a motor vehicle repair franchise to read this language carefully:

If any motor vehicle franchise shall require or permit motor vehicle franchisees to perform services or provide parts in satisfaction of a warranty issued by the motor vehicle franchisor:

a. The motor vehicle franchisor shall reimburse each motor vehicle franchisee for such services as are rendered and for such parts as are supplied, in an amount equal to the prevailing retail price charged by such motor vehicle franchisee for such services and parts in circumstances where such services are rendered or such parts supplied other than pursuant to warranty; provided that such motor vehicle franchisee’s prevailing retail price is not unreasonable when compared with that of the holders of motor vehicle franchises from the same motor vehicle franchisor for identical merchandise or services in the geographic area in which the motor vehicle franchisee is engaged in business.

b. The motor vehicle franchisor shall not by agreement, by restrictions upon reimbursement, or otherwise, restrict the nature and extent of services to be rendered or parts to be provided so that such restriction prevents the motor vehicle franchisee from satisfying the warranty by rendering services in a good and workmanlike manner and providing parts which are required in accordance with generally accepted standards. Any such restriction shall constitute a prohibited practice hereunder.

c. The motor vehicle franchisor shall reimburse the motor vehicle franchisee pursuant to subsection a. of this section, without deduction, for services performed on, and parts supplied for, a motor vehicle by the motor vehicle franchisee in good faith and in accordance with generally accepted standards, notwithstanding any requirement that the motor vehicle franchisor accept the return of the motor vehicle or make payment to a consumer with respect to the motor vehicle pursuant to the provisions of P.L.1988, c. 123 (C.56:12-29 et seq.).

d. For the purposes of this section, the “prevailing retail price” charged by: (1) a motor vehicle franchisee for parts means the price paid by the motor vehicle franchisee for those parts, including all shipping and other charges, multiplied by the sum of 1.0 and the franchisee’s average percentage markup over the price paid by the motor vehicle franchisee for parts purchased by the motor vehicle franchisee from the motor vehicle franchisor and sold at retail. The motor vehicle franchisee may establish average percentage markup under this section by submitting to the motor vehicle franchisor 100 sequential customer paid service repair orders or 90 days of customer paid service repair orders, whichever is less, covering repairs made no more than 180 days before the submission, and declaring what the average percentage markup is. The average percentage markup so declared shall go into effect 30 days following the declaration subject to audit of the submitted repair orders by the motor vehicle franchisor and adjustment of the average percentage markup based on that audit. Only retail sales not involving warranty repairs, parts covered by subsection e. of this section, or parts supplied for routine vehicle maintenance, shall be considered in calculating average percentage markup. No motor vehicle franchisor shall require a motor vehicle franchisee to establish average percentage markup by a methodology, or by requiring information, that is unduly burdensome or time consuming to provide, including, but not limited to, part by part or transaction by transaction calculations. A motor vehicle franchisee shall not request a change in the average percentage markup more than twice in one calendar year; and (2) a recreational motor vehicle franchisee for parts means actual wholesale cost, plus a minimum 30% handling charge and any freight costs incurred to return the removed parts to the motor vehicle franchisor.

e. If a motor vehicle franchisor supplies a part or parts for use in a repair rendered under a warranty other than by sale of that part or parts to the motor vehicle franchisee, the motor vehicle franchisee shall be entitled to compensation equivalent to the motor vehicle franchisee’s average percentage markup on the part or parts, as if the part or parts had been sold to the motor vehicle franchisee by the motor vehicle franchisor. The requirements of this section shall not apply to entire engine assemblies and entire transmission assemblies. In the case of those assemblies, the motor vehicle franchisor shall reimburse the motor vehicle franchisee in the amount of 30% of what the motor vehicle franchisee would have paid the motor vehicle franchisor for the assembly if the assembly had not been supplied by the franchisor other than by the sale of that assembly to the motor vehicle franchisee.

f. The motor vehicle franchisor shall reimburse the motor vehicle franchisee for parts supplied and services rendered under a warranty within 30 days after approval of a claim for reimbursement. All claims for reimbursement shall be approved or disapproved within 30 days after receipt of the claim by the motor vehicle franchisor. When a claim is disapproved, the motor vehicle franchisee shall be notified in writing of the grounds for the disapproval. No claim that has been approved and paid shall be charged back to the motor vehicle franchisee unless it can be shown that the claim was false or fraudulent, that the services were not properly performed, that the parts or services were unnecessary to correct the defective condition, or that the motor vehicle franchisee failed to reasonably substantiate the claim in accordance with reasonable written requirements of the motor vehicle franchisor, provided that the motor vehicle franchisee had been notified of the requirements prior to the time the claim arose and the requirements were in effect at the time the claim arose. A motor vehicle franchisor shall not audit a claim after the expiration of 12 months following the payment of the claim unless the motor vehicle franchisor has reasonable grounds to believe that the claim was fraudulent.

g. The obligations imposed on motor vehicle franchisors by this section shall apply to any parent, subsidiary, affiliate or agent of the motor vehicle franchisor, any person under common ownership or control, any employee of the motor vehicle franchisor and any person holding 1% or more of the shares of any class of securities or other ownership interest in the motor vehicle franchisor, if a warranty or service or repair plan is issued by that person instead of or in addition to one issued by the motor vehicle franchisor.

h. The provisions of this section shall also apply to franchisor administered service and repair plans:

     (1) if the motor vehicle franchisee offers for sale only the franchisor administered service or repair plan; or

     (2) if the motor vehicle franchisee is paid its prevailing retail price for all service or repair plans the motor vehicle franchisee offers for sale to purchasers of new motor vehicles; or

     (3) for the first 36,000 miles of coverage under the franchisor administered service or repair plan, if the warranty offered by the motor vehicle franchisor on the motor vehicle provides coverage for less than 36,000 miles; or

     (4) for motor vehicles covered by a franchisor administered service or repair plan, if the motor vehicle franchisee does not offer for sale the franchisor administered service or repair plan.

With respect to franchisor administered service or repair plans covering only routine maintenance service, this section applies only to those plans sold to customers on or after the effective date of P.L.1999, c.45.

     i. A motor vehicle franchisor shall make payment to a motor vehicle franchisee pursuant to incentive, bonus, sales, performance or other programs within 30 days after receipt of a claim from the motor vehicle franchisee. When a claim is disapproved, the motor vehicle franchisee shall be notified in writing of the grounds for disapproval. No claim shall be disapproved unless it can be shown that the claim was false or fraudulent, or that the motor vehicle franchisee failed to reasonably substantiate the claim in accordance with reasonable written requirements of the motor vehicle franchisor, provided that the motor vehicle franchisee had been notified of the requirements prior to the time the claim arose and the requirements were in effect at the time the claim arose. A motor vehicle franchisor shall not audit a claim after the expiration of 12 months following the payment of the claim.

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