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.
© 2011 Nissenbaum Law Group, LLC