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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.

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