Category Archives: new jersey franchise practices act

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