Category Archives: new jersey

Does Your Company Need to Circulate the Conscientious Employee Protection Act Notice to its Employees?

Employers should take notice of the poster that small New Jersey employers are required to display as mandated in the New Jersey Conscientious Employee Protection Act (CEPA).

Under the CEPA, employers with ten or more employees must distribute notice of the CEPA law once a year to their employees. Employers should post the most recent whistleblower poster in an area that is visible and accessible for employees.

New Jersey’s Department of Labor and Workforce Development requires employers to display several posters for employees to be able to read and review. The posters range from information on wage and hour law, child labor law and family leave insurance. CEPA, also known as the “Whistleblower Act,” was designed to provide broad protections against employer retaliation for employees acting within the public interest and blow the whistle on illegal or unethical activity committed by their employers or co-employees.

CEPA states that New Jersey law prohibits an employer from taking any retaliatory action against an employee because the employee:

a) Discloses or threatens to disclose to a supervisor or public body conduct that the employee believes violates a law, rule or regulation promulgated pursuant to law;
b) Provides information to or testifies before public bodies regarding such conduct;
c) Objects or refuses to participate in an activity, policy or practice the employee reasonably believes violates a law, rule, regulation or public policy, or is fraudulent or criminal. 

As a result of the requirement, all employers with ten or more employees should immediately acquire and post the newest whistleblower poster in an area that is visible and accessible to employees. Additionally, employers should provide employees with an annual notice, either via e-mail or in some handwritten form. It is also advisable to have employees complete acknowledgement forms to provide proof the employee has read and understood the notice it has received.

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

When Will a Nonprofit Corporation That Works with a For Profit Corporation Lose the Charitable Property Tax Exemption?

A nonprofit company should generally maintain a solid boundary between its activities and those of a related for profit company. A recent decision of the New Jersey Supreme Court highlighted why this is so important.

In that case, the Court held that nonprofit companies could lose their property tax exemptions if they commingle their affairs with affiliated entities that operate for profit. International Schools Services v. West Windsor Township, 207 N.J. 3 (N.J. 2011).

The plaintiff, International Schools Services, Inc. (ISS), was a nonprofit corporation that ensured that American children living overseas receive a quality education. In 1999, ISS created Independent Schools Group, Inc. (ISG), a for profit corporation that provided insurance and investment services to the educational community abroad. In 2002, ISS created ISS Financial and Insurance Network Inc. (ISSFIN), a for profit corporation that provided insurance services to ISS clients. The headquarters of both ISG and ISSFIN was located on ISS-owned property in West Windsor, New Jersey. Both ISG and ISSFIN paid below-market rates for their lease of the office space and ISS issued an unsecured loan to ISG. Additionally, ISS’ president was a member of the board of directors for both for profit entities.

West Windsor granted ISS a property tax exemption from 1990 through 2001 under New Jersey Statute 54:4-3.6. However, after reviewing the entity’s activities, the town revoked the exemption based on ISS’ close relationship with ISG and ISSFIN. The Tax Court rejected the plaintiff’s appeal and the Appellate Division partially agreed.

In 1984, the New Jersey Supreme Court set out three criteria for a nonprofit corporation to meet in order to secure a tax exemption for its real property:

  1. It must be organized exclusively for the moral and mental improvement of men, women and children.
  2. Its property must be actually and exclusively used for the tax-exempt purpose.
  3. Its operation and use of its property must not be conducted for profit.

Paper Mill Playhouse v. Millburn Township, 95 N.J. 503, 506 (N.J. 1984).

The Legislature has since amended the second prong of the test, removing the requirement of exclusivity and instead permitting an exemption for property that is “actually used” in connection with tax-exempt functions. The Court considered this change and asked “whether the Legislature’s elimination of the exclusivity requirement allows a nonprofit entity to conduct for profit activities in a commingled fashion on its owned and occupied property.” International Schools Services at 6.

The Court determined that the Legislature did not intend for such a result, because doing so would allow a nonprofit entity “to claim a property tax exemption when it has become inseparably entangled with for profit entities” and thus “would allow indirect taxpayer subsidization of those entities.” Id. at 42. The Court upheld West Windsor’s denial of the tax exemption “because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way – from ISS to the for profit entities.” Id. at 4.

This decision is important for nonprofit companies that have close corporate relations with for profit companies that might jeopardize their ability to receive tax exemptions. It suggests that allowing a nonprofit entity to get too close – financially or otherwise – with a for profit entity could leave the nonprofit without the tax exemptions they value so greatly.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

When Can a Plaintiff Pierce the Corporate Veil of a Limited Partnership?

New Jersey might be joining a group of states that have decided to allow plaintiffs to pierce the corporate veil of limited partnerships, but the state’s courts would only allow it in limited circumstances.

A limited partner is one who does not insinuate himself in the running of the partnership, and is therefore, not jointly and severally liable for the acts and omissions of the other partners. However, in a matter of first impression, the Appellate Division of the Superior Court of New Jersey recently held that a plaintiff would be able to pierce the corporate veil of a limited partner in certain situations, including when that partner dominated the partnership or used it to perpetuate a fraud or injustice. Canter v. Lakewood, 420 N.J.Super. 508, 22 A.3d 68.

The suit arose when the plaintiff, Sanford Canter, broke his leg during a slip-and-fall at Lakewood at Vorhees (“Lakewood”) nursing home, where he was a resident. The defendants named in the negligence suit included Seniors Healthcare, Inc. (“SHI”) and Ozal of Lakewood (“Ozal”), each a limited partner of Lakewood. Carter asserted that, in addition to Lakewood, the limited partners of the nursing home should also be liable.

While generally a limited partner is shielded from liability for the partnership’s obligations, the New Jersey Statutes set forth that the two exceptions to this rule:

a) a limited partner is also a general partner, or
b) a limited partner participates in the control of the business.

N.J.S.A. 42:2A-27a.

Nevertheless, N.J.S.A. 42:2A-27b’s “safe harbor” provision allows a limited partner to engage in certain activities of the partnership without being considered in control of the business. Those safe harbor activities include being a shareholder of a general partner; consulting or advising with a general partner; or being the partnership’s contractor, agent or employee.

However, the Canter Court held that a limited partner may also be found liable when the partner “dominates” the partnership or uses it to commit a fraud or injustice. Factors that are considered during this determination of “domination” include:

a) the limited partner’s role in day-to-day operations of a business
b) the limited partner’s decision-making authority compared to that of a general partner
c) Capitalization of the entity relative to the nature of the company’s business

SHI argued that veil piercing did not apply to a limited partnership and, even if it did, that SHI did not dominate Lakewood or use it to perpetuate a fraud or injustice. The Court agreed with SHI’s second argument, stating that “corporate veil-piercing principles can apply to a limited partnership; however, the record does not support veil piercing in this case.”

The Court reversed the lower court’s decision and granted SHI’s motion for summary judgment, finding no evidence that it had dominated Lakewood or used its control in the company to perpetuate any fraud. The Court’s decision aligns New Jersey law with that of other states who have adopted the Revised Uniform Limited Partnership Act. It is significant  because it provides a framework for courts to use when determining whether to pierce the shield of a limited partner.  

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

When is it Appropriate to Use an Indemnification Provision in Selling a Business?

Most people selling their business are unaware (at lease at the outset) that the contract of sale normally includes some sort of indemnification language. There are many variations, but in the typical case, this means that the seller agrees to hold the buyer harmless from claims of third parties relating to what the seller did or did not do when they owned the business. Likewise, the buyer holds the seller harmless from claims of third parties for what the buyer does or does not do after the sale concludes.

Obviously, there are many legitimate variations to this approach. For example, if the seller is going to continue as a consultant or even employee to the business, the indemnification may need to take into account that he should continue to have some sort of indemnification obligation. Likewise, one might decide to define the indemnification obligation as applying to no more than a fixed upper amount or limit it to a certain period of time.

In the extreme case, a buyer or seller might want to take the position that there should be no indemnification provision at all. This includes situations in which the business is being sold for a relatively small sum that is less than the business is actually worth. In such a case, the seller may insist that it is being sold “as is” and “with all flaws” the same way as distressed real estate. In other words, the price figures in the risk inherent in having no indemnification clause.

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.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

May the State of New Jersey require merchants to collect zip code information from purchasers of gift cards?

The United States District Court for the District of New Jersey was recently asked to determine whether to uphold a New Jersey law requiring merchants to collect zip code information from purchasers of gift cards – which are also known as “stored value cards” (“SVC”).  New Jersey Retail Merch. Assoc. v. Sidamon-Eristoff, No. 10-5059. The purpose of collecting this information was to establish that the card was purchased in New Jersey. Having established that, if the card were not redeemed within a certain period, it would become the property of the State of New Jersey by the legal principle known as, escheat.

A group of plaintiffs led by the New Jersey Retail Merchants Association sued Andrew Sidamon-Eristoff, the Treasurer of the State of New Jersey on the grounds that the law placed an unfair burden on merchants.  The plaintiffs sought a temporary restraining order preventing the State from enforcing the portion of the law requiring merchants to collect zip code information from purchaser of SVCs at the time of sale (the “data collection provision”).  A different portion of the law – which presumed that if no zip code information was available, the presumption would be that it was purchased in New Jersey (the “place-of-purchase presumption”) – was held unconstitutional by the same District Court in an earlier proceeding.  The plaintiffs argued that the data collection provision was similarly unconstitutional on the grounds that it was so interrelated to the place-of-purchase presumption that the two could not be severed.

The District Court held that the requirement to obtain zip code information was “entirely independent from what presumption is applied when no zip code is actually obtained, and the place-of-purchase presumption is applied.”  Id. at *11.  The court reasoned that removing the place-of-purchase presumption placed the focus on the residence of the purchaser/owner of the SVC rather than on the location where the SVC was purchased.  The court also reasoned that upholding the data collection provision furthered the objective of the law, which was to reunite purchasers/owners with their abandoned property.  The court determined that the collection of zip code information assisted in fulfilling that objective.

The District Court also examined decisions of the United States Supreme Court and determined that the Supreme Court consistently held that it is the purchaser’s last known address that determines which state has the right to “escheat” – acquire title to property for which there is no owner – and “the data collection provision focuses on that key location.”  Id. at *16.  The District Court noted that in the cases it analyzed, the Supreme Court refused to permit other states – such as Pennsylvania and Delaware – to presume that all property purchased in the state had been purchased by a state resident even when no address was on record.  The Supreme Court created a method to govern the escheat of intangible property by creating the Texas priority scheme, beginning with its decision in Texas v. New Jersey, 85 S.Ct. 626 (1965).

The Texas priority scheme has two rules.  The “primary rule” states that, “the right and power to escheat the debt should be accorded to the State of the creditor’s last known address as shown by the debtor’s books and records.”  The “secondary rule” states that, “where the creditor’s last known address is unknown, or where the last known address is in a state that does not provide for the escheat of the abandoned property . . .  the right to escheat [goes] to the debtor’s State of corporate domicile.”  Per the court, the Texas line of cases clearly authorized states to require issuers of intangible property to collect the last known address of the purchaser and to rely on that address in reuniting the purchaser with her abandoned property.

In conclusion, the District Court held that the data collection provision was entirely severable from the place-of-purchase presumption and that there was no interdependence between the two provisions.  The District Court also held that “collection of the purchaser’s last known address has been sanctioned by the United States Supreme Court and is integral to the Texas priority scheme.”  Id. at *17.  As a result, the District Court denied the plaintiffs’ motion for a temporary restraining order.

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