Monday, July 27, 2009

Lighting Manufacturer Restrained from Terminating Likely New Jersey “Franchise”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A manufacturer of lighting for emergency response vehicles was temporarily restrained from terminating an entity that sold and installed the manufacturer’s products, a federal district court in Camden, New Jersey, has ruled.

After deciding the threshold issue that the New Jersey Franchise Practices Act (NJFPA) was likely applicable to the dispute, the court determined that the termination likely violated both the Act’s notice requirement and its “good cause” for termination requirement. Because the other prerequisites for injunctive relief were satisfied, the requested relief was granted and a preliminary injunction hearing scheduled.

The seller brought suit against the manufacturer after the manufacturer issued it a notice of termination. In addition to seeking the order prohibiting the manufacturer from terminating the parties’ Master Distributor Agreement and compelling the manufacturer to honor its obligations under the agreement, the seller alleged common law claims, including breach of contract.

What is a Franchise?

A franchise exists under the NJFPA if: (1) there is a “community of interest” between the franchisor and the franchisee; (2) the franchisor granted a “license” to the franchisee; and (3) the parties contemplated that the franchisee would maintain a place of business in New Jersey, according to the court.

In addition, in order to meet the Act’s definition of a “franchise,” a purported franchisee was required to establish that it made sales of the alleged franchisor’s products in excess of $35,000 per year and that those sales constituted at least 20 percent of the purported franchisee’s business.

Place of Business

The seller’s complaint asserted that at its Cherry Hill, New Jersey location, it established and maintains a sales/service desk at which it (1) displays the manufacturer’s products, banners, and logos; (2) offers for sale and sells the manufacturer’s products; and (3) demonstrates and trains technicians regarding the capabilities and use of the products.

Thus, the seller would likely prove that it maintained a place of business in New Jersey, the court held.

Trademark License

The seller was likely to prove that it was granted a license to use the manufacturer’s trademarks and trade name, the court determined.

The manufacturer contended that it had not granted the seller a license as contemplated by the NJFPA; rather, it merely granted the seller limited permission to sell a brand name product.

However, the manufacturer authorized the seller to use its mark solely for the purpose of promoting the manufacturer’s products in accordance with the parties’ agreement and required the seller to maximize the sale and use its best efforts to promote, introduce, demonstrate, and solicit orders for, and sell such products, and to protect and promote the good name of the manufacturer. Therefore, the license granted to the seller was more than just a limited license given to any retailer of a product, the court reasoned.

Community of Interest

The seller was likely to prove that it had a “community of interest” with the manufacturer under the meaning of the NJFPA, the court decided. Case law explained that a community of interest under the NJFPA existed when the terms of the parties’ agreement or the nature of the franchised business required the licensee to make a substantial investment in goods or skill that would be of minimal utility outside the franchise.

The seller’s argument that it had a community of interest with the manufacturer could be boiled down to a single sentence in its brief, indicating that, without the manufacturer’s products, the seller would have no business, the court noted.

The seller’s complaint asserted that, since 2001 when the parties’ relationship of over eight years began, the seller had invested in common marketing and promotional campaigns with the manufacturer pursuant to their agreement. Further, the seller alleged that its efforts resulted in converting a significant number of customers to the products of the manufacturer from the products of competing manufacturers. Those efforts would only inure to the benefit of the manufacturer if the parties’ agreement was terminated, according to the court.

Moreover, the agreement clearly required the seller to make such investments. It required the seller to maintain both inside and outside sales forces, use its best efforts to promote and sell the manufacturer’s products, and to offer promotions on those products at least twice each year.

Minimum Sales Threshold

The NJFPA’s minimum sales threshold for a “franchise” was also likely satisfied by the parties’ relationship, the court held. Under the NJFPA, an entity was required to establish that it made sales in excess of $35,000 per year of a franchisor’s products and that those sales accounted for at least 20 percent of the entity’s overall business to qualify the entity as a franchisee entitled to the Act’s protections.

A declaration submitted by the seller stated that in the preceding 12 months, the seller’s sales of the manufacturer’s products amounted to more than $1.9 million, and those sales represented approximately 37 percent of the seller’s overall business.

Because the seller had thus demonstrated that it would likely satisfy all of the Act’s requirements for a franchise, the NJFPA applied to the parties’ dispute.

Further details of the court’s ruling in Emergency Accessories & Installation, Inc. v. Whelen Engineering Co., Inc. will appear in the CCH Business Franchise Guide.

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