Friday, August 27, 2010

Preliminary Injunction Halts Termination of Likely New Jersey “Franchise”

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

An engine manufacturer and its authorized dealer likely shared a “community of interest” under the meaning of the New Jersey Franchise Practices Act (NJFPA), a federal district court in Camden, New Jersey, has ruled in a not-for-publication decision. Moreover, the relationship satisfied the Act’s gross sales requirement that more than 20 percent of a franchisee’s gross sales were intended to be derived from the franchise before the franchisee was entitled to statutory protections, according to the court. Thus, the dealer was likely to succeed in establishing that it was a “franchise” protected by the statute, and its request for a preliminary injunction enjoining termination by the manufacturer was granted.

The dealer brought suit against the manufacturer, seeking to enjoin it from terminating their agreement. The manufacturer did not dispute that the dealer would be irreparably harmed if the injunction was not granted, and that the balance of the hardships between the parties, as well as the public interest, favored granting the injunction. The only preliminary injunction factor that the manufacturer disputed was the dealer’s likelihood of success on the merits. The manufacturer argued that the parties did not share the “community of interest” necessary to show that the relationship constituted a “franchise” under the NJFPA.

Caselaw indicated that a community of interest existed “when the terms of the agreement between the parties or the nature of the franchise business requires the licensee, in the interest of the licensed business’s success, to make a substantial investment in goods or skill that will be of minimal utility outside the franchise.

Indicia of Control

The relationship between the parties had the indicia of control that were the hallmark of a community of interest, the court decided. The dealer stood to lose all of the following tangible and intangible indicia of control if terminated: (1) the larger building the dealer moved to in order to accommodate business related to the manufacturer that it would not be able to fully utilize; (2) special tools and a computer system to service business related to the manufacturer, and its intangible investment in mastering such equipment; (3) signage, advertisements, apparel, and its investments in producing such items and in developing a customer basis that associated the dealer with the manufacturer’s products; (4) investments made in training employees in the manufacturer’s products, including approximately $20,000 in travel and expenses; and (5) a substantial inventory of parts for the manufacturer’s products that the dealer would have significantly less opportunity to sell, according to the court.

Unequal Bargaining Power

Courts defining a community of interest under the NJFPA also focused on the importance of unequal bargaining power between franchisor and franchisee, the court noted. A substantial portion of the dealer’s business came from the warranty work it performed for the manufacturer, the consumer relationships that emerged from such work, and customers who found the dealer through listings for dealers of the manufacturer’s products. In sum, the dealer relied heavily upon the manufacturer but the manufacturer could easily send its warranty work elsewhere and the dealer’s sales did not yield a substantial portion of the manufacturer’ profits.

The manufacturer pointed out that much of the dealer’s investments in the relationship were not required by the dealer agreement but were voluntary. However, the court’s inquiry was not limited to the four corners of the parties’ agreement. Business relationships evolved and, at the very least, the manufacturer assented to the dealer’s franchise-related expenses. Whether or not the agreement required such investments, it clearly contemplated such future investments, the court reasoned. For example, the agreement set extensive terms for the dealer’s use of the manufacturer’s mark in literature and advertising. The fact that the dealer sold products and services for the manufacturer’s competitors did not defeat the relationship’s character as a franchise.

Symbiotic Relationship

Moreover, the parties shared a symbiotic relationship that was characteristic of a community of interest in that the manufacturer conceded that its dealers were necessary to its profitability and satisfied customers of the dealer were likely to become repeat customers for both parties. The fact that the interests of the parties were sometimes at odds did not defeat the existence of a community of interest, the court ruled.

The July 29, 2010, decision in Engines, Inc. v. MAN Engines and Components, Inc., Civil Action No. 10-277, appears at CCH Business Franchise Guide ¶14,431.

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