Criminal Conviction of Franchisee President Was Not Good Cause for Termination

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

A pancake restaurant franchisor violated the New Jersey Franchise Practices Act (NJFPA) by terminating a franchise on the basis of the conviction of the president and majority owner of the franchise for endangering the welfare of a child, the federal district court in Newark, New Jersey, has decided.

The conviction was not "directly related to the business conducted pursuant to the franchise" under the meaning of the NJFPA.

The franchisor was not likely to succeed on the merits of its claims that the franchisee’s continued use of the franchisor’s trademarks was unauthorized because, as long as the parties’ agreement remained valid, the franchisee had a license to use those marks. Thus, the franchisor’s motion for a preliminary injunction barring the franchisee from continuing to use its marks was denied.

The franchisor notified the franchisee that it was terminating their agreement pursuant to a provision which granted the franchisor the right to terminate immediately, without notice, upon the conviction of the franchisee or any of its principal shareholders, "of a felony or any other criminal misconduct which is relevant to the operation of the franchise." However, the franchisee continued to operate the restaurant as if it was a franchise and claimed that the termination violated the NJFPA.

The parties’ agreement stipulated that, in order for a termination to be valid, it must be lawful under the NJFPA, the court noted. Under the statute, immediate termination was warranted only when "the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise."

There was nothing in the record suggesting that the crime occurred at the restaurant or that any other direct factual nexus existed between the conviction and the business of the franchise, the court observed. The court was unwilling to accept that potential damage to the franchisor’s brand, standing alone, was sufficient to satisfy the "directly related" standard of the NJFPA.

The decision is Int’l House of Pancakes v. Parsippany Pancake, CCH Business Franchise Guide ¶14,856.