We have recently posted about interesting developments in franchise legislation in states like Pennsylvania and Massachusetts. This post touches on a recent judicial interpretation of existing legislation in New Jersey.
Not all business arrangements fit neatly into the definition of a franchise. This often leads to litigation to determine if specific business relationships qualify for each state’s unique protections.
A New Jersey District Court case recently decided that a particular distributor was a franchisee and was, therefore, protected under the New Jersey Franchise Practices Act (“NJFPA”). In McPeak v. S-L Distribution Company, Inc., the contract between the parties specifically stated that it was not a franchise agreement and did not provide the distributor with a franchise. The agreement further prohibited the distributor (who had the exclusive right to sell and distribute products in a specified region in New Jersey) from conducting his business using the defendant-corporation’s name, trademarks or tradenames.
The court initially held that the distributor had not proven that a franchise existed, but, upon the distributor’s motion to amend his pleadings, analyzed the claims a second time to determine if a franchise existed.
The NJFPA Section 56:10-3 defines a franchise as:
1. A written arrangement for a definite or indefinite period;
2. in which a person grants to another person a license to use a trade name, trade mark, service mark or related characteristics, and
3. in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement or otherwise.
The Court considered whether a license was granted and whether there was a community of interest between the parties.
Not every agreement for use of a trademark in the sale of goods or services is a license within the meaning of the NJFPA. A franchise relationship is characterized by the use of another’s trade name so that:
– The consuming public reasonably believes that there is a connection between the licensor and licensee;
– the consuming public reasonably believes that the licensor vouches for the activity of the licensee; and/or
– the licensee is able to rely on the franchisor’s goodwill (based on the use of the tradename) to induce the consuming public to buy the licensed goods.
The court held that authorization and/or a requirement to use a tradename does not necessarily create a license. Here, however, e-mails calling the distributor a “salesperson of [defendant-corporation]” was sufficient to show that the defendant-corporation was vouching for the distributor. It was not necessary for the distributor to prove in his amended complaint that the consuming publicactually believed that the defendant-corporation was vouching for him, it was enough to plead that they reasonably could have.
The court also held that use of a promotion or tradename for “off the shelf” products, and wholesale distribution agreements can be afforded protection under the NJFPA.
Community of Interest
A community of interest is shown when a franchisor attempts to reach his ultimate consumer through entities other than his own which, although legally separate from the franchisor, are economically dependent upon him. New Jersey and Wisconsin are the only two states to use this standard to determine whether a franchise relationship exists.
A community of interest existed here because the distributor was economically dependent on the corporation-defendant, particularly in light of the fact that the agreement between the parties prohibited the distributor from selling products that defendant-corporation determined were in competition with its own products.
The decision is noteworthy, as it indicates that New Jersey courts will extend the protections under the NJFPA to protect a greater number of businesses – even those whose agreements specifically disclaim that they are a franchise. When considered in conjunction with the enhanced protections currently proposed in states nationwide, the McPeak case may indicate that courts are embracing the legislative trend, and enhancing the protections afforded to franchisees. Franchisors (or rather business owners who don’t want to be franchisors) should be aware that merely disclaiming that an agreement is a franchise is not sufficient to avoid the protections of the NJFPA.