New Jersey Franchise Practices Act: Franchisee Protection extended to "Constructive" Termination
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In the recent decision of Maintainco, Inc. v. Mitsubishi Caterpillar Forklift America, Inc., the Appellate Division for the Superior Court of the State of New Jersey affirmed the application of the New Jersey Franchise Practices Act ("NJFPA") to the "constructive" termination of franchisee rights. That is, actual termination is not required for a franchisee to invoke the protections of the NJFPA.
In the Maintainco decision, utilizing fundamental principals contract law, the Appellate Division held that that the franchisor / manufacturer's actions including (a) the threatened termination of the franchisee / dealer's rights, (b) the failure to disclose customary annual business plans to the franchisee, and (c) the grant of competing rights to a third party franchisee within the plaintiff franchisee's territory, constituted "constructive" acts of termination actionable under the NJFPA. In the court's well reasoned decision, the following points are instructive:
- Franchisee's faced with the "constructive" termination of their franchise rights possess a claim for violation of the NJFPA;
- "Sound and non-discriminatory" business decisions are insufficient to justify the "non-renewal" of a New Jersey franchise. The failure to renew a franchise must be based on the franchisee's failure to "substantially meet the performance requirements of the franchisor";
- Performance requirements imposed on franchisees must be "reasonable;
- Attorney fees are recoverable by a franchisee who successfully prosecutes a NJFPA claim; and
- Expert fees are not recoverable under the NJFPA.
It appears that the NJFPA will provide some protection from unlawful terminations due to encroachment on territories of franchisees, or other "punishing" and unreasonable terminations, but, of course, so many of the big franchisors in some sectors don't even offer protected territories any more because they can sell their highly visible franchises without offering protected territories under the terms of the contracts.
I have never been able to understand the purpose of the State Franchise statutes since they seem to give NO relief to franchisees who are fraudulently induced to contract because franchisees, under federal regulatory policy, are not informed of the material risk factors of unit performance statistics in the possession of the franchisor before they unknowingly buy an unperforming franchise.
Apparently, under the provisions of the FTC Rule, there is no fraudulent inducement to contract as long as the franchisor has disclosed in compliance with the federal rule. And, unfortunately for franchisees, even when the franchisor hasn't complied completely with the Federal Rule, there is no private right of action for the franchisee under federal law or state law for a substantive violation of the Federal Franchise Rule or the State Franchise Statute.
Of course, franchisees hardly ever win in court and it is not surprising that there is no recovery for "expert witness fees" that are absolutely necessary in prosecuting any kind of claim, breach or fraud, against a franchisor.
Obviously, the court or the arbitrator has the discretion to determine what is "reasonable" and case law determines that encroachment and other opportunistic behaviour of franchisors is "reasonable" as long as the conduct is permitted under the terms of the contract.
Isn't this just more "much ado about nothing" that will do little to bring relief to franchisees?