New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

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.

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In a recent decision of the United States Court of Appeals for the Second Circuit, In re American Express Merchants' Litig, 2009 WL 214525, *2, *5-*6 (2nd Cir. January 30, 2009), the Second Circuit rejected the enforcement of a "class-action waiver" clause contained in American Express's standard merchant agreement (the agreement between American Express and the restaurants and vendors that accept the American Express card).  Although the Court did not impose a per se prohibition, it held that "class action waiver clauses", may be invalidated where their implementation (i.e., prohibiting the plaintiff from joining together with others in a class action - and forcing the plaintiff to fight American Express on its own) would be to strip a plaintiff of its substantive statutory rights.  In the American Express decision, the plaintiff/vendor was one of many vendors claiming damages based upon American Express's alleged violation of federal law. The problem for this plaintiff was that, if forced to fight American Express alone (whether in court or an arbitration proceeding), it did not possess the resources to litigate against a corporate giant.

What does this mean for franchisees?  Right now, maybe not much.  But, down the line it could serve as a basis for expanding franchisee rights and possibly addressing onerous clauses in franchise agreements that undermine a franchisees "substantive rights".  For the time being, franchisees / individuals considering the purchase of a franchise, must recognize that as a small business owner and franchisee, the contractual rights and obligations specified in your franchise agreement will constitute one of your most important "business assets".  So, before buying a franchise, do your homework, read your franchise agreement, review the franchisor's disclosure document (FDD) and seek out the advice of an experienced accountant and attorney. Also, as discussed in a prior post, speak to existing franchisees. Definitely, ask questions.

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