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

In the State of New Jersey any determination as to the existence or non-existence of a franchise relationship requires a a factual evaluation of the legal rights and obligations between the parties.

What Constitutes a Franchise in New Jersey?

The parameters and factors to be evaluated are defined and proscribed by the New Jersey Franchise Practices Act, N.J.S.A. 56:10-3(a), which defines a "franchise" and "franchise relationship" as one  requiring:

a written agreement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristics, an in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement or otherwise.

Based on New Jersey's definition of a franchise, franchise relationships in the State of New Jersey are characterized by (a) a written agreement, (b) a trademark license, and (c) a community of interest in the marketing of goods or services.  Factors (a) and (b) are relatively self-explanatory.  As to factor (c), a "community of interest", typically exists, where the presumptive "franchisor" / party granting the trademark license, maintains control to direct and/or influence the potential franchisees marketing and business activities.  

Why Should you Care?

If your business relationship qualifies as a franchise your legal obligations and rights will exist subject to the mandates of, among other things, the New Jersey Franchise Practices Act.  That is, your relationship as "franchisor and franchisee" will not only be governed by the terms of your written agreement but also by the statutory requirements set forth in the New Jersey Franchise Practices Act.  Examples of some statutory mandates that will be imposed on your business relationship include restrictions limiting a "franchisors" ability to terminate a franchise without "good cause" and restrictions prohibiting a franchisor from imposing  unreasonable performance requirements on its franchisees.

If you are a manufacturer or distributor with "licensed" retail outlets you must be on guard that your distribution /  licensing agreement - depending on its terms - may impose and subject your business to franchise regulation and restrictions.  if you are an independent "distributor / licensee" who sells or distributes product or services - if you qualify as a franchisee  - you may have more legal protections than you realize. 

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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.

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“Unstable” would qualify as a mild assessment of the current state of our economy and the job market.  In the face of historic corporate layoffs, many skilled and hardworking individuals are considering a leap from corporate employee to small business entrepreneur and franchisee.  After speaking to many clients who have successfully made this leap, one thing is clear, before you put your savings, severance package or financial stability on the line, be prepared for some “culture shock” and understand that there are some fundamental differences between the life of a corporate employee and that of a franchisee.

Difference No.: 1 - “You are on your own”

I know this may initially sound conflicting, especially since you are considering a franchise for the very opposite reason, i.e., the support and backing that you (hopefully) will be obtaining from the franchisor and the franchise system that you select – but you must keep in mind that we are discussing the differences between life as a “corporate employee” to that of a “franchisee”.  While a franchise will afford you distinct and tangible benefits over the typical small business (benefits such as an established system, a known brand name and tested products and services) you must nevertheless remember that you will be moving from a structured corporate environment with layers of management and delegated decision making, to the “heart of small business” where every decision and every problem will be presented to you (and only you) on a daily basis.  Gone are peers and “colleagues” to “run things by” and in their place are “employees”. Employees that may even include that high school delivery boy who forgets to show up on your busiest night. 

Difference No.: 2 – “Profits Matter”

I understand that this is an obvious point.  But this is so important that it should be mentioned again and again.  So, here goes: “profits matter”.  Gone are “bad corporate quarters” that do not have a direct affect on your weekly paycheck and in its place is the reality that the success of your business will be measured on a daily, weekly and monthly basis based on how much money you earn and get to take home to your family.

Difference No.: 3 – “ Sales Skills Required”

As a franchisee and small business owner, just working hard is not enough.  You will be the face of your business and must be front and center interacting and building relationships with your customers and clients each and every day. You can’t overlook this business necessity and must make sure that you are prepared to take this step.

Difference No.: 4 – “Adjustments to your Social Calendar”

If your new business involves retail sales, be prepared for an adjustment to your social calendar. Since your new business will, most likely, experience its busiest days on the weekends, be prepared to work on the weekends and take days off on weekdays when most of your friends and family are at work.

If you have the right expectations, select the appropriate franchise and commit to hard work, the life of a franchisee can prove rewarding and add a level of independence unavailable to corporate employees.  However, before making this leap, be prepared for some culture shock and give some serious thought as to both the positive and negative adjustments that you will be required to make.  Get it right, and, hopefully, you may be on your way to adding some independence and balance to your life.   

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