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

When it comes to "franchise litigation" and disputes between franchisors and franchisees almost, inevitably, the issue of injunctive relief  is raised.  Franchisors typically seek injunctions involving (a) the turn-over of the franchise location, (b) the de-identification of the franchise location, (c) specific performance requiring the franchisee to protect the franchisors marks, and/or (d) the enforcement of non-competition covenants where the franchisee establishes a competing business.  Franchisees typically seek injunctive relief focused on the franchisee's preservation of its franchise location, enforcement of protected territories and specific performance as to the franchisor's on-going obligation to support the franchisees business and to maintain access to proprietary products and services.

So, when faced with a franchise dispute in the State of New Jersey, franchisors, franchisees and their legal counsel need to be aware of the basic but thoroughly applied standard of  review that New Jersey courts apply to applications / motions for injunctive relief.  The most commonly cited and relied upon legal decision is the decision of the New Jersey Supreme Court in  Crowe v. DeGioia. Although the Crowe decision did not involve a business or franchise dispute  (worse - it involved a marital dispute) it, nevertheless, sets the standard for New Jersey injunctions.  Under the Crowe decision, franchisors and/or franchisees seeking injunctive relief must evaluate and be aware of the following legal proofs:

• Demonstration of "Irreparable Harm".  When seeking an injunction the moving party - whether franchisor or franchisee - must demonstrate that absent the award of a preliminary injunction that such party will suffer "irreparable harm".  Irreparable harm is typically equated with a harm for which a future "monetary award" cannot serve as proper or adequate compensation.  For franchisors, "irreparable harm" is typically alleged to occur where the franchisor's trademarks are in jeopardy or where the franchisors proprietary trade secrets are alleged to have been disclosed or violated by the franchisee.  For franchisee's irreparable harm, typically, comes in the form of franchisor violations (i.e., non-renewal and violation of protected territories) where the goodwill of the franchisees business is placed in jeopardy.

• "Likelihood of Success on the Merits".  The moving party must demonstrate that as to the causes of action set forth in the underlying complaint that the moving party possesses a "likelihood of success on the merits".  For franchisors it is common to rely on claims and causes of action alleging a franchisees violation of the detailed "franchisee obligations" set forth in the applicable franchise agreement.  Since franchise agreements, typically, favor a franchisor, franchisees seeking an injunction are, many times, forced to rely upon New Jersey's franchise relation statute - the New Jersey Franchise Practices Act.  That is a franchisee would argue that the franchisors threatened actions violate the mandates of the New Jersey Franchise Practices act and that injunctive relief is merited.

• Maintenance of the "Status Quo".  The purpose of a preliminary injunction and/or temporary restraints is to maintain the "status quo" pending the ultimate resolution of each parties legal rights in the litigation.  Accordingly, injunctive relief proper only where the moving party seeks to preserve and maintain its rights in a condition that is the same as when the litigation began.  From a franchisee perspective the proper scope of an injunction should be to preserve the status of the franchisor / franchisee relationship and the on-going operations of the franchisees business.  As to this standard, franchisors are, typically, afforded more latitude due to the express terms of the franchise agreement.  For Franchisor's preserving the "status quo" is typically viewed from the point in time after termination of the franchisees rights.

In all instances it is critical for franchisors and franchisees to recognize that "injunctive relief" is an equitable remedy and is subject to the jurisdiction of New Jersey's Chancery Courts. Applications for injunctive relief (and opposition thereto) must be supported and backed-up by detailed factual certifications and affidavits. Applications for injunctive relief serve a critical tactical and substantive role in New Jersey franchise litigation.

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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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Can you expand your business in the State of New Jersey through a "license agreement" without triggering New Jersey's franchise relationship laws?  (This is not a simple question and, unfortunately, the answer involves an evaluation of both "objective" and "subjective" factors.)

Short Answer:  

Yes, however you must discuss and evaluate the substance of  your license agreement, including your degree of control over your "licensees" operations and your economic influence over your "licensees" business.  

Long Answer :

The New Jersey Franchise Practices Act contains extensive prohibitions and restrictions governing (and in many cases modifying) the contractual relationship between franchisors and franchisees within the state.  Under New Jersey law the following criteria give rise to a franchise relationship and the potential imposition of franchise regulation:

1. The existence of a written agreement for a definite or indefinite period;
2. Providing for a license to use a trade name, trademark, service mark or related characteristic is granted; and
3. The existence of a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.

With New Jersey's definition of a "franchise" heavily dependent on the existence of a "trademark license", your contemplated "license agreement" may have the unintended consequence of creating a regulated "franchise relationship".  To determine if your (1) written (2) trademark license agreement "crosses the line into franchise territory" you must evaluate the (3) community of interest criteria and determine whether or not your written license agreement "creates a community of interest [between you and your licensee] in the marketing of goods or services..."

This "community of interest" criteria is not defined by the New Jersey statute, involves a subjective determination and has been expansively evaluated by New Jersey courts in favor of finding a franchise relationship. To make this determination the courts look to the relationship between the parties and, among other things, the extent to which the licensee (franchisee) is economically dependent on the licensor (franchisor).  That is, where a licensee invests in a business that is largely dependent on a licensor's trademarks, products and/or services and where the licensor possesses significant influence over the licensees business, a "community of interest" (and thereby a franchise relationship) may exist.  Some of the factors that the courts have found to be relevant, include:

• The extent and nature of the licensees /franchisees business investment;
• The bargaining power between the parties;
• The licensees/franchisees economic dependence on the licensor's/franchisor's goods or services;
• The licensor's/franchisor's control over the goods and services offered by the licensee/franchisee; and 
• The licensees/franchisees ability to procure and/or offer goods supplied by a third-party.

Ultimately, any determination as to whether or not your New Jersey license agreement "crosses the line" into franchise territory will require a detailed evaluation of your written agreement and the economic relationship and legal rights that you create.  If your "license agreement" gives rise to a "franchise relationship", your licensee (and now franchisee) will be granted substantial protections and rights granted by the New Jersey Franchise Practices Act.    The key is to be aware of this "unintended consequence" when structuring and planning your "license" agreements and business relationships

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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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Although the State of New Jersey is not a Franchise Registration State, over the years, the New Jersey State legislature has implemented laws pertaining to and affecting the legal rights between franchisors and franchisees.  The New Jersey Franchise Practices Act (NJSA 56:10-1)("NJFPA") adopts an extremely "paternalistic" approach to the franchisee / franchisor relationship and implements a number of legislated rights designed to benefit franchisees.

Both franchisors and franchisees with operations in the state of New Jersey should be aware of the NJFPA and its legislated rights, including NJFPA's  extremely vague "prohibition" against "unreasonable standards of performance".

Franchisor Standards of Performance must be "Reasonable".  Under the NJFPA franchisors are prohibited from imposing "unreasonable standards of performance on franchisees". This extremely vague "prohibition" is open to a broad range of interpretation and is designed, among other things, to prevent the termination of franchisee rights under the pre-text of "non-compliance".  

Relevance to Franchisees: This provision of the NJFPA, essentially, imposes a "reasonableness" standard when evaluating a franchisors attempted termination of a franchise relationship.  Under the NJFPA lawyers for the "terminated franchisee" are afforded the legal right to challenge, question and have the court evaluate the "reasonableness" of the franchisor's standards.

Relevance to Franchisors: Even if your system standards are well thought out, balanced and fair (as is typically the case with "successful" franchisors) when dealing with New Jersey franchisees, franchisors and their legal counsel must recognize that your system standards may be subject to interpretation and evaluation in a judicial proceeding.  To avoid unnecessary litigation costs and expenses, before terminating a franchise relationship take extra caution to document and communicate your performance standards and issues of non-compliance. 

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