District Court Broadly Interprets NJFPA 20% Requirement

The Protections of the New Jersey Franchise Practices Act Still Potentially Available to Businesses That Do Not Derive 20 Percent Of Sales From Franchise

On July 11, the District Court of New Jersey held in no uncertain terms that a business seeking the protections of the New Jersey Franchise Practices Act, N.J.S.A. §§ 56:10-1, -15 (“NJFPA” or the “Act”), could fall under the umbrella of the Act if there existed a mere intention of 20% of the business sales deriving from a purported franchise’s products/services.   

Background on the Case

In Ocean City Express Co. v. Atlas Van Lines, Inc., Civil No. 13-1467 (JBS/KMW) (D.N.J. July 12, 2016), Ocean City Express Co, Inc. (“Ocean City” or “Plaintiff”) alleged that Atlas Van Lines, Inc. (“Atlas” or “Defendant”) violated the NJFPA by terminating the parties’ Agency Agreement of March 31, 2016 without “good cause.”  After multiple other motions, Atlas moved for summary judgment claiming that, among other failings, the arrangement between the parties did not qualify as a franchise under the NJFPA because less than 20% of the Plaintiff’s gross sales derived from the Agency Agreement.  Indeed, Ocean City readily admitted that only 2.71% of its actual sales in 2010 derived from the Agency Agreement.  Ocean City, in response, claimed that while its actual gross sales fell below the 20% threshold, the intention in executing the Agreement was for sales to exceed the 20% mark and the failure to meet this mark was as a result of the Defendant’s actions.

Analysis of the NJFPA’s 20 Percent Mandate

The Court rejected Atlas’ argument and ultimately denied summary judgment.  In doing so, the Court explained that, by the plain language of the NJFPA, a mere intention for 20% of sales to be derived from the franchise could satisfy the 20% requirement of the Act.  Indeed, the NJFPA provides, in relevant part, that for a purported franchisee to receive the Act’s protections, “more than 20% of the franchisee's gross sales [must be] intended to be or are derived from such franchise.”  Additionally, the Court cited precedent holding that remedial statutes such as the NJFPA should be read broadly to give effect to the legislative purpose of the law.  Applying these precepts, the Court concluded that the NJFPA “compels, on its face, an inquiry into the scope of intended revenues, in addition to actual revenues.”

The Court also noted that even a cursory look at the factual record demonstrated that at least the plaintiff intended that Ocean City would derive over 20% of its gross sales from the arrangement with Atlas.  As such, the court held that “a reasonable factfinder could well conclude that Ocean City meets the 20% requirement of the New Jersey Franchise Practices Act ("NJFPA"), due to the parties' intent, as a matter of law.”

District Court of New Jersey Denies Motion to Dismiss Franchisees’ Claims That Franchisor Imposed “Unreasonable Standards” on Franchisees

Last month, the District Court of New Jersey clarified the type of conduct that could give rise to a claim that a franchisor imposed “unreasonable standards of performance” on a franchisee in violation of the New Jersey Franchise Practices Act (the “NJFPA”), N.J.S.A. 56:10-7(e).   

In South Gas, Inc. v. ExxonMobil Oil Corp., Docket No. 09-cv-6236 (KM)(MAH) (D.N.J. Feb. 29, 2016), plaintiffs, ExxonMobil Oil Corporation (“Exxon”) franchisees, filed suit against Exxon.  Plaintiffs’ claimed, inter alia, that Exxon imposed “unreasonable standards of performance” on plaintiffs in violation of the NJFPA.  Specifically, Plaintiffs’ Second Amended Complaint included allegations that Exxon had imposed unreasonable “inventory standards” and “volume requirements.”  Exxon moved to dismiss plaintiffs’ claim, arguing that (1) plaintiffs had not alleged specific conduct that, even if proven, constituted “unreasonable standards of performance,” and (2) plaintiffs did not have standing to sue pursuant to N.J.S.A. 56:10-7(e) because Exxon did not terminate plaintiffs.

The District Court rejected both of Exxon’s arguments and denied Exxon’s motion to dismiss plaintiffs’ claim under N.J.S.A. 56:10-7(e).   Specifically, the Court held that unreasonable “inventory standards” and unreasonable “volume requirements” satisfied even “a fairly strict reading of the ‘standards of performance’ section” of the NJFPA.  The Court also emphasized that even where individual actions by a franchisor do not, alone, violate N.J.S.A. 56:10-7(e), the “cumulative effect” of these actions may amount to the franchisor’s imposition of an unreasonable standard of performance.  Finally, the Court held that a franchisee need not be terminated in order to file a claim under N.J.S.A. 56:10-7(e), explaining that “Exxon cites no case law for this proposition . . . the statute does not explicitly require termination[,] [n]or would requiring termination be faithful to the policy of reading the NJFPA broadly to effect its legislative purpose.” 

District Court of New Jersey Sanctions Franchisor For “Misleading” and “Troublesome” Discovery Responses

Last month, the District Court of New Jersey issued an opinion sanctioning 7-Eleven for its “discovery transgressions” in Younes v. 7-Eleven, Civil No. 13-4578 (RMB/JS) (D.N.J. Dec. 11, 2015), a case currently pending in Camden. In Younes, plaintiffs alleged that 7-Eleven wrongfully targeted certain South Jersey franchisees for termination in violation of their franchise agreements. 

Plaintiffs filed a motion for sanctions against 7-Eleven for 7-Eleven’s alleged refusal to adequately respond to plaintiffs’ discovery requests, as well as 7-Eleven’s alleged failure to comply with multiple Court Orders compelling discovery.  In its December 11, 2015 decision, the District Court issued sanctions against 7-Eleven for its discovery transgressions, noting “[n]othing would please the Court more than if it did not have to decide the present motion . . . .”  In doing so, the District Court sent a stern warning to practitioners and litigants that failure to take a reasonable approach to discovery would not be tolerated.  Among the important takeaways from the opinion are the following:

(1)   A Court Order compelling discovery is not a prerequisite to discovery sanctions. 

In response to 7-Eleven’s argument that it could not be sanctioned for any alleged discovery transgressions that occurred prior to any Court Order regarding discovery, the District Court held in no uncertain terms that 7-Eleven was wrong.  The Court explained that “[a] party cannot serve substantially deficient discovery responses with impunity,” explaining that 28 U.S.C. 1927, the Court’s inherent power and Rule 26(g)(3) provided the Court authority to sanction 7-Eleven for conduct 7-Eleven engaged in prior to the Court’s involvement in the discovery dispute. 

(2)   If you reasonably understand what a party is requesting in discovery, and the discovery is not otherwise objectionable, provide the discovery.  Parties play a “gotcha” game at their own risk. 

7-Eleven argued that its failure to provide discovery was justified because plaintiffs did not correctly identify the exact project name – “Project P” – in its discovery requests seeking information regarding projects related to franchise terminations in South Jersey.  Instead, Plaintiffs referred to the project at issue as “Operation Philadelphia.”  The District Court rejected this argument, explaining as follows:

 7-Eleven is playing a ‘gotcha’ game when it argues it did not have to produce Project P discovery because plaintiffs referred to Operation Philadelphia instead of Project P.  In this context these terms are synonymous.  It was not plaintiffs’ burden to specifically identify the term Project P before they received responsive information.  They are franchisees with no knowledge of 7-Eleven’s internal plans.  If a reasonable investigation was done the use of the term ‘Operation Philadelphia,’ in the context of plaintiffs’ representations and theory of the case, and 7-Eleven’s hoard of Project P documents, would have and should have put 7-Eleven on notice that plaintiffs were referring to Project P. . .

Further, the federal rules do not and should not require plaintiffs to use “magic words” to obtain clearly relevant discovery.  The obligation on parties and counsel to come forward with relevant documents requested during discovery is “absolute”.

(3)   Showing that a party spent a substantial amount of money on responding to discovery will not, by itself, be a defense to a claim for discovery sanctions.                 

7-Eleven also attempted to avoid sanctions by explaining to the Court that it had spent a substantial amount of time and money on responding to plaintiffs’ discovery requests.  The District Court was unpersuaded, explaining that “7-Eleven only has itself to blame for its incomplete, duplicative and/or misguided document and ESI searches.  If 7-Eleven had done what it was supposed to do from the outset of discovery its transaction costs would have been substantially reduced.”

In sum, the District Court’s decision reminds practitioners and litigants that parties must take their discovery obligations seriously and, perhaps above all, always, in the Court’s words, “stop and think” about the legitimacy of a discovery response.

The New Jersey Franchise Practices Act: Beware the “Constructive Termination”

In any franchise relationship, a franchisor may wish to terminate a franchisee for reasons having nothing to do with a franchisee’s performance. Perhaps the franchisor seeks to downsize the number of franchisees in its fleet or distribute its products through a new business plan in which the franchisee no longer fits.  In any event, a New Jersey franchisor likely knows that, absent good cause, the New Jersey Franchise Practices Act generally prohibits a franchisor from terminating a franchisee.  In other words, the franchisor’s hands may be tied.

What if, however, the franchisee decides to back out of the franchise relationship on its own?  Could a savvy franchisor avoid the prohibitions of the Franchise Practices Act by simply making its franchisee’s life so miserable that the franchisee decides to leave the franchise?  

Not likely.

The Franchise Practices Act generally prohibits both express termination and “constructive termination” of a franchisee without good cause.  As explained by the Appellate Division in Maintainco, Inc. v. Mitsubishi Caterpillar Forklift American, Inc., 408 N.J. Super 461, 479 (App. Div. 2009), “the word “ ‘termination’ in the [Franchise Practices Act] includes constructive termination in accordance with traditional contract law principles.”  

What conduct constitutes a “constructive termination”?  Generally, where a franchisee gives up a franchise because a franchisor acts in a manner that would force a reasonable franchisee to leave a franchise, the franchisor’s conduct may give rise to a “constructive termination” claim.  Indeed, a change in the terms of the relationship could count as a “constructive termination”.  For example, where a franchisor removes a franchisee’s designation as the “exclusive” distributor while still permitting the franchisee to be a non-exclusive distributor of its products, this action may constitute a “constructive termination” under the Franchise Practices Act.  See 408 N.J. Super 479-480.

Bottom line -- franchisors should think twice before attempting to push a franchisee to leave a franchise “voluntarily” or engaging in conduct that would force a reasonable franchisee to give up the franchise.   The franchisor’s actions may constitute a “constructive termination” under the Franchise Practices Act and result in the same repercussions as an express termination of the franchisee.