Opinion ID: 2373925
Heading Depth: 1
Heading Rank: 4

Heading: Does the New Jersey Franchise Practices Act apply at all in view of the parties having chosen California law to govern the interpretation of their contract?

Text: The threshold question is whether New Jersey law should govern this dispute. The 1984 Reseller Agreement contains a provision stipulating that the [A]greement shall be construed and interpreted, and the legal relations created by it shall be determined, in accordance with the laws of the State of California. Ordinarily, when parties to a contract have agreed to be governed by the laws of a particular state, New Jersey courts will uphold the contractual choice if it does not violate New Jersey's public policy. Winer Motors, Inc. v. Jaguar Rover Triumph, Inc., 208 N.J. Super. 666, 671-72, 506 A. 2d 817 (App.Div. 1986); Kalman Floor Co. v. Jos. L. Muscarelle, Inc., 196 N.J. Super. 16, 21-22, 481 A. 2d 553 (App.Div. 1984), aff'd o.b., 98 N.J. 266, 486 A. 2d 334 (1985). That view is reflected in the Restatement (Second) of Conflicts of Laws § 187 (1969) ( Restatement ), which provides that the law of the state chosen by the parties will apply, unless either: (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which    would be the state of the applicable law in the absence of an effective choice of law by the parties. The exception set forth in part (a) of the Restatement approach does not apply because CCC is headquartered in California, and hence California law has a substantial relationship to the parties. CCC argues that the exception under part (b) of the Restatement does not apply because New Jersey does not have a materially greater interest than California concerning ISI's distribution rights in states other than New Jersey. CCC argues that New Jersey has an interest in regulating only those franchise terminations that occur within its borders, but that when, as here, the alleged franchise is being terminated in states other than New Jersey, New Jersey has no interest in applying its law protecting the rights of franchisees. CCC relies on Carlos v. Philips Business Systems, Inc., 556 F. Supp. 769 (E.D.N.Y.), aff'd, 742 F. 2d 1432 (2d Cir.1983). In Carlos, a manufacturer of dictating equipment had failed to renew an exclusive-distributorship agreement with the plaintiff, who did business in New Jersey, Connecticut, and Ohio. The court found that the only states that had a true interest in the outcome of the litigation were those states in which the distributorship was being terminated because they would be the states which would bear any economic burdens associated with business failures occurring within their borders. Id. at 774 n. 4. The court thus applied New Jersey law to determine whether the termination was valid in New Jersey, and Connecticut law to determine if the termination was valid in Connecticut. Id. at 774-77. The court declined to apply the franchise-protection acts of either New Jersey or Connecticut to the non-renewal in Ohio, which had no franchise protection act, stating: The court has not been cited to, nor can it find[,] any authority for the proposition that the New Jersey and Connecticut Legislatures purported to give this important legislation extraterritorial effect. Therefore, it declines to so apply them. [ Id. at 777.] CCC argues that because the issue here is the discontinuation of ISI's distributorship in Maine, New Hampshire, Vermont, Rhode Island, Connecticut, Maryland, Delaware, and the District of Columbia, New Jersey does not have an interest in this litigation, let alone one that is materially greater than California's or the states whose interests are affected. Although a close question, we do not believe that the trial court erred in applying New Jersey law to the dispute between the parties. In Winer Motors, supra, 208 N.J. Super. at 671-73, 506 A. 2d 817, the court recognized that the state in which the franchisee is located has a significant policy interest in governing the relations between the parties, and determined that the law of that state would apply rather than the law of the contractually-agreed-on forum. There, the franchisee was located in Connecticut and the contract specified that New Jersey law would apply to disputes between the parties. The court declined to apply New Jersey law and determined that just as New Jersey would apply its local law to govern the relationship between an out-of-state franchisor and a New Jersey franchisee, Connecticut would apply its law to govern the relations between an out-of-state franchisor and a Connecticut franchisee. Id. at 672-73, 506 A. 2d 817. In Wright-Moore Corp. v. Ricoh Corp., 908 F. 2d 128 (7th Cir.1990), the court refused to apply a contractual clause that selected New York law as the governing law, when the franchisor was located in New York and the franchisee in Indiana. The court applied Indiana law, reasoning that a franchisor, through its superior bargaining power, should not be permitted to force the franchisee to waive the legislatively provided protections, whether directly through waiver provisions or indirectly through choice of law. Id. at 132. The Ricoh case, like our case, involved a multi-state (indeed, national) franchise. Nonetheless, subject to Commerce Clause considerations to be discussed in Part VI, infra at 366-372, 614 A.2d at 146-148, the Ricoh court held that Indiana law governed the franchise relationship. Although New Jersey law contains no express provision against waiver of the Act's protection, that the Act's protection may not be waived appears to be a common assumption. See Unif. Franchise and Business Opportunities Act § 103, 7A U.L.A. 104 (Supp. 1992) (Uniform Act) (A party to a franchise or business opportunity may not waive a right or benefit conferred, or avoid a duty imposed, by this [Act]   .). [5] That a franchisee's principal place of business in a given state will afford the franchisee the protection of that state's law in connection with all products sold by the franchisee is implicit in other decisions as well. See Swan Sales Corp. v. Jos. Schlitz Brewing, 126 Wis. 2d 16, 374 N.W. 2d 640, 644 (Ct.App. 1985) (because dealer did not do any business in Wisconsin, that state's franchise act could not be applied to Swan's overseas beer sales). Despite some contrary precedent, [m]ost courts    have held that the parties to a franchise agreement cannot avoid the franchise law of the state in which the franchisee is located by providing in their agreement that the laws of another state will govern. Thomas M. Pitegoff, Choice of Law in Franchise Agreements, 9 Franchise Law Journal 15, 19 (1989). CCC contends that New Jersey does not have an interest in this litigation because no franchise is being terminated in New Jersey. CCC attempts to split the contract into sales that occur in New Jersey and sales that occur in other states. However, the purpose behind franchise-act legislation is that dealers geographically situated in a forum state are to be the desired beneficiaries of the legislation in order to make their bargaining position more equal to manufacturers[']. Bimel-Walroth Co. v. Raytheon Co., 796 F. 2d 840, 843 (6th Cir.1986). To strip away the spokes of a hub-type franchise would counter the purpose of such legislation. To use a mundane example, assume that an automobile manufacturer gave a franchise to a dealer in Montvale, New Jersey to serve northern Bergen County, New Jersey as well as Rockland County, New York. Would we assume that the New Jersey Legislature would be indifferent to the dealer's plight if, after having made a substantial investment in the fixed plant and having created a market for the manufacturer's vehicle in Rockland County, the manufacturer, without good cause, took over the Rockland County market for itself? ISI's situation is not identical but is analogous. Few franchises are intrastate, and were parties free to dispense with the protection afforded by franchise acts, any large franchisor by insertion of a choice of law provision requiring the application of the franchisor's home state's law, could with a stroke of a pen remove the beneficial effect of the franchisee's state's remedial legislation. Winer Motors, supra, 208 N.J. Super. at 671-72, 506 A. 2d 817. We will reject even the parties' choice of New Jersey local law in order to preserve the fundamental public policy of the franchisee's home state where its statutes afford greater protection. Id. at 672, 506 A. 2d 817; see also Business Incentives Co. v. Sony Corp. of Am., 397 F. Supp. 63, 67 (S.D.N.Y. 1975) (declining to apply a contractual provision that New York law would govern the dispute between New Jersey distributor and New York company that provided Sony products for distribution by the New Jersey company). As the New Jersey Act and the cases interpreting it make clear, New Jersey has a strong policy in favor of protecting its franchisees. In this case, New Jersey has significant contacts with the transaction. The franchisee is located here and the majority of ISI's employees reside in New Jersey. The franchise-specific investments, referred to below, relate primarily to the assets in New Jersey and the goodwill developed for CCC by New Jersey residents. New Jersey would undoubtedly be the state of applicable law had no choice-of-law provision existed. The Chancery Division reasoned that because ISI maintained a place of business in New Jersey and had met all other requirements of the Act, New Jersey had the overriding interest in the fair treatment of its franchisee. The court qualified its interpretation of New Jersey law to the extent that it actually conflicted with the law of sister-states. The record is sufficient to allow New Jersey law to apply.