Opinion ID: 2373925
Heading Depth: 1
Heading Rank: 3

Heading: What is a franchise under the New Jersey Franchise Practices Act?

Text: We now turn to the issue of whether the business relationship between CCC and ISI constitutes a franchise protected under the Act. CCC asserts that the 1984 agreement does not constitute a franchise because (1) CCC never granted to ISI a license, as that term is contemplated under N.J.S.A. 56:10-3a; (2) there is no community of interest between CCC and ISI; (3) the parties did not contemplate that ISI would maintain a place of business within the State of New Jersey; and (4) ISI never maintained a place of business in the State of New Jersey. We address each of those arguments in turn. Although franchise arrangements take many different forms, in its simplest form, franchising involves a company with a product or service which arranges for a group of dealers to handle its distribution. The company with the product, product line or service is known as the franchisor, and the dealers who acquire the right to sell the product or service exclusively are known as franchisees. [Ernest Gellhorn, Limitations on Contract Termination Rights  Franchise Cancellations, 1967 Duke L.J. 465, 465 n. 1 (quoting Lewis & Hancock, The Franchise System of Distribution 1 (1963) (Gellhorn)).] There are three general categories of business franchises: (1) Product Franchises, under which a franchisee[] distribute[s] goods produced by the franchisor    and which bear the franchisor's trademark.    Typical product franchises include automobile and truck dealers, gasoline service stations, and soft drink bottlers. (2) Package or Format Franchises, under which the franchisee is licensed to do business under a prepackaged business format established by the franchisor and identified with the franchisor's trademark.    Examples of format franchises include fast food outlets and automotive products or services. (3) Fractional Franchises, under which franchisees market a manufacturer's or supplier's trademarked products. In contrast to product or format franchises, the fractional franchisor exerts minimal control over the franchisee's business operations, and the franchisee often operates under [its] own trade name. Common fractional franchises include independent hardware stores    that sell a variety of products [belonging to different manufacturers]. [Kevin S. Dittmar, Foerster, Inc. v. Atlas Metal Parts  The Wisconsin Supreme Court Takes a Narrow View of the Dealer's Financial Interest Protected by the Wisconsin Fair Dealership Law, 1985 Wis.L.Rev. 155, 167-68 (footnotes omitted) (Dittmar).] At common law, freedom of contract was the rule applicable to franchise agreements. Gellhorn, supra, 1967 Duke L.J. at 468. The effects of termination were starkly simple  the franchisee would be ousted from the franchise, essentially forfeiting his investment   . The franchisor would then regain full control of the terminated business and would be free to begin a relationship with a new franchisee. Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166, 176, 495 A. 2d 66 (1985) (citations omitted); see also Gellhorn, supra, 1967 Duke L.J. at 467 n. 5 (describing the financial hardship suffered by a terminated beer distributor). Recognizing that the marketplace was not necessarily the best protector of those franchisees with substantially-inferior bargaining power, this Court wrote: Where there is grossly disproportionate bargaining power, the principle of freedom to contract is non-existent and unilateral terms result. In such a situation courts will not hesitate to declare void as against public policy grossly unfair contractual provisions which clearly tend to the injury of the public in some way. [ Shell Oil Co. v. Marinello, 63 N.J. 402, 408, 307 A. 2d 598 (1973), cert. denied, 415 U.S. 920, 94 S.Ct. 1421, 39 L.Ed. 2d 475 (1974) (citing Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 403-04, 161 A. 2d 69 (1960)).] Franchising became a popular method of distribution in the late 1960s. 1 Gladys Glickman, Franchising § 2.01 at 2-3 (1969) (Glickman). As the popularity of franchising grew, concerns were raised about the degree of control the franchisor exercised over the franchisee, in particular, the franchisor's power of life or death to terminate the franchise. Id. at 2-3 to 2-4. In response to the growth of national franchising, the Federal Trade Commission (or FTC) began setting guidelines for franchises in the 1970s. Id. § 2.02[2] at 2-7 to 2-8. The FTC defines a franchise as any continuing commercial relationship    whereby    a person (hereinafter `franchisee') offers, sells, or distributes    goods, commodities, or services which are: (1)[i]dentified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (hereinafter `franchisor'). 16 C.F.R. § 436.2(a) (1992). The FTC definition requires further that the franchisor exert[] or [have] authority to exert a significant degree of control over the franchisee's method of operation. Ibid. [4] In the Guides to Compliance accompanying the FTC franchising rule, the Commission states: The name which the parties give to their relationship is not relevant in determining whether the relationship is within the scope of the rule. Thus, a relationship described by the parties as a franchise will not be covered by the rule unless it meets the definitional criteria of the rule; conversely, a self-described `distributorship' will be covered by the rule if the definitional elements are satisfied. [Glickman, Franchising, supra, § 2.02[2] at 2-8 n. 7 (quoting Final Guides to Compliance with Franchising Rule § IA, 44 Fed.Reg. No. 166, p. 49966).] Therefore, in determining whether a relationship constitutes a franchise, the FTC examines the entire course of dealings between the parties. Prompted in large measure by the unfair practices of automobile manufacturers and major oil companies, New Jersey passed the Franchise Practices Act in 1971. N.J.S.A. 56:10-1 to -12. This Act was supplemented in 1977 with four sections, two of which specifically concern automobile franchises. See N.J.S.A. 56:10-7.1 and 56:10-13. In 1982, the Legislature passed the Motor Vehicle Franchises Act, N.J.S.A. 56:10-16 to -25 (now N.J.S.A. 56:10-16 to -29). The Franchise Practices Act (the Act) provides franchisees protection against indiscriminate terminations by prohibiting cancellation or non-renewal of franchises for other than good cause. The Act's supporters indicated that [t]his bill gives neither the franchisor nor franchisee the upper hand. What it does, however, is to prevent arbitrary or capricious actions by the franchisor who generally has vastly greater economic power than the franchisee. Franchise Practices Act: Hearing on A. 2063 Before the Assembly Judiciary Comm., 194th Leg., 2d Sess. 136 (1971) ( Hearing on A. 2063 ) (Statement of Charles W. Davis, Executive Vice-President New Jersey Hotel/Motel Ass'n). The Act defines a franchise as a written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise. [ N.J.S.A. 56:10-3a.] However, not all franchisees are protected; the Act applies only to a franchise (1) the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the State of New Jersey, (2) where gross sales of products or services between the franchisor and franchisee covered by such franchise shall have exceeded $35,000.00 for the 12 months next preceding the institution of suit pursuant to this act, and (3) where more than 20% of the franchisee's gross sales are intended to be or are derived from such franchise. [ N.J.S.A. 56:10-4.]