Opinion ID: 2373925
Heading Depth: 1
Heading Rank: 10

Heading: If there is a New Jersey franchise, does the Act have extraterritorial reach to the franchise activities in states other than New Jersey?

Text: This question is closely related to the initial choice-of-law question discussed in Part III, supra at 341-346, 614 A. 2d at 133-135. If New Jersey law, rather than California law, applies, does the application of New Jersey law stop at New Jersey's border? Recall that the Chancery Division reasoned that although the Legislature did not intend that the Act's provision apply extraterritorially, the parties had given the law that effect. The reasoning echoes that of a Florida court that ruled that a Florida Mercedes dealer could invoke New Jersey's Franchise Practices Act because the New Jersey subsidiary of Mercedes that granted the Florida dealership had expressly made the New Jersey law applicable to the contract. Mercedes-Benz of N. Am. v. Department of Motor Vehicles, 455 So. 2d 404 (Fla. Dist. Ct. App. 1984). We are not so certain that the same analogy can be drawn here. Surely nothing indicates that CCC intended or agreed that the New Jersey law would cover its activities in the sister states of New Jersey. Hence, we are remitted to the question of whether the New Jersey Legislature intended the Act to apply to franchise activities outside of the state. To return to the illustration that we gave in the choice-of-law section of this opinion, supra at 344-345, 614 A. 2d at 134-135, would the Legislature have intended to protect a New Jersey businessperson who had invested substantial assets in a New Jersey-based hub of a multi-state franchise operation? In some measure the answer to that question depends on the extent of State power as lawmakers may have understood it. Obviously, New Jersey has no power, and therefore no interest, to regulate commerce that occurs entirely beyond its borders. See Healy v. Beer Institute, Inc., 491 U.S. 324, 109 S.Ct. 2491, 105 L.Ed. 2d 275 (1989). In Healy, a Connecticut statute controlling beer pricing attempted to regulate the price of liquor sold outside of the state by equating that price with the price of liquor sold in the state. The Supreme Court held that the statute violated the Commerce Clause because it had the effect of controlling commercial activity occurring wholly outside Connecticut and it facially discriminated against interstate brewers and importers, thus not advancing the state's claimed justification of insuring the lowest in-state beer prices. Ibid.; see also Edgar v. MITE Corporation, 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed. 2d 269 (1982) (holding that an Illinois statute regulating tender offers to shareholders beyond Illinois borders was impermissible burden on interstate commerce that outweighed its putative local benefits to in-state corporations). The feature that distinguishes the Edgar decision from a case such as ours is that the Illinois Takeover Act could be applied to regulate a tender offer which would not affect a single Illinois shareholder. Id. at 642, 102 S.Ct. at 2640, 73 L.Ed. 2d at 283. Thus, the Court reasoned that the Commerce Clause precluded the application of a state statute to commerce that took place wholly outside of Illinois' borders. See also Healy, supra, 491 U.S. at 337, 109 S.Ct. at 2500, 105 L.Ed. 2d at 289 (Connecticut statute has the undeniable effect of controlling commercial activity occurring wholly outside the boundary of the State). The same analogy, however, does not apply here. To the extent that it is applicable, the New Jersey Act regulates in-state conduct that has out-of-state effects. For example, in Mon-Shore Management, Inc. v. Family Media, Inc., 584 F. Supp. 186 (S.D.N.Y. 1984), the defendants argued that the New York Franchise Sales Act could not be applied to a franchise offer to franchisees in Pennsylvania and New Jersey. That court, however, held that to apply the New York Franchise Sales Act even though it regulated conduct in sister states was appropriate, because an important aspect of a particular franchise transaction  an offer to sell or buy, or actual sale  occurs in the state, or the franchise will operate in the state, or the franchisee resides here. Id. at 191 (emphasis added). The court reasoned that a state statute that affects interstate commerce will be upheld so long as it `regulates evenhandedly to effectuate a legitimate local public interest and its effects upon interstate commerce are only incidental ... unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.' Id. at 190 (quoting Pike v. Bruce Church, 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed. 2d 174, 178 (1970)). So too here, in contrast to Edgar, the State regulation is applicable only to specific transactions affecting New Jersey, i.e., franchises that have a place of business in New Jersey. Were it otherwise, nearly every aspect of substantive state law would be disabled from affecting the conduct of multi-state corporations. When New Jersey law imposes a legal duty on the volitional behavior of a contracting party, that ruling will often have effects beyond state boundaries. For example, if the issue in this case were that of straight contract law, i.e., had the contract precluded termination of the out-of-state territory, the New Jersey common law upholding the contract would be regulating commerce that takes place wholly outside of the state's borders. In terms of state power, whether state contract law or state statutory law is applied to the in-state activity makes no difference. See Cipollone v. Liggett Group, Inc., 505 U.S. ___, ___, 112 S.Ct. 2608, 2635, 120 L.Ed. 2d 407, 445 (1992) (Scalia, J., concurring in part, dissenting in part) (declaring that any legal duty imposed on volitional behavior is one imposed by law). Another way of looking at the extraterritorial reach of the statute is in the context of due-process limitations on state choice of law. See Lea Brilmayer and Charles Norchi, Federal Extraterritoriality and Fifth Amendment Due Process, 105 Harv.L.Rev. 1217 (1992) (Brilmayer and Norchi). The leading case dealing with due-process limitations on state choice of law is Allstate Insurance Co. v. Hague, 449 U.S. 302, 101 S.Ct. 633, 66 L.Ed. 2d 521 (1981). The authors summarize the Hague formulation thus: [D]ue process [in choice of law] requires `contacts' with the forum, `interests' arising out of these contacts, and `fairness' to the defendant. Brilmayer and Norchi, supra, 105 Harv.L.Rev. at 1242. That test echoes the Commerce Clause test of Pike v. Bruce Church in terms of the legitimacy of the local interest and reasonableness of the regulation. The proposition is fairly well established that a state may regulate its residents, even when they are acting outside of the state. Id. at 1241 (discussing Skiriotes v. Florida, 313 U.S. 69, 61 S.Ct. 924, 85 L.Ed. 1193 (1941)). In Skiriotes, the State applied its law to one of its residents who, while outside the state's territorial waters, had violated environmental regulations. The Supreme Court upheld the State's action. Ibid.; Skiriotes, supra, 313 U.S. at 79, 61 S.Ct. at 937, 85 L.Ed. at 1201. A State's power over its own citizens should extend to protection of its own citizens' rights when dealing with others even though there may be incidental effects in other jurisdictions. When analyzing the constitutionality of a statute with incidental extraterritorial effect, legislative intent and constitutional power (under the Commerce and Due Process Clauses) will tend to merge. At its core, the New Jersey Franchise Practices Act is meant to deal with the unconscionable business practices affecting New Jersey franchises. Under the Hague formulation we surely find contacts with the forum, interests arising out of those contacts, and fairness to the defendant in the statute. Fairness to the defendant is implicit in the statute's requirements. By definition, the Act, and particularly its community-of-interest requirement, is intended to protect business parties who made a franchise-specific capital investment of either goods or services in New Jersey. See Westfield Centre Serv., Inc. v. Cities Serv. Oil Co., 86 N.J. 453, 432 A. 2d 48 (1981) (inequities that Legislature was trying to correct under the Act resulted from unequal bargaining power of the parties, leading to unconscionable termination provisions that imperiled innocent franchisees with substantial losses of their investments). Thus the statute's own terms, including the community-of-interest and good-cause requirements, will allow the application of the Act only in situations in which there are contacts with the forum, interests arising out of those contacts, and fairness to the defendant in the sense that a defendant who acts fairly with a franchisee need fear no oppressive regulation. Therefore, the Act's own terms curtail any impermissible extraterritorial effect and ensure its constitutionality under Commerce Clause or due-process analysis despite some incidental extraterritorial effects. As noted, a critical factor in this case is the installed base of customers that ISI has built up over a twenty-year period. Because of the peculiar relationship between the hardware and the software, to terminate the franchise arrangements could be devastating within that customer base and could allow the franchisor unconscionably to reap the harvest of the franchisee's long years of effort. But a termination might not be equally devastating in all jurisdictions. The Act defines good cause for termination as failure by the franchisee to substantially comply with those requirements imposed upon [it] by the franchise. N.J.S.A. 56:10-5. To the extent that the franchisee has not met any imposed requirements to develop the franchise in the foreign jurisdiction, there may be good cause for termination. In order to resolve the issue of good cause (the franchisee's failure substantially to comply with imposed requirements), the factfinder will inevitably have to weigh the interests, including the percentage of sales in those jurisdictions to be terminated and the franchisee's installed base of customers, goodwill, and other investments attributable to that jurisdiction in relation to the franchise-specific investment of goods or services in New Jersey. If the franchisee will suffer no threat to the health of its business, supra at 360, 614 A. 2d at 143, by loss of those jurisdictions (unlike the hypothetical Montvale car dealer stripped of its customer base in New York), invocation of the Act's protection against unconscionable conduct may not be warranted. The computer-aided instruction industry has apparently entered or is about to enter an entirely new phase in which the principal product of CCC will be the intellectual content of its software  its curriculum programs. The hardware-software relationship may become less dominant, thereby diminishing the importance of the installed base of customers. However, the trial court, as discussed in Part V C, supra at 355-366, 614 A. 2d at 140-145, did not err in finding on this record that the CCC-ISI relationship showed a community of interest sufficient to invoke the Act's protections and require evaluation of the good cause asserted to justify the termination.