The New Jersey Legislature enacted the FPA in 1971 (codified at N.J.S. 56:10-1). The Act’s focus was to address concerns raised by the automobile dealer industry. The Legislature’s goal was to level the playing field and protect dealers from aggressive manufacturers. Specifically, the Legislature provided the following rationale as the underpinning of the Act:
It is therefore necessary in the public interest to define the relationship and responsibilities of franchisors and franchisees in connection with franchise arrangements and to protect franchisees from unreasonable termination by franchisors that may result from a disparity of bargaining power between national and regional franchisors and small franchisees.
The act was intended to protect both retail and wholesale distribution franchisees. These findings were amended years later in 2009 when the Legislature noted that the Courts in some cases had “more narrowly construed the Franchise Practices Act than was intended by the Legislature.” Id.
Although the last comment suggests that the Legislature may not have drafted the initial Act as comprehensively as was originally intended, it is important to keep in mind that the Act was drafted with one industry principally in mind, auto distributorships, and this explains the twists and turns in the Act’s provisions which, even to lawyers, can be confusing. Further, this starting point will help in understanding the recent court decisions, which broadened the scope of the Act, as well as echoed the strong public policy in favor or protecting New Jersey franchisees.
Perhaps the most confusing aspect of the Act are the definitions. The first definition of franchise is found in N.J.S. 56:10-3.a.: “‘Franchise’ means a written arrangement for a definite period, in which a person grants to another person a license to use 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.” This definition is clear: (1) there must be a written agreement; (2) granting a license involving intellectual property; and (3) there must be a community, or collective, of people interested in selling this product/service (think franchisee investors).
Yet the Act does not stop here with one definition, as there is a further definition (the qualifier) addressing what constitutes a franchise protected by this law. In N.J.S. 56:10-4 (addressed “Application of act”), the Legislature believed it important to further define a protected franchise by applying the following three criteria:
1. the performance of which [franchise] contemplates or requires the franchise to establish or maintain a place of business within the [State];
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.
Why the additional definition? Likely, it was because at the time of the Act’s creation, many truly franchise relationships were labeled something else, such as a “licensing agreement” or “distribution agreement” rather than a “franchise agreement.” Also, often there were attempts to avoid the regulations of the Federal Trade Commission by mislabeling the agreements.
However, by defining the franchise relationship in this manner, the Legislature effectively created “covered” and “uncovered” franchisees. What is an example of an “uncovered” franchisee? It is any franchisee whom has not been in business for 12 months and generated $35,000.00 in revenue. Therefore, even though the relationship between the parties is clearly a franchise where the agreement is called a “franchise agreement,” and which was preceded by the issuance of a Franchise Disclosure Document as required by federal law, this franchisee is not covered by the FPA.
This seems like an unjust result, and it is. First term franchisees are just as vulnerable to the franchisors as the franchisees who have been in business 12 months and generated at least $35,000.00 in annual revenue. What the Legislature had evidently intended as a means of defining true franchise relationships acting under the guise of other labels, turned out to be the creation of two classes of franchisees: (1) the first covered and permitted to pursue the full remedies afforded by the law, such as renewable terms and an award of attorney’s fees; and (2) the second uncovered and denied the same statutory remedies, thus limiting them to traditional breach of contract remedies.
The New Jersey Superior Court has recognized the inequities under the Act. For instance, the Supreme Court extended an amendment to the FPA, which deemed forum selection clauses in Franchise Agreements to be presumptively invalid, and which was written specifically for auto distributor franchise agreements, to all franchisees covered under the Act. See, Kubis & Perszyk Assocs. V. Sun Mirosystems, 146 N.J. 176 (1996).
Further, the Court has ruled that in instances where New Jersey franchisees are not covered under the FPA, they may seek relief under the Consumer Fraud Act, N.J.S.A. 56:8-1. Kavky v. Herbalife Intern. of America, 359 N.J. Super. 497 (App. Div. 2003).
Therefore, “uncovered” franchisees should look to the Consumer Fraud Act for remedies, unless they meet the precise definitions established by the FPA. However, note that the Consumer Fraud Act allows greater remedies – treble damages, in addition to a the recovery of attorney’s fees. Therefore, not being covered under the FPA may lead a franchisee to a silver lining within the CFA.
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need franchise-related legal advice, please contact us to discuss the specifics of your franchise business.
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