The franchise relationship places a great deal of pressure on the franchisee, despite the many advantages of utilizing a franchisor’s know how and reputation. A franchisee invests significant money and time and most often the risk of failure rests only with the franchisee. The franchisor does not concern itself with the failure of any individual franchise. This has often led to a disparity in bargaining positions. This unlevel playing field led to the passage of a Franchise Practices Act.The New Jersey Franchise Practices Act
The New Jersey Franchise Practices Act, enacted in 1971, defines the relationship and obligations of franchisors and franchisees in connection with franchise agreements. Under the statutory definition of franchise, two criteria must be satisfied: first, there must be a written arrangement in which one grants to another a license to use a trade name, trademark, service mark, or related characteristic, and second, there must be a community of interest in the marketing of the goods and services being offered. The Act strongly favors franchisees and was enacted to remedy unfair practices on the part of franchisors.
Once a relationship commences, a franchisee must comply with the terms of the agreement. In return, the franchisee receives the benefit of a franchise, which cannot be terminated or refused renewal, absent good cause shown. “Good cause” means that it must be found that a franchisee did not substantially perform the obligations under the written agreement.
Termination Difficult for Franchisor
Litigation can often result when a franchisor seeks to terminate the franchise. Similar to the potential lifetime nature of a residential lease, when a franchisee is substantially in compliance, the franchise continues, even when the agreement has expired. Many times a franchisor will look for ways to terminate the franchise. When a franchisee wants to transfer a franchise, written notice must be given to the franchisor. The notice must contain, in addition to basic information such as name and address of the prospective transferee, financial qualifications and business experience for the previous 5 years. The franchisor then has sixty (60) days to, in writing, approve the transfer or not. Again, the act does not favor the franchisor, so if the franchisor wants to deny the transfer, the reason must be backed with “material reasons relating to character, financial ability or business experience.”
In recent litigation, VW Credit v. Coast Auto. Group, 346 N.J. Super. (App.Div. 2002), the Appellate Division, reiterated that the rejection of a transfer must be based on a bona fide business decision. This case involved an automobile dealership franchise, which the franchisee was attempting to transfer. The Franchisor based its disapproval on a claimed deficient application and the character of the transferee. The statutory standard, outlined above, is an objective one, with the burden resting with the franchisor. The Court found the transferee to have the necessary business experience and the character allegations were no more than allegation. The Court found that consent to the transfer should have been granted. The remedy of specific performance applies. The franchisor tried to argue that specific performance was not appropriate as they gave notice of disapproval within the statutory time limits. This would have limited the franchisee’s relief to damages instead of specific performance. However, the Court found that a “franchisor should not be able to circumvent the automatic approval contemplated by the Legislature by giving notice of disapproval within the time period and facially complying” with the statute.
Darrell M. Felsenstein, is an Associate at WJ&L, LLP, who practices in the Litigation Area.