A recent federal court opinion overlooked a plain-language requirement of the “place of business” element of a claim under the New Jersey Franchise Practices Act (NJFPA), N.J.S.A. § 56:10-1 et seq., potentially expanding the scope of the franchise protection law in New Jersey. Scheuer, LLC v. S-L Distribution Co., No. 2:16-cv-08783 (D.N.J. Aug. 25, 2017). But the court’s opinion was preliminary, and the NJFPA claim should fail if the alleged franchisee cannot show that the terminated franchise contemplated or required the franchisee to maintain a warehouse in the state of New Jersey.
New Jersey Franchise Practices Act
The NJFPA was enacted “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.” N.J.S.A. § 56:10-2. Under the NJFPA, a “franchise” is defined as (1) a written arrangement for a definite or indefinite period; (2) in which a person grants to another person a license to use a trade name, trade mark, service mark or related characteristics; and (3) 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. § 56:10-3(a). Additionally, the NJFPA only applies to a franchise when (1) the performance of the franchise contemplates or requires the franchisee to establish or maintain a place of business within the state of New Jersey; (2) gross sales of products or services between the franchisor and franchisee exceed $35,000 per year; and (3) more than 20 percent of the franchisee’s gross sales are intended to be or are derived from the franchise. N.J.S.A. § 56:10-4(a) (emphasis added).
Expanding the Scope of the NJFPA
After implementation of the NJFPA, the legislature recognized that “the courts have in some cases more narrowly construed the Franchise Practices Act than was intended by the Legislature” and that the act’s protections were necessary for “not only retail businesses, but also wholesale distribution franchisees.” N.J.S.A. § 56:10-2. Therefore, the NJFPA was amended to expand the scope of the act’s coverage to include distributors that do not sell directly to consumers. To qualify for protection under the act before 2010, the franchisee was required to show that performance of the franchise agreement contemplated or required the franchisee to establish or maintain a place of business within New Jersey, and “place of business” was defined narrowly as a fixed geographical location at which the franchisee displayed for sale and sold the franchisor’s goods or offered for sale and sold the franchisor’s services and did not include an office, a warehouse, a place of storage, a residence or a vehicle. Accordingly, a franchisee was entitled to the protections of the act only if, among other things, the agreement contemplated and the franchisee did in fact maintain or establish a fixed geographical location in New Jersey to display and sell the franchisor’s goods or services.
However, the current amended version of the NJFPA includes an exception to the definition of “place of business” that expands the coverage of the act to include more businesses. “Place of business” means:
a fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or offers for sale and sells the franchisor’s services. Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle, except that with respect to persons who do not make a majority of their sales directly to consumers, “place of business” means a fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or offers for sale and sells the franchisor’s services, or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor’s goods are delivered to customers.
N.J.S.A. § 56:10-3(f) (emphasis added).
Recent Case Law
Judge Cox Arleo recently applied the expanded definition of “place of business” in Scheuer, LLC v. S-L Distribution Company. In Scheuer, a putative class of franchisees brought claims against a franchisor for wrongful termination under the NJFPA. The franchisor, S-L, sought dismissal for failure to state a claim under the act because Scheuer did not maintain a place of business within New Jersey. A franchisee who does not make a majority of their sales directly to consumers can satisfy the amended definition of “place of business” by having an office or warehouse in New Jersey from which the franchisor’s goods are delivered to customers. Scheuer pleaded that it operated out of a warehouse in New Jersey where it received shipments of S-L products for sale to retail outlets. The court found that these allegations were sufficient to establish a place of business.
However, the court may have overlooked the franchisor’s more nuanced argument. S-L argued that Scheuer failed to establish that the performance of the franchise contemplated or required Scheuer to maintain a place of business in New Jersey — one of the plain-language requirements to qualify as a franchise under the NJFPA. S-L asserted that the distributor agreement contemplated that Scheuer would purchase and pick up product from S-L’s warehouse for distribution to retailers, and, accordingly, there was never any expectation that Scheuer would maintain a place of business in New Jersey. The court, however, did not address this argument in its order. Instead it denied S-L’s motion to dismiss, finding that Scheuer had sufficiently pled a claim under the NJFPA, citing to McPeak v. S-L Distribution Company, No. 12-349 (D.N.J. Jan. 24, 2014).
The court in McPeak also denied a motion to dismiss claims under the NJFPA. In that case, the franchisee operated out of the franchisor’s warehouse, and this was held sufficient to satisfy the requirement that a franchisee “establish” a place of business. However, in McPeak, the contract between the parties specifically required the franchisee to maintain a separate place of business, thus satisfying the prima facie pleading requirement that the performance of the franchise contemplates or requires the franchisee to maintain a place of business. In contrast, the distribution agreement in Scheuer did not contain a similar provision and instead required the distributor to pick up orders from franchisor’s warehouse. Additionally, there was no allegation in the Scheuer complaint that the performance of the franchise contemplated or required that the franchisee maintain or establish a place of business in New Jersey.
While the franchisee escaped dismissal at the motion to dismiss stage of the lawsuit, the NJFPA claims could (and should) likely fail at summary judgment without proof that the performance of the franchise, as demonstrated by the distribution agreement or the parties’ course of dealing, contemplated or required the franchisee to establish or maintain a place of business within New Jersey as required under N.J.S.A. § 56:10-4(a). See Cooper Distrib. Co. v. Amana Refrigeration, Inc., 63 F.3d 262, 275 (3d Cir. 1995) (holding that a franchise is governed by the NJFPA if the contract requires, or if the parties reasonably anticipated, that the franchisee would establish a New Jersey place of business, and finding that the parties contemplated that that franchisee would establish a New Jersey place of business based on the course of dealing throughout the parties’ relationship).
Finally, Judge Cox Arleo reaffirmed that the NJFPA supersedes any choice of law or venue provision in the franchise agreement. This is not a surprising result. New Jersey state and federal courts have long held that franchisors cannot escape the requirements of the NJFPA by inserting choice-of-law or forum-selection clauses that require a law or venue other than New Jersey into their franchise agreements. See, e.g., Instructional Sys. Inc. v. Computer Curriculum Corp., 130 N.J. 324, 341-42 (1992); Red Roof Franchising, LLC v. Patel, 877 F. Supp. 2d 124, 130-31 (D.N.J. 2012). In fact, the New Jersey Supreme Court has described such clauses as presumptively invalid. Kubis & Perszyk Assocs. v. Sun Microsystems, 146 N.J. 176, 192-3 (1996).
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.