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Federal Court Denies Attempt to Broaden Interpretation of the New Jersey Franchise Practices Act
by: Peter Lawrence Loh of Foley & Lardner LLP  -  D & F Updates - Distribution & Franchise Updates
Monday, June 24, 2024

The U.S. District Court for the District of New Jersey refused a franchisee’s attempt to broaden the protections of the New Jersey Franchise Protection Act. William Minnebo and Philly Metal Supply LLC entered into a franchise agreement with a franchisor, Metal Supermarkets Franchising America Inc., on May 1, 2021, for a franchise to sell metal supplies. A little over a year later, on June 2, 2022, Philly Metal Supply closed its franchise. Metal Supermarkets then terminated the franchise two days later.

Philly Metal claimed Metal Supermarkets did not provide accurate information about market conditions or local competition and imposed unreasonable standards on the franchise. Philly Metal filed suit in New Jersey state court for several causes of action including violation of the New Jersey Franchise Practices Act (“NJFPA”). Metal Supermarkets removed the case to federal court and then filed a motion to transfer the case to the U.S. District Court for the Western District of New York.

The district court in New Jersey granted the motion to transfer despite Philly Metal’s argument that the NJFPA precluded a change in venue. At the motion to transfer hearing, Philly Metal introduced a case, Tynan v. General Motors Corp., 127 N.J. 269 (N.J. 1992),that neither side cited in the briefing. On this basis, the district court permitted Philly Metal to move for reconsideration of its transfer order and for leave to file an interlocutory appeal. 

To grant a motion for reconsideration, a court must find a change in the controlling law, the availability of new evidence, or the need to prevent “manifest injustice.” To bring a claim under the NJFPA, the Plaintiff must show the following three elements:

  1. The performance of [the agreement] 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 the 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.

Both parties conceded that Philly Metal met the first and third elements. The dispute was over satisfaction of the second element.

This is where Philly Metal relied upon Tynan and cases it cited for the proposition that the NJFPA could be broadened to allow Philly Metal to qualify as a franchise and, thus, be entitled to its protections, namely the ability to block enforcement of a forum selection clause. The district court declined and instead opted to interpret the statute under its plain terms and in accordance with the statute’s purpose of protecting franchisees with less bargaining power.

Moreover, the district court explained that regardless of the meaning of Tynan, Philly Metal failed to plead a colorable claim under the NJFPA. Philly Metal’s claim that Metals Supermarket wrongfully terminated the franchise agreement after imposing unreasonable standards on Philly Metal did not hold up. Although the NJFPA does not define “unreasonable standards,” courts have found this standard met after franchisees were required to “operate at a substantial financial loss” while a franchisor tried an unproven market strategy. In addition, performance standards that indicate manipulative behavior, arbitrariness, or bad intent by the franchisor may also rise to an “unreasonable standard.” Philly Metal could only point to Metals Supermarket’s requirement to purchase inventory from a Philly Metal competitor who also sold the same inventory to retail customers. The Court did not find that the facts as the Plaintiffs alleged showed that the Defendants had a “bad intent” or plan to ruin the franchise economically. Therefore, the Court held that the Plaintiffs failed to establish a claim under the NJFPA and denied their motion for reconsideration.

Second, the Court denied the Plaintiff’s motion for leave to file an interlocutory appeal. To grant a motion for leave to file an interlocutory appeal, there must be a controlling question of law with “substantial ground for difference of opinion.” The Court explained that although some guidance regarding the meaning of the holding in Tynan would be helpful, such clarification would not “materially advance the ultimate termination of the litigation” because the Plaintiffs still failed to a state valid claim under the NJFPA.

This case demonstrates that although the NJFPA’s purpose is to protect franchisees with less bargaining power, courts recognize that this protection is not unlimited. Courts in New Jersey will enforce the statute pursuant to its plain terms. In addition, this case provides helpful insight for franchisors defending allegations that they imposed “unreasonable standards” on a franchisee by explaining that Plaintiffs must substantiate their claims with an actual showing of a franchisor’s manipulative behavior, arbitrariness, or bad intent.

Olivia Vasquez contributed to this article

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