By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Franchise Law Attorney
Today, in the first part of our series on franchises and when the protections of the New Jersey Franchise Practices Act (NJFPA) apply, we will take a look at the NJFPA and who it was meant to protect. As explained in previous blogs, there are many different types of franchises that exist. You know the obvious ones. Dunkin Donuts, McDonald’s, and KFC all have agreements with companies who run their franchises. Each of these franchises is a cookie-cutter of the franchisor, and this type of experience promotes the brand by creating the same experience no matter where you go. But in the legal world, as with most things, the line between who is a franchisee and who isn’t is blurred. For example, consider a local watch store allowed to be an authorized dealer of a brand name of watches, such as Rolex, but sells other types of watches. Does the store have a franchise relationship with Rolex such that it is subject to the protections of the NJFPA? The question will be answered in another blog, but for now, let’s dive into how the courts define a franchise.
When the NJFPA was enacted, it was meant as protection from the inequality that would exist between franchisor and franchisee. After all, the franchisee is simply given a license to use the franchisor’s property, including trademarks, recipes, and products it has created, and that license is easily revocable without statutory protections in place. In the case of the McDonald’s or Dunkin Donuts, revocation of the license through termination of the franchise agreement means death of the business. So the NJFPA was enacted to protect franchisees from having the proverbial carpet from being pulled out from under them.
Under the Act, there are five critical elements necessary to establish a franchise under the NJFPA:
- The franchisee maintains the place of business in New Jersey;
- The franchisor grants a license to the franchisee;
- Gross sales of the shared product or service between franchisor and franchisee exceeds $35,000 for a year preceding the lawsuit;
- More than 20% of the franchisee’s gross sales are derived, or intended to be derived, from the relationship; and
- A “community of interest” exists between the franchisor and franchisee.
As you can tell, items 1-4 are pretty self-explanatory and can be established right away just by looking at the prospective franchisee’s sales reports from the past year, along with the purported franchise agreement. It is item 5, the community of interest, that has been examined by the courts and law reviews in New Jersey in figuring out what it means.
The “community of interest” requirement is meant to limit the types of licensing agreements the protections were meant for. It restricts the types of agreements protected to ones that would suffer extreme losses if the agreement was terminated. The Third Circuit has laid down four different factors courts should look at to determine the “community of interest” issue, and they are centered on the type of power the franchisor has over the franchisee.
- Disparity in bargaining power
- Economic dependence on the franchisor
- Amount of control franchisor has over the franchisee
- Investments made by the franchisee to the franchisor
In our next blog, we will discuss the first three factors and determine just how much dominance is sufficient for the NJFPA to apply, and then the subsequent article will discuss the investment portion and how the state Supreme Court has limited the applicability of that factor even more than the Third Circuit.
To discuss your NJ Franchise matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.