Recent Amendments to the New Jersey Franchise Practices Act Expands Its Scope to Include More Distributors
By: John J. Jacko, III, Esquire of FELLHEIMER & EICHEN LLP ©2010
On January 16, 2010, the New Jersey Legislature approved amendments to the New Jersey Franchise Practices Act (Franchise Practices Act), N.J.S.A. §§56:10-1, et seq., broadening it scope to include a broader range of distributors that were signed into law by outgoing Governor Jon Corzine, effective immediately. Dubbed the “Mobile Franchise Bill” prior to passage, the amendments alter and expand the scope of covered franchises by defining “place of business to mean:
...a fixed geographical location at which the franchisee displays for sale or at which or from which the franchisee sells the franchisor’s goods or offers for sale and sells the franchisor’s services. Place o f business shall not mean a place of storage, a residence or a vehicle, but shall mean 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 identifies the additional amendment language).
In passing the amendments, the New Jersey Legislature also amended its findings and declarations to specify its determination that it is in the public interest to “protect franchisees from unreasonable termination by franchisors” due to “a disparity of bargaining power” and that there was a need to not only protect “retail businesses, but also wholesale distribution franchises that, through their efforts, enhance the reputation and goodwill of franchisors.” N.J.S.A. §56:10-2. Perhaps most interesting of all is the Legislature’s finding that “the courts have in some cases more narrowly construed the Franchise Practices Act than was intended by the Legislature.” Id.
The Franchise Practices Act amendments were passed despite vocal opposition from the franchising community. Even as late as the weeks leading up to passage, the International Franchise Association (IFA) urged its members and constituents to ask legislators to “oppose the bill or take the necessary steps to remove business-format franchising from the scope of the bill.” IFA Insider Vol. 14, Issue No. 26, December 22, 2009 Page 3. Arguing that the amendments would subject New Jersey businesses, already regulated by the Federal Trade Commission Franchise Rule, to additional state scrutiny that would put them at a competitive disadvantage to businesses in near by states, the IFA cited economic studies in support of its argument that “undue regulation . . . has a chilling effect on the growth of small franchised businesses and withholds the dream of business ownership from prospective investors.” Id.
In order for a franchisee to claim protection under the Franchise Practices Act, it must show:
- the franchisor granted the franchisee a license to use a trade name, trade mark, service mark, or related characteristic;
- there is a “community of interest” in the marketing of goods and services;
- the franchisee has established or maintains a “place of business” in New Jersey;
- the gross sales of products or services between the franchisor and franchisee exceed $35,000 in the year prior; and
- more than 20% of the of the franchisee’s sales are intended to be or are derived from the franchise.
The Franchise Practices Act amendments open the law’s protections from wrongful termination to wholesale distributor’s not previously covered, if they can meet the statute’s five part test. Only time will tell of the larger economic impact that the amended Franchise Practices Act will have on the New Jersey economy and franchise community.
In a “business format” franchise, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the business.
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