The following article has been provided by MHSNJ member Jeremy Silberman.
MHSNJ Member Jeremy I. Silberman, Esq.In the January 2009 MHSNJ Newsletter, I wrote about the wide range of businesses covered by New Jersey’s Franchise Practices Act (“NJFPA”) and its protections. Click here to download January 2009 Newsletter. On January 16, 2010, the NJFPA was amended to cover an even wider range of businesses, including specifically warehouse based wholesale distributors.
Enacted in 1971, the NJFPA prohibits a “franchisor” from terminating a “franchisee” without “good cause” or from imposing unreasonable standards of performance. First, let’s be clear that a “franchise,” for purposes of the NJFPA, is not just your neighborhood McDonalds, Burger King, and other types of traditional franchises. Many types of businesses in New Jersey, are franchises for purpose of the NJFPA, including companies in material handling industries. A contract between any two businesses is a “franchise” under the NJFPA so long as six requirements are met: (1) a written arrangement between the parties, (2) one party (called the “franchisor”) grants the other party (the “franchisee”) permission to use a trademark, trade name, service mark, or related characteristic, (3) there is a “community of Interest” in the marketing of goods or services, (4) the franchisee has “a place of business” in New Jersey, (5) more than 20% of the franchisee’s gross sales are derived (or intended to be derived) from this arrangement, and (6) gross sales of products or services between the franchisor and franchisee exceed $35,000 in the prior year.
I highlighted the “place of business” element in the above paragraph because that requirement was just amended to include warehouses and offices of wholesale distributors. Prior to the recent amendment, the NJFPA defined a place of business as “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... [but] shall not mean an office, a warehouse, a place of storage, a residence or a vehicle.” Thus, the law required some level of sales activity to take place on the premises and excluded certain types of facilities. Manufacturers used this “place of business” definition to deprive distribution businesses of the NJFPA’s protections. Distributors frequently do not conduct sales activity on their own premises; the distributors’ personnel make sales calls, obtain orders, and make deliveries at their customers’ facilities. This led to the following anomaly: if a distributor required its customers to buy goods at the distributor’s place of business, it could be protected from termination by the statute, yet if the distributor instead delivered products to its customers and consummated its sales at the customer’s location, it did not meet the place of business requirement, and was not protected by the NJFPA.
Following this logic, in 2007, the federal district court in New Jersey allowed the termination of a New Jersey wholesale distributor of Vitaminwater™ beverages, holding that it was not protected by the NJFPA. This company had been distributing Vitaminwater™ beverages since the product was first introduced, and invested considerable time and money to create a market for the product where none previously existed. Its personnel made sales calls at customers’ corporate offices and supermarkets, obtained orders at the customers’ facilities, and delivered the product to the customers’ stores. After the distributor built a multi-million dollar market, the Coca-Cola Company purchased Glaceau, maker of Vitaminwater™ , terminated the Vitaminwater™ distributors, and replaced them with Coca-Cola’s existing distributors. The New Jersey distributor sued for unlawful termination, in violation of the NJFPA. However the federal district court found it was not protected by the statute because it did not have sufficient retail sales activity at its own warehouse to meet the “place of business” requirement.
The legislature passed the new amendment to the NJFPA in response to this Vitaminwater™ distributor case and other instances where wholesale distributors were denied NJFPA protection. In passing the amendment, the legislature expressly found that protections against unreasonable termination “are necessary to protect not only retail businesses, but also wholesale distribution franchisees that, through their efforts, enhance the reputation and good will of franchisors in this State.” (P.L. 1971, c.356, Sec. 2.)
Under the amended law, effective January 16, 2010, the place of business definition is expanded:
Place of business means a fixed geographic 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 geographic location at which the franchisee displays for sale and sells the franchisor’s goods . . . or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor’s goods are delivered for customers. (P.L. 1971, c.356, s.3)
This expansion of the place of business requirement is limited to companies “who do not make a majority of their sales directly to consumers.” For these businesses, at least, the place of business requirement can be met by an office or warehouse from which sales personnel make sales calls or from which product is delivered, even if no sales activity takes place at the facility. The amended NJFPA is a significant improvement in protecting New Jersey’s wholesale distributors from unreasonable terminations, and expands the opportunity to structure your business operations to fall within its protections.
Enacted in 1971, the NJFPA prohibits a “franchisor” from terminating a “franchisee” without “good cause” or from imposing unreasonable standards of performance. First, let’s be clear that a “franchise,” for purposes of the NJFPA, is not just your neighborhood McDonalds, Burger King, and other types of traditional franchises. Many types of businesses in New Jersey, are franchises for purpose of the NJFPA, including companies in material handling industries. A contract between any two businesses is a “franchise” under the NJFPA so long as six requirements are met: (1) a written arrangement between the parties, (2) one party (called the “franchisor”) grants the other party (the “franchisee”) permission to use a trademark, trade name, service mark, or related characteristic, (3) there is a “community of Interest” in the marketing of goods or services, (4) the franchisee has “a place of business” in New Jersey, (5) more than 20% of the franchisee’s gross sales are derived (or intended to be derived) from this arrangement, and (6) gross sales of products or services between the franchisor and franchisee exceed $35,000 in the prior year.
I highlighted the “place of business” element in the above paragraph because that requirement was just amended to include warehouses and offices of wholesale distributors. Prior to the recent amendment, the NJFPA defined a place of business as “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... [but] shall not mean an office, a warehouse, a place of storage, a residence or a vehicle.” Thus, the law required some level of sales activity to take place on the premises and excluded certain types of facilities. Manufacturers used this “place of business” definition to deprive distribution businesses of the NJFPA’s protections. Distributors frequently do not conduct sales activity on their own premises; the distributors’ personnel make sales calls, obtain orders, and make deliveries at their customers’ facilities. This led to the following anomaly: if a distributor required its customers to buy goods at the distributor’s place of business, it could be protected from termination by the statute, yet if the distributor instead delivered products to its customers and consummated its sales at the customer’s location, it did not meet the place of business requirement, and was not protected by the NJFPA.
Following this logic, in 2007, the federal district court in New Jersey allowed the termination of a New Jersey wholesale distributor of Vitaminwater™ beverages, holding that it was not protected by the NJFPA. This company had been distributing Vitaminwater™ beverages since the product was first introduced, and invested considerable time and money to create a market for the product where none previously existed. Its personnel made sales calls at customers’ corporate offices and supermarkets, obtained orders at the customers’ facilities, and delivered the product to the customers’ stores. After the distributor built a multi-million dollar market, the Coca-Cola Company purchased Glaceau, maker of Vitaminwater™ , terminated the Vitaminwater™ distributors, and replaced them with Coca-Cola’s existing distributors. The New Jersey distributor sued for unlawful termination, in violation of the NJFPA. However the federal district court found it was not protected by the statute because it did not have sufficient retail sales activity at its own warehouse to meet the “place of business” requirement.
The legislature passed the new amendment to the NJFPA in response to this Vitaminwater™ distributor case and other instances where wholesale distributors were denied NJFPA protection. In passing the amendment, the legislature expressly found that protections against unreasonable termination “are necessary to protect not only retail businesses, but also wholesale distribution franchisees that, through their efforts, enhance the reputation and good will of franchisors in this State.” (P.L. 1971, c.356, Sec. 2.)
Under the amended law, effective January 16, 2010, the place of business definition is expanded:
Place of business means a fixed geographic 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 geographic location at which the franchisee displays for sale and sells the franchisor’s goods . . . or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor’s goods are delivered for customers. (P.L. 1971, c.356, s.3)
This expansion of the place of business requirement is limited to companies “who do not make a majority of their sales directly to consumers.” For these businesses, at least, the place of business requirement can be met by an office or warehouse from which sales personnel make sales calls or from which product is delivered, even if no sales activity takes place at the facility. The amended NJFPA is a significant improvement in protecting New Jersey’s wholesale distributors from unreasonable terminations, and expands the opportunity to structure your business operations to fall within its protections.
Jeremy I. Silberman (MHSNJ Member) and Haekyoung Suh, who contributed to this article, are members of Norris, McLaughlin & Marcus, P.A. and specialize in franchise and distribution law. Norris, McLaughlin & Marcus is a full service law firm based in Bridgewater, New Jersey, with offices in Allentown, Pennsylvania, and New York City. For more information visit www.nmmlaw.com.
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