Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Class action under NJFPA survives dismissal efforts at pleading stage, (Sep 10, 2014)

By Edward L. Puzzo, J.D.

It was premature to dismiss a class action, claiming that a distributorship agreement violated the New Jersey Franchise Practices Act (NJFPA), at the complaint stage due to alleged deficiencies in commonality, predominance, ascertainability or Article III standing, the federal district court in Camden, New Jersey has ruled (McPeak v. S-L Distribution Company, Inc., September 5, 2014, Kugler, R.).

Background. On October 27, 2006, Joseph A. McPeak entered an agreement with S-L Distribution Co., granting McPeak an exclusive right to sell and distribute certain products in a specified geographic region in Southern New Jersey. The “Distributor Agreement” classified McPeak as an independent contractor and explicitly stated that McPeak was not to be considered “as the franchisee, partner, agent, or employee” of S-L. It further contained a provision that McPeak “understands and acknowledges that this Agreement is not a franchise agreement,” since it did not provide McPeak with a franchise to distribute authorized products under a marketing plan or system prescribed by S-L, and prohibited McPeak from conducting his business under S-L’s name or trademark. In November 2011, McPeak received notice that S-L was terminating the distributor agreement. McPeak asserted that S-L illegally terminated his franchise in violation of the New Jersey Franchise Practices Act. S-L moved to dismiss the action, claiming that McPeak was not a “franchise” entitled to protection under the NJFPA. On December 19, 2012, the court dismissed McPeak’s complaint, but on January 29, 2014 granted his motion to file an amended complaint. S-L moved to strike the class action allegations of the amended complaint because “the complaint itself demonstrates that the requirements for maintaining a class action cannot be met.”

Class action. Under Fed R. Civ. P. 23(a), the certification of a claim as a class action requires (1) a class so numerous that joinder of all members is impracticable; (2) questions of law or fact exist which are common to the class; 3) that the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. In addition, under Fed R. Civ. P. 23(b), class certification requires that common questions predominate over questions affecting only individual members, and class resolution must be superior to other available methods for the fair and efficient adjudication of the controversy.

Commonality, predominance. S-L Distribution argued that certification of McPeak’s NJFPA claim as a class action was improper on its face, because it lacked commonality and thus failed the predominance requirement. A claim under the NJFPA requires proof that each plaintiff is a franchisee, S-L noted. This status was disclaimed by the contracts between S-L and each potential class member. Thus each potential class member, through evidence individual to that person, would have to prove that they had been granted “a license to use a trade name, trade mark, service mark, or related characteristics,” and that the parties had an arrangement “in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease agreement, or otherwise.”

The court conceded that some of McPeak’s allegations relating to the license requirement were individual to him. However, the court continued, it did not automatically follow that no facts could possibly be developed through discovery that could satisfy the license requirement on a classwide basis. In the Landsman case (640 F.3d 72, 2011), the Third Circuit cautioned against striking class allegations prior to discovery based on lack of predominance. Thus the court concluded that, while it may be difficult for McPeak to produce evidence of commonality through evidence common to the class, the court could not conclude from the complaint that no such evidence could ever be produced.

Ascertainability. S-L also argued that the class was not ascertainable through objective criteria; that is, class members would be impossible to identify without extensive and individualized fact-finding. McPeak, the court noted, identified the class as “all individuals or entities that operated out of a warehouse in the State of New Jersey who were party to a Distributor Agreement with Snyder’s-Lance Distribution, Inc. on November 1, 2011.” All persons who meet this definition, the court observed, could be ascertained through objective methods, such as through S-L’s records of its Distributor Agreement. The court opined that S-L’s argument pertained, not to McPeak’s actual proposed class definition, but instead to the anticipated difficulty plaintiffs would have in proving the factors necessary for a viable NJFPA claim. S-L’s objections would more properly be addressed through a summary judgment motion, the court noted, and not at the class certification stage.

Article III standing. Finally, S-L argued that McPeak’s proposed class included persons without Article III standing, arguing that the proposed class definition lacked purported facts sufficient to establish that there was a license and a community of interest sufficient to establish the existence of a franchise for all purported class members. But, the court countered, if all persons with a Distributor Agreement with S-L and warehouse space in New Jersey were franchisees under the meaning of the NJFPA, then they would each appear to have standing. McPeak is entitled to seek to develop such evidence through discovery. S-L did not cite any case where a court struck class allegations at the pleading stage on the basis of lack of standing by potential absent class members. Accordingly, S-L’s motion to strike the class action allegations must be denied as premature, the court ruled.

The case is Civil Action No. 12-348 (RBK/KMW).

Attorneys: Michael M. Weinkowitz (Levin, Fishbein, Sedran & Berman) for Joseph A. McPeak. Keith E. Smith (Eckert Seamans Cherin & Mellott LLC) for S-L Distribution Company, Inc.

Companies: S-L Distribution Company, Inc.

Cases: FranchisingDistribution NewJerseyNews