Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Moving business did not adequately allege that it was New Jersey franchise, (Feb 24, 2014)

By Peter Reap, J.D., LL.M.

Ocean City Express Co., a moving business that had entered into an Agency Agreement with Atlas Van Lines, failed to adequately allege that the parties’ relationship constituted a franchise relationship under the New Jersey Franchise Practices Act (NJFPA), the federal district court in Newark, has determined (Ocean City Express Co., Inc. v. Atlas Van Lines, Inc., February 19, 2014, Simandle, J.). Specifically, Ocean failed to plead that its business location is a qualifying place of business. Ocean’s NJFPA claim against Atlas was dismissed without prejudice. In addition, its good faith and fair dealing claim was dismissed with prejudice. Ocean was granted 14 days in which to file an amended NJFPA claim.

Background. On December 17, 2010, Atlas sent Ocean a letter terminating the Agency Agreement “without setting forth any basis justifying ‘good cause’ for such termination.” Ocean brought suit.

On July 25, 2013, the court granted without prejudice Atlas’ motion to dismiss because Ocean failed to plead facts sufficient to show that its relationship with Atlas qualified as a franchise relationship under the NJFPA. Specifically, Ocean failed to allege the amount of gross sales stemming from the relationship and the percentage of Ocean’s sales that came from the Agency Agreement. The court also dismissed Ocean’s good faith and fair dealing claim because the Agency Agreement specifies that Indiana law applies and because Indiana common law does not allow good faith and fair dealing claims. Ocean’s motion to file an amended complaint was before the court.

Good faith and fair dealing claim. The court’s previous dismissal of Ocean’s good faith and fair dealing claim was without prejudice because Indiana law has exceptions for contracts involving a fiduciary duty or ambiguity and, in an amended pleading, Ocean could potentially plead a good faith and fair dealing claim that fell within an exception.

Ocean’s proposed Amended Complaint, however, did not allege any of the exceptions recognized by Indiana law. In fact, Ocean’s good faith and fair dealing claim is identical to the claim that was previously dismissed. Thus, Ocean’s motion to amend its claim for a violation of the implied duty of good faith and fair dealing was futile and this claim was dismissed with prejudice.

NJFPA claim. Ocean did not plead facts sufficient to show that its relationship with Atlas qualified as a franchise relationship under the NJFPA, the court held. Specifically, Ocean failed to plead that its business location is a qualifying place of business.

The NJFPA defines a franchise as “a written arrangement … in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services … .” N.J.S.A. § 56:10-3(a).

The proposed Amended Complaint satisfied the “license” requirement of the NJFPA. The Agency Agreement authorized Ocean to “represent[] and act[] on behalf of Atlas in connection with Atlas’ business.” Thus, Atlas “vouches” for the activity of Ocean covered by the agreement and the “license” requirement was satisfied, according to the court.

The proposed Amended Complaint also satisfied the “community of interest” requirement, which “exists when the terms of the agreement between the parties or the nature of the franchise business requires the licensee, in the interest of the licensed business’s success, to make a substantial investment in goods or skills that will be of minimal utility outside the franchise.” Ocean alleged that Atlas’ termination of the agreement caused Ocean to incur costs “between $175,000 and $200,000” to “de-brand Plaintiff’s various vehicles, buildings, stationary, and other signage.” These franchise-specific investments were required by the Agency Agreement, which states that Ocean shall “advertise the services of Atlas at Agent’s expense … ,” the court observed. Thus, a community of interest existed.

Even if a relationship met the general franchise definition, not all franchises fall under the NJFPA, the court noted. To state an NJFPA claim, Ocean must also show: (1) a place of business within New Jersey, (2) gross sales stemming from the franchise agreement that exceeded $35,000.00 in the 12 months preceding initiation of the lawsuit, and (3) that more than 20% of Plaintiff’s gross sales came from the franchise relationship.

The proposed Amended Complaint failed to allege that Ocean’s principal office is a qualifying place of business under the NJFPA, the court decided. The NJFPA defines “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.” N.J.S.A. § 56:10-3(f). The Act further explains that “[p]lace of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle.”

Ocean failed to allege that its business location is a qualifying “place of business” because Ocean did not allege that its business location was a place involving the display of goods or the physical interaction between the customer and the vendor. Furthermore, Ocean did not allege that its business location was regularly used for activities that were an integral part of the sales process.

Ocean’s proposed Amended Complaint alleged that Ocean’s principal office is located at 580 W. Leeds Avenue, City of Pleasantville, Atlantic County, New Jersey. Ocean did not, however, allege that this address is a “sales location.”

There is an exception to the “place of business” definition for businesses that do not make the “majority of [their] sales directly to consumers.” N.J.S.A. § 56:10-3(f). Ocean did not plead facts sufficient to determine whether it makes the majority of its sales directly to consumers, and thus it did not qualify for the exception, the court ruled.

Ocean did remedy the grounds for dismissal discussed explicitly in the court’s July 25, 2013, opinion, in which the court held that Ocean failed to allege the amount of gross sales stemming from the relationship between the parties and the percentage of Ocean’s sales that came from the Agency Agreement, the court noted. If Ocean, consistent with counsel’s obligations under Rule 11, Fed. R. Civ. P., could satisfy the remaining NJFPA pleading requirement, it could file a Second Amended Complaint within (14) days without the necessity of seeking leave of court, the court stated.

The case is No. 13-1467 (JBS/KMW).

Attorneys: Jeffrey H. Sutherland for Ocean City Express Co., Inc. Gary Francis Seitz (Rawle & Henderson, LLP) for Atlas Van Lines, Inc.

Companies: Ocean City Express Co., Inc.; Atlas Van Lines, Inc.

Cases: FranchisingDistribution NewJerseyNews