Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Terminated moving business failed to state a claim under New Jersey franchise law, implied duty of good faith and fair dealing, (Jul 26, 2013)

By John W. Arden, J.D., LL.M.

A moving van agent failed to state claims that its principal violated the New Jersey Franchise Practices Act or breached the implied covenant of good faith and fair dealing by terminating their agency agreement without good cause or advance written notice, the federal district court in Camden, New Jersey has ruled (Ocean City Express Co., Inc. v. Atlas Van Lines, Inc., July 25, 2013, Simandle, J.). The court granted the principal’s motion to dismiss for failure to state a claim, without prejudice.

The agent, Ocean City Express Co., Inc., asserted claims against the principal, Atlas Van Lines, for violation of the New Jersey Franchise Practices Act and breach of the implied duty of good faith and fair dealing. The district court held that Ocean City failed to plead sufficient facts to show that it qualified as a “franchise” under the New Jersey statute and could not maintain a claim under the implied covenant of good faith and fair dealing because Indiana law, which governed the action, does not recognize such claims.

“Franchise.” In order to state a claim under the New Jersey Franchise Practices Act, a plaintiff must allege: (1) a place of business within New Jersey, (2) gross sales stemming from a purported franchise agreement of more than $35,000 in the 12 months preceding initiation of the lawsuit, and (3) more than 20 percent of gross sales coming from the franchise relationship. Failure to satisfy any of these requirements required dismissal of the Franchise Practices Act claim, the court noted. Because the complaint in this case failed to allege gross sales exceeding $35,000 from Atlas Van Lines’ products and services, the agent failed to state a claim.

The complaint expressly alleged that the “business relationship between Plaintiff and Defendant pursuant to the Agency Agreement and Plaintiff’s and Defendant’s performance thereof constituted a Franchise within the meaning of the New Jersey Franchise Practices Act.” However, the complaint did not allege facts to support this conclusion, the court found. It did not allege the amount of gross sales stemming from the relationship and made no claims regarding the percentage of sales that came from the agency agreement.

A certification attached to the plaintiff’s opposition brief alleged that revenue from Atlas Van Lines comprised between 85 percent and 90 percent of Ocean City’s total revenue. The court refused to consider this assertion because a plaintiff may not add factual allegations in opposition. “[T]he mechanism for curing pleading deficiencies is to file an amended complaint pursuant to Fed. R. Civ. P. 15(a).” A certification attached to an opposition brief is not a pleading that may be considered at this procedural posture, according to the court.

Even if the court could consider the allegation regarding percentage of sales stemming from the agency agreement, neither the complaint nor the certification alleged that sales exceeded $35,000 in the last 12 months of the parties’ business relationship. That deficiency alone was sufficient for dismissal, according to the court. The dismissal was without prejudice and with leave to file a motion to amend.

Duty of good faith and fair dealing. Atlas Van Lines argued that Indiana law governed the action, pursuant to the agency agreement, and that Indiana does not recognize a duty of good faith and fair dealing. The agency agreement stated that it “shall be interpreted in accordance with the laws of Indiana.” The district court looked to New Jersey choice of law rules, which generally uphold a contractual choice of law if it does not violate New Jersey’s public policy.

Ocean City failed to cite any cases holding that enforcement of a choice-of-law provision that results in the preclusion of a good faith and fair dealing claim would violate New Jersey’s public policy. “The implied duty of good faith and fair dealing arises from New Jersey’s common law . . . not from some overarching legislative statement of public policy.” Thus, the court applied Indiana law to dismiss Ocean City’s good faith and fair dealing claim.

The dismissal was without prejudice because Indiana law has exceptions for contracts involving a fiduciary duty or ambiguity. “Plaintiff may be able to show, in an amended pleading, a plausible basis to claim that the duty of good faith and fair dealing does apply, even under Indiana law.” While the proposition was doubtful, the court would not foreclose a final opportunity to allege an exception to the general rule.

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

Attorneys: Jeffrey H. Sutherland (Jeffrey H. Sutherland, PC) 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