Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Termination of water distributorship may have violated Franchise Practices Act, (Oct 27, 2014)

By Greg Hammond, J.D.

Nestlé Waters North America’s termination of a water distributorship might have violated the New Jersey’s Fraudulent Practices Act (FPA), among other claims. In denying the distributor’s motion for preliminary injunction and partially denying Nestlé’s motion to dismiss, the federal district court in Trenton, New Jersey, determined—in part—that questions remained regarding whether the distributor maintained a place of business within the “franchise” definition of the FPA (Watchung Spring Water Co., Inc. v. Nestlé Waters North America Inc., October 23, 2014, Sheridan, P.).

Background. Nestlé and Watchung Spring Water Co., Inc. entered into a distributorship agreement in 1994, in which Watchung operated as an exclusive distributor of certain Nestlé products in a defined geographic area in New Jersey. The agreement also had an automatic renewal provision, absent lawful termination. However, in 2014, Nestlé sent Watchung a letter terminating the agreement and, months later, sent Watchung a proposed agreement that would render Watchung a non-exclusive distributor in the same territory it operated in for over sixty years. Watchung consequently brought suit for declaratory and injunctive relief, alleging violations of the FPA, breach of covenant of good faith and fair dealing, tortious interference with economic advantage, and breach of contract. Watchung also applied for preliminary injunction, and Nestlé moved to dismiss for failure to state a claim for which relief may be granted.

Preliminary injunction. In support of its application for preliminary injunction, Watchung argued that a likelihood of success existed because: (1) the agreement created a franchise, triggering the application of the FPA, and precluding Nestlé from terminating the agreement without sufficient cause and alternatively (2) Nestlé improperly terminated the agreement. Nestlé opposed the motion, arguing that the distributorship relationship between the two companies was not subject to the FPA and that Watchung was not a “franchise” because it did not maintain a “place of business” in New Jersey. The court noted that the “place of business” definition “contemplates a location where selling is a major activity—a particular kind of selling involving the interplay of goods on display, the physical presence of the customer and the selling efforts of the vendor.” Because the Watchung facility in question was regularly used as a warehouse for storage of Nestlé’s products and the terms of the agreement “simply call for the maintenance of what can only fairly be described as a warehouse,” the court determined that it would be required to conduct a hearing to determine whether the facility is a “place of business” within the meaning of the FPA. Consequently, the application for preliminary injunction was denied.

Motion to dismiss. The court also found that Watchung sufficiently pleaded its claims for violation of the FPA, declaratory and injunctive relief, breach of covenant of good faith and fair dealing, and breach of contract. Thus, it partially denied Nestlé’s motion to dismiss. However, the cause of action for tortious interference with business advantage was dismissed with prejudice. The court found that the distributor pleaded the claim’s malice requirement in a conclusory fashion, and that the company attempted “to present what appears to be either a claim sounding in breach of contract or violation of the FPA in the clothing of a tort.”

The case number is 14-cv-04984 (PGS)(DEA).

Attorneys: Adam K. Derman (Wolff & Samson, PC) for Watchung Spring Water Co., Inc. Elena Therese McDermott (Herrick, Feinstein LLP) for Nestlé Waters North America Inc.

Companies: Watchung Spring Water Co., Inc.; Nestlé Waters North America Inc.

Cases: FranchisingDistribution NewJerseyNews