Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DNJ: Product Distributorship Was Not a “Franchise” Under New Jersey Law, (Dec 27, 2012)

By John W. Arden, J.D., LLM.

Absent a license to use a supplier’s trademark, a product distribution relationship was not a “franchise” under the New Jersey Franchise Practices Act, the federal district court Camden, New Jersey has ruled (McPeak v. S-L Distribution Co., Inc., December 19, 2012, Kugler, R.). Thus, the supplier’s unilateral termination of the relationship did not violate the statute.

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 shall not 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. After news spread of the termination, McPeak’s business became “worthless” because no prospective purchaser would buy a business that would “disappear in days,” according to McPeak. On January 3, 2012, S-L allegedly reduced McPeak’s exclusive territory, causing his sales volume to drop by almost 50 percent. Subsequently, the parties executed a revised contract that required McPeak to use only advertising supplied or approved by S-L, that prohibited the use of S-L’s trademarks, and that explicitly repudiated McPeak’s status as a franchisee.

On January 19, McPeak filed this action, asserting that S-L illegally terminated his franchise in violation of the New Jersey Franchise Practices Act. On March 8, 2012, McPeak sold his distributorship back to S-L. S-L moved to dismiss the action, claiming that McPeak lacked standing because he sold the distributorship and that McPeak was not a “franchise” entitled to protection under the Franchise Practices Act.

The district court rejected the standing argument, finding that McPeak properly alleged that he suffered an injury in fact, that S-L’s conduct caused the injury, and that the injury would be redressed by recovery of the difference between the fair market value of his distributorship and the price he actually received from S-L’s repurchase of the terminated agreement.

“Franchise” Definition

For purposes of the Franchise Practices Act, a “franchise” is a “written arrangement for a definite or indefinite period, 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 at wholesale, retail, by lease, agreement, or otherwise.”

Neither party in this case disputed that the first statutory element requiring a written agreement was satisfied. However, McPeak failed to satisfy the element of a license to use S-L’s trademark or trade name.

The New Jersey Supreme Court has declared that “not every grant of permission to use a trademark in the sale of goods is a ‘license’ within the meaning of the Franchise Act.” Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324, CCH Business Franchise Guide ¶10,119 (1992). Rather, the hallmark of the franchise relationship is the use of another’s trade name in such a manner as to create a reasonable belief, on the part of the consuming public, that there is a connection between the trade name licensor and licensee by which the licensor vouches for the activity of the licensee. Neptune T.V. & Appliance Service, Inc. v. Litton Systems, Inc., 130 N.J Super 153, CCH Business Franchise Guide ¶8023 (1983).

In this case, McPeak alleged that (1) the agreement granted him the exclusive right to sell and distribute authorized products to authorized outlets within a defined territory; (2) the retailers believed that there was a connection between S-L and McPeak such that S-L was responsible for the overall performance, quality, image, good will, and service provided by McPeak; (3) the exclusive right to sell and distribute authorized products constituted a franchise within the meaning of the Franchise Practices Act; (4) the relationship between S-L and its franchisees established a uniformity of product and control of placement, marketing, price, and other marketing and distribution methods that caused retailer customers to believe they were dealing with S-L itself or a franchise; and (5) customers believed that S-L vouched for his activities.

However, these allegations did not support a finding of a trademark license between the parties, according to the district court. The exclusive right to sell products within a defined territory did not confer a license. The fact that S-L allowed McPeak to use its insignia in some circumstances did not in itself create a license, the court observed. If it did, any business selling a name brand product would be considered as holding a license under New Jersey law. Moreover, McPeak failed to properly plead any facts demonstrating that he actually used S-L’s name.

He tried to sidestep those deficiencies by analogizing to Instructional Systems, in which the New Jersey Supreme Court ruled that the parties’ arrangement constituted a license despite not actually using the producer’s name on stationery, business cards, or signs. However, the contract in that case expressly conferred the right to use the producer’s name, trademark, and logo in advertising, exhibits, trade shows, and manuals. In this case, the distributor agreement explicitly denied McPeak the right to use S-L’s trademarks or trade names.

McPeak failed to plead any facts to support a license arrangement with S-L; failed to cite any contractual provision granting such a license; and failed to plead any actual trademark use constituting a license. Thus, McPeak failed to satisfy the trademark license element of the “franchise” definition.

The case is Civil No. 12-00348 (RBK/KMW).

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

Cases: FranchisingDistribution NewJerseyNews