Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.J. Super. App. Div.: New Jersey franchise law not applicable to insurance agency relationships, (May 14, 2014)

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

Insurance agencies were not entitled to the protections of the New Jersey Franchise Practices Act because application of the franchise law would interfere with the regulatory framework set out in New Jersey’s insurance code and because the agencies did not qualify as “franchises” within the Act, according to the Superior Court of New Jersey, Appellate Division (DeLuca v. Allstate New Jersey Insurance Co., May 13, 2014, Per Curiam).

Three independent agents sought damages for wrongful termination under the Act and breach of the implied covenant of good faith and fair dealing. On summary judgment, the trial court concluded that (1) applying the Franchise Practices Act to insurance agency relationships would interfere with the regulatory framework of the New Jersey insurance code; (2) the agency relationship did not qualify as a “franchise” within the Act; and (3) the termination of exclusive agency agreements did not violate the implied covenant of good faith and fair dealing.

On appeal, the three agents argued that they were “franchises” within the Act and that the trial court erred in finding that they failed to establish the “community of interest” and “place of business” elements of the franchise definition and in dismissing the implied covenant claims.

Conflict with insurance regulation. The appellate court agreed with the trial court holding that applying the Franchise Practices Act would conflict with the “highly regulated” insurance industry. Among the sharp differences between the insurance code and franchise statute is the regulation of terminations. The insurance code allows the termination of an agency agreement for any reason except specifically enumerated reasons upon 90 days’ notice. The franchise statute prohibits termination “without good cause,” generally involving the franchisee’s failure to substantially comply with the requirements of the franchise agreement.

“These conflicts, as well as the numerous other examples cited in the judge’s decision, pertain to direct, unavoidable, patent, sharp, and real differences between the Act and the heavily regulated insurance scheme,” the appellate court observed. “As a result, we agree with the judge that the Act is inapplicable to plaintiffs’ insurer-agent relationship with Allstate.”

“Franchise” definition. Even if there were no conflicts between the franchise law and the insurance regulations, the relationship between the complaining agents and Allstate did not constitute a franchise under the Act because there was no “community of interest” between the parties and the agents did not maintain a “place of business” within the state, the appellate court held.

“Community of interest” exists when the terms of an agreement or the nature of the franchise business requires the licensee to make a substantial investment in goods or skill that would be of minimal utility outside the franchise. These investments are usually tangible capital investments such as a building designed to meet the style of the franchise, special equipment useful only to produce the franchise product, or franchise signs. As the trial court stated, the agents made no such investments.

The Act applied only to franchises that contemplate or maintain a place of business within the State of New Jersey. A “place of business” means a fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or services. In New Jersey, only an insurer may sell insurance, and the agents were not insurers, the court noted. They were not authorized to sell Allstate’s insurance. Consequently, they did not maintain a “place of business” within the meaning of the franchise law.

Breach of implied covenant. Every contract in New Jersey contains an implied covenant of good faith and fair dealing. Under the implied covenant, neither party to a contract may do anything that will have to effect of destroying or injuring the right of the other party to receive the fruits of the contract. The party claiming a breach of the implied covenant must provide evidence that the other party engaged in some conduct that denied it the benefit of the bargain originally intended by the parties.

In this case, the agents alleged that Allstate breached the implied covenant by terminating their exclusive agreements (EAs) in an unreasonable and arbitrary manner. Pursuant to the exclusive agreements, either party could terminate the relationship without cause, upon 90 days’ written notice. “The record shows, however, that Allstate adequately informed plaintiffs about the consequences of their failure to meet their Expected Results,” the court found. “The EAs required plaintiffs to ‘meet certain business objectives established by the Company in the areas of profitability, growth, retention, customer satisfaction, and customer service.’” Allstate conducted annual reviews to determine whether the agents were achieving expected results. At their annual reviews for the year 2007, Allstate advised the agents that they had not met their expected results in some areas. Thereafter, the agents failed to meet expected results by wide margins for 2008, 2009, and 2010.

Allstate informed them that their performances were deficient and that their continued failure could jeopardize their agency relationships. Allstate made further warnings, but the agents failed to show improvement, resulting in their eventual termination under the exclusive agreements’ “without cause” provision. Allstate’s warnings were patent, timely, and unmistakable, according to the court.

The terminations did not plainly deny the agents either (1) the benefit of the bargain originally intended or (2) the fruits of their contracts, the court held. As required by the agreements, Allstate made payments for the agents’ economic interests in their agencies. The agents failed to show bad motive or intention by Allstate. Without proof of bad motive or intention, the agents did not have viable claims for breach of the implied covenant.

The case is Docket No. A-2724-11T4.

Attorneys: W. Michael Garner (W. Michael Garner, P.A.) for Mario DeLuca and Auburn Insurance Agency, LLC. David J. D’Aloia (Saiber LLC) for Allstate New Jersey Insurance Co. Jason N. Silberberg, Deputy Attorney General, amicus curiae for New Jersey Department of Banking and Insurance.

Companies: Allstate New Jersey Insurance Co.; Auburn Insurance Agency, LLC

Cases: FranchisingDistribution NewJerseyNews