Attempt to Broaden Interpretation of the New Jersey Franchise Practices Act Is Denied

A franchisee’s effort to expand the protections of the New Jersey Franchise Practices Act recently failed in U.S. district court. The franchisee sued its former franchisor when the franchisor terminated the franchise at issue for non-performance. The franchisor successfully moved for transfer of venue under the terms of the franchise agreement, and the franchisee moved for reconsideration and ultimately failed. In doing so, the district court rejected the franchisee’s attempt to broaden the NJFPA.

Background of the Franchise Dispute

William Minnebo and Philly Metal Supply LLC entered into a franchise agreement with a franchisor, Metal Supermarkets Franchising America Inc., on May 1, 2021, for a franchise to sell metal supplies. A little over a year later, on June 2, 2022, Philly Metal Supply closed its franchise. Metal Supermarkets then terminated the franchise two days later. Philly Metal claimed Metal Supermarkets did not provide accurate information about market conditions or local competition and imposed unreasonable standards on the franchise. Philly Metal filed suit in New Jersey state court for several causes of action including violation of the New Jersey Franchise Practices Act.

The Franchisor’s Motion to Transfer

Metal Supermarkets removed the case to federal court and then filed a motion to transfer the case to the U.S. District Court for the Western District of New York. The district court in New Jersey granted the motion to transfer despite Philly Metal’s argument that the NJFPA precluded a change in venue. At the motion to transfer hearing, Philly Metal introduced a case, Tynan v. General Motors Corp., 127 N.J. 269 (N.J. 1992),that neither side cited in the briefing. On this basis, the district court permitted Philly Metal to move for reconsideration of its transfer order and for leave to file an interlocutory appeal.  

The District Court Refuses to Broaden the Protections of the New Jersey Franchise Practices Act

To grant a motion for reconsideration, a court must find a change in the controlling law, the availability of new evidence, or the need to prevent “manifest injustice.” To bring a claim under the New Jersey act, the Plaintiff must show the following three elements:

• The performance of [the agreement] contemplates or requires the franchisee to establish or maintain a place of business within the State of New Jersey;
• Where gross sales of products or services between the franchisor and the franchisee covered by such franchise shall have exceeded $35,000.00 for the 12 months next preceding the institution of suit pursuant to this act; and
• Where more than 20% of the franchisee’s gross sales are intended to be or are derived from such franchise.

Both parties conceded that Philly Metal met the first and third elements. The dispute was over satisfaction of the second element.

Philly Metal relied upon Tynan and cases it cited for the proposition that the New Jersey Franchise Practices Act could be broadened to allow Philly Metal to qualify as a franchise and, thus, be entitled to its protections, namely the ability to block enforcement of a forum selection clause. The district court declined and instead opted to interpret the statute under its plain terms and in accordance with the statute’s purpose of protecting franchisees with less bargaining power.

The Franchisee’s Claim for Violation of the New Jersey Franchise Practices Act Also Fails

Moreover, Philly Metal failed to plead a colorable claim under the act. Philly Metal’s claim that Metals Supermarket wrongfully terminated the franchise agreement after imposing unreasonable standards on Philly Metal did not hold up. Although the act does not define “unreasonable standards,” courts have found this standard met after franchisees were required to “operate at a substantial financial loss” while a franchisor tried an unproven market strategy. In addition, performance standards that indicate manipulative behavior, arbitrariness, or bad intent by the franchisor may also rise to an “unreasonable standard.” Philly Metal could only point to Metals Supermarket’s requirement to purchase inventory from a Philly Metal competitor who also sold the same inventory to retail customers. The Court did not find that the facts as the Plaintiffs alleged showed that the Defendants had a “bad intent” or plan to ruin the franchise economically. Therefore, the Court held that the Plaintiffs failed to establish a claim under the New Jersey Franchise Practices Act and denied their motion for reconsideration.

Key Takeaways from this Franchise Dispute

This case demonstrates that although the New Jersey act’s purpose is to protect franchisees with less bargaining power, courts recognize that this protection is not unlimited. Courts will enforce the New Jersey Franchise Practices Act pursuant to its plain terms. In addition, this case provides helpful insight for franchisors defending allegations that they imposed “unreasonable standards” on a franchisee by explaining that Plaintiffs must substantiate their claims with an actual showing of a franchisor’s manipulative behavior, arbitrariness, or bad intent.

Special thanks to Olivia Vasquez, a summer associate in Foley’s Dallas office, for her contributions to this article.