Understanding Franchisor Obligations Under the New Jersey Franchise Practices Act
February 9, 2018
NJFPA is One of the Most Comprehensive Franchise Laws in the Country, Therefore, it is Important to Understand Both the Franchisee and Franchisor Obligations Involved
The New Jersey Franchise Practices Act (NJFPA) regulates certain aspects of the relationship between franchisees and franchisors. It is one of the most comprehensive franchise laws in the country, yet many New Jersey businesses are unaware of its legal requirements. A business relationship may be considered that of a franchisor-franchisee, even if not denominated as such if it meets the criteria set forth in the FPA. See Instructional Systems, Inc. vs. Computer Curriculum Corp., 130 NJ 324, 340-341 (1991).
Franchises Covered Under the NJFPA
The NJFPA defines a “franchise” as a “written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, 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.” The statute only applies to franchisees that maintain a place of business in New Jersey, have gross sales of more than $35,000 in the 12 months preceding any legal action under the law, and derive more than 20 percent of gross sales from the franchise.
New Jersey Franchise Law Notice Requirements
The NJFPA provides that a franchisor is prohibited from terminating or refusing to renew a franchise absent good cause. The statute defines “good cause” as the franchisee’s failure to substantially comply with the requirements imposed by the franchise agreement.
The NJFPA further mandates that a franchisor may not terminate, cancel, or refuse to renew a franchise without providing a 60-days written notice that sets forth all the reasons for the decision. There are two notable exceptions: (1) where the alleged grounds are voluntary abandonment by the franchisee of the franchise relationship in which case the written notice may be given 15 days in advance of the termination, cancellation, or failure to renew; and (2) where the alleged grounds are the conviction of the franchisee of an indictable offense directly related to the franchise business, in which case the termination, cancellation or failure to renew may be effective immediately upon the delivery and receipt of written notice at any time following the conviction.
Franchisees seeking to transfer or assign a franchise must also comply with certain notice provisions. Under the NJFPA, the franchisee must first notify the franchisor of its intention via a written notice setting forth the prospective transferee’s name, address, statement of financial qualification and business experience during the previous five years. The franchisor then has 60 days after receipt of the notice to either approve the sale in writing or advise the franchisee of the unacceptability of the proposed transferee. The rejection must also be in writing and set forth material reasons relating to the character, financial ability or business experience of the proposed transferee. If the franchisor does not reply within the specified 60 days, his approval is deemed granted. No transfer, assignment or sale will be considered be valid unless the transferee agrees in writing to comply with all the requirements of the existing franchise agreement.
Violations of the NJFPA
The NJFPA also establishes several prohibited practices for franchisors. Under the statute, they may not:
- Require a franchisee at time of entering into a franchise arrangement to assent to a release, assignment, novation, waiver or estoppel which would relieve any person from liability imposed under the law
- Inhibit the right to free association among franchisees;
- Require or prohibit any change in the franchisee’s management without good cause;
- Restrict the franchisee’s sale of equity or transfer of securities as long as the transaction does not amount to a transfer of control;
- Impose unreasonable standards of performance on the franchisee;
- Provide any term or condition in any lease or other agreement ancillary or collateral to a franchise, which term or condition directly or indirectly violates the NJFPA; or
- Require a franchisee located in New Jersey to litigate statutory claims in another forum.
Notably, the franchisee’s failure to substantially comply with the franchise agreement is a defense to any action brought by the franchisee under the statute. If successful, franchisees are entitled to money damages and attorney’s fees.
If you have any questions or if you would like to discuss the matter further, please contact me, Joel Kreizman, at 201-806-3364.