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09/29/2016

Proposed Amendments to the New Jersey Franchise Practices Act

Client Alert

Written by: Evan M. Goldman, Esq.

With thousands of franchises in the State of New Jersey, one of the most important, and lesser known, statutes is the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1, et seq.(the “NJFPA”). The NJFPA defines what constitutes a franchise under New Jersey law, and provides statutory protections for franchisees within New Jersey from certain improper termination events and non-renewals by their franchisors. The NJFPA is among the most comprehensive in the nation, and yet, far too many franchisees and their legal counsel are unaware of its existence. The defining feature of the NJFPA is that it does not allow a franchisor to terminate a franchisee without demonstrating cause and providing sixty (60) days’ notice and opportunity to cure, with limited exceptions. Yet, it is not a perfect statute.

On June 6, 2016, New Jersey State Senator Bob Smith (D-17) introduced Senate Bill 2325 (hereinafter, the “Bill”) to the New Jersey Senate, where it was referred same to the Senate Commerce Committee, which would make several substantive changes to the NJFPA. Senator Smith’s proposed revisions are a step in the right direction towards making a more equal playing field between franchisors and franchisees in New Jersey. However, some proposed sections of the Bill seek to reverse decades of franchisor-franchisee relationship practices in a quick and summary manner, which may be too much, too soon. The Bill’s proposed revisions include:

  • In-Term Practices by the Franchisor. The Bill seeks to prohibit, during the term of the franchise agreement, franchisors from: (1) requiring franchisees, as a condition of renewal or transfer, to assent to a general release from franchisor liability; (2) restricting the sale of any minor ownership interest in a franchise to employees, personnel of the franchisee, spouse, child or heir of an owner, as long as the basic financial requirements of the franchisor are complied with; (3) competing in a franchisee’s exclusive territory/region; (4) imposing unreasonable standards of performance (including facilities, financial, operating, or other requirements) upon a franchisee; and (5) requiring a franchisee to purchase goods and/or services from a third-party vendor (and prohibiting franchisors from taking a commission or other payment from any such vendor) without taking reasonable steps to secure the best possible price.
  • Fiduciary Duty upon Franchisor. The Bill seeks to place a fiduciary duty upon franchisors for any funds collected by the franchisor from the franchisees for use in advertising. The Bill would further require the franchisor annually detail how those funds are being used.
  • Termination by the Franchisee. The Bill seeks to allow franchisees to terminate the franchise relationship in a manner similar to that of the franchisor; namely, upon sixty (60) days’ notice of termination, cancellation, or non-renewal. However, the Bill does not require the franchisee to demonstrate cause or provide the franchisor with an opportunity to cure.
  • Post-Termination Obligations. The Bill looks to bar franchisors, upon termination, cancellation, or non-renewal, from: (1) requiring franchisees to pay excessive damages (commonly referred to as liquidated damages); (2) requiring franchisees to personally guarantee the debts of the franchise to the franchisor; and (3) imposing non-competition agreements that extend for more than six (6) months and/or restrict employment outside the county in which the franchise was located.
  • Franchisor Forum-Selection Clauses. The Bill, in a completely new section, seeks to bar franchisors from requiring a franchisee to sign any agreement—including franchise agreements, lease agreements, or ancillary agreements—which specifies the Court in which a claim may be brought, or otherwise prohibits a franchisee from bringing an action in a particular court otherwise available to the franchisee under the laws of New Jersey.

Undoubtedly, the Bill certainly raises important issues for the franchise community. To date, there has been no vote regarding the Bill, and it is unlikely to pass in its current form without moderation of some of the provisions highlighted. Therefore, it is likely going to take input from all stakeholders—including franchisors and franchisees—to craft legislation that protects franchisees, is likely to pass both the Senate and Assembly, and can be signed by the Governor of New Jersey.

For a more in-depth analysis of the Bill, and franchisee protections that are available to you, please keep a look out for the forthcoming article, co-authored with Scott D. Salmon, Esq., entitled “Leveling the Playing Field: Amending the New Jersey Franchise Practices Act to Better Protect Franchisees,” to be published in the Mercer County Lawyer. If you are interested in discussing these issues further, you can also contact Evan M. Goldman, Esq., at 609-734-6360 or egoldman@hillwallack.com.