January 1, 1900

by Paul N. Watter and Len F. Collett

The Motor Vehicle Franchise Act (N.J.S.A. 56:10-16, et seq.) was passed into law in 1982 to regulate the granting, relocation, reopening, reactivation, or establishment of motor vehicle franchises and retail businesses by motor vehicle franchisors in the same line as existing franchises (the "Act"). The Act established the Motor Vehicle Franchise Committee and set forth the circumstances, with limited exceptions, under which a motor vehicle franchisor is permitted to grant, relocate, reopen or reactivate a franchise or establish, relocate, reopen or reactivate a business. Further, the Act sets forth an administrative hearing process through which existing franchises can protest pending grants or reactivations of franchises by the franchisor.

The Act was amended in 1985 to prohibit manufacturers, distributors and importers of motor vehicles from engaging in the business of new car sales to prevent the replacement of the State’s independently-owned franchises with manufacturer-controlled dealerships. The Act was again amended in 1991 to prohibit the manufacturers, distributors and importers of motor vehicles from engaging in the retail sale of used motor vehicles except through their franchisees (i.e., motor vehicle dealers).

Specific guidelines are set forth in the Act to protect existing franchises when their franchisor establishes additional franchises that would infringe on the existing franchises’ market area. In that regard, the Act prohibits a motor vehicle franchisor from granting, relocating, reopening or reactivating a franchise, if the franchise will be harmful to either an existing franchise or to the public interest.

Procedural Steps to Protect Your Franchise

To ensure that existing franchises are afforded the protections required by the Act, prior to the grant, relocation, reopening or reactivation of a franchise or business, franchisors are required to give advance written notice to all of its existing franchisees in the same line within an eight mile radius from a proposed franchise or business; or, if there are no existing franchisees within an 8-mile radius, the franchisor must provide notice to the next closest existing franchisee in the same line within a 14-mile radius. Thereafter, any affected franchisee within the market area can file a protest with the Motor Vehicle Franchise Committee. The protest must be made within 30 days of receipt of the notice or 30 days after the end of any appeal procedure provided by the motor vehicle franchisor, whichever is later. The Act requires any protest to set forth all of the protesting franchisee’s reasons for objecting to the granting or reactivation of a franchise including a statement of the facts and supporting affidavits for all issues raised in the protest. When such a protest is filed, the franchisor and the franchisee are notified in writing by the Committee, and a determination is made to either hear the protest itself or to transmit the protest to the New Jersey Office of Administrative Law (the "OAL") for a hearing. Regardless of whether the hearing is conducted by the Committee or is heard by the OAL, the hearing is conducted as a contested case in accordance with the provisions of New Jersey’s "Administrative Procedure Act," which sets forth procedural rules and processes for the resolution of disputes at the agency level.

Any testimony taken at the hearing is required to be under oath and accurately recorded. The Committee is permitted to subpoena witnesses and compel their attendance, administer oaths and require the production for examination of any documents relating to the hearing. The Committee is further permitted to subpoena and compel the attendance of witnesses requested by a party and can designate and require the production for examination of any documents relating to any matter involved in the hearing. Finally, any party can request a transcript or any other record made of or at the hearing.

Pursuant to New Jersey statute and court rules, a disappointed party is permitted to appeal the decision of either the Committee or the OAL directly to the Appellate Courts of New Jersey.

Determination of Injury to an Existing Franchise

The purpose of the hearing conducted by the Committee or the OAL set forth above is to determine whether the grant of a new or reopening of a franchise will harm existing franchisees. This determination is governed by an elaborate test set forth in the Motor Vehicle Franchise Act.

In determining whether a new franchise will harm existing franchisees, the Act recommends that the Committee consider (1) the effect that the new franchise will have on the provision of stable, adequate and reliable sales and service to purchasers in the same line in the relevant market area; (2) the effect that the new franchise or business will have on the stability of existing franchisees in the same line in the relevant market area; (3) whether the existing franchisees are providing adequate and convenient consumer service; and, if applicable, (4) the effect on a relocating dealer of a denial of its relocation into the relevant market area.

The Act sets forth circumstances under which it is presumed that the grant or reactivation of a franchise or business will injure existing franchisees or the public interest. These circumstances include situations where the proposed franchise or business is likely to cause a significant reduction in new vehicle sales or the gross income of a protestor; where the proposed franchise or business will not operate a full service franchise or business; or where an owner or operator of the proposed franchise or business has engaged in unfair or deceptive business practices with respect to a motor vehicle franchise or business.

Some cases involving the above protest have reached the New Jersey Courts. In one such case, the Supreme Court of New Jersey held that where the evidence suggested only that a new dealership would have an adverse effect on the existing dealerships, there was insufficient evidence to find that the existing dealership would be substantially injured by the establishment of a new dealership within 4.25 miles. There, the Court stressed the need for the protesting franchisee to quantify any alleged adverse effect of a competing franchise. Monmouth Chrysler- Plymouth, Inc. v. Chrysler Corp. In another case, a motorcycle dealer was successful in prohibiting a franchisor from establishing an authorized motorcycle dealership within a six-mile radius of existing motorcycle franchisee because the existing dealer showed that it derived 75 percent of its business from that six-mile radius. House of Suzuki v. U.S. Suzuki. Additionally, the Courts have determined that a franchisor’s decision to locate a competing franchise in order to coerce, intimidate, or retaliate against an existing dealer is a significant factor in determining whether an existing franchisor will be injured by a new franchise within its market area.

Conclusion

In conclusion, the Motor Vehicle Franchise Act provides significant protections for existing motor vehicle franchises from the unwelcome addition of competing franchises in the same line and within the same market area. However, to avail itself of these protections, any franchisee, which is confronted with a planned opening of a competing franchise, must act quickly and decisively to protect itself through the procedures set forth in the Act. Any response must include not only a cogent legal argument based on the Act and existing case law, but also a convincing factual basis that shows how, why and to what extent the existing franchise will be harmed by the unwelcome introduction of another franchise into the market area.

Paul N.Watter is a partner of Hill Wallack and a member of the Public Finance and Tax, Corporate & Business Practice Groups. He represents an extensive list of clients in all areas of Banking & Secured Transactions, Bond Counsel, Securities, Finance and Corporate Law.

Len F. Collett is an associate in the Administrative Law/Government Procurement Practice Group. He concentrates his practice in Administrative Law and Corporate Litigation including Public Procurement and Environmental Litigation with a particular emphasis on administrative, environmental and regulatory compliance.