Aetna Chemical Corp. v. General Electric Company

95-174 (U. S. Dist. Ct. D. N.J. 1997) (Unpublished)
  • Opinion Date: September 12, 1997

DISTRIBUTORSHIPS; FRANCHISES—When a distributor’s relationship with a manufacturer ended, the distributor filed omnibus claims including for breach of an implied duty of good faith and fair dealing, violation of the Consumer Fraud Act, violation of the Franchise Practices Act, breach of fiduciary duty, and more. Here, in a preliminary setting, the Court, with thoughtful analysis, sorts through the claims, dismissing some and allowing others to proceed.

A distributor formed a subsidiary to concentrate its efforts on the sale of a manufacturer’s products. The manufacturer did not fully extend the distribution agreement when it was up for renewal in January, 1994, but informed the subsidiary that the old agreement would be extended for a probationary period of three months, after which the manufacturer would decide whether to fully renew the agreement. At the end of January, 1994, the manufacturer wrote a letter to the subsidiary detailing specific performance criteria it had to meet in order to avoid termination of the agreement. The subsidiary claimed it relied on the terms of the letter and spent almost $1 million to satisfy its conditions. At the end of the probationary period, the manufacturer terminated the agreement. The subsidiary filed a complaint alleging breach of (i) contract, (ii) the obligation of good faith and fair dealing and (iii) fiduciary duty, as well as fraud, unfair competition, defamation, conspiracy and tortious interference with business contracts. The subsidiary claimed that the manufacturer notified other distributors of the termination of the relationship, and defamed it by falsely informing the other distributors that the subsidiary would not continue as a viable business. The subsidiary also claimed the manufacturer disclosed its confidential pricing and product information to its competitors. The manufacturer moved for summary judgment.

First, the manufacturer claimed the written agreement with the subsidiary was the only document evidencing a contract, and since it was unambiguous, it must be enforced as written. The subsidiary claimed that other documents, including the January, 1994 letter, were integrated as part of the contract because: (1) the contract was ambiguous, and (2) certain items in the other documents were either modifications of the agreement or were to be incorporated by reference into the contract. The subsidiary contended that the January, 1994 letter modified the then-existing agreement, and set forth conditions precedent to renewal such that termination was prohibited if the subsidiary complied with the conditions of the letter. The District Court found only one part of the contract to be ambiguous, and refused to dismiss the breach of contract claim, because a jury could find that the manufacturer breached part of the contract. The Court also stated that the January, 1994 letter did not modify the terms of the contract and therefore that the subsidiary was not permitted to use the terms of the letter to claim that the manufacturer breached a contractual obligation. Every New Jersey contract has an implied covenant of good faith and fair dealing. The subsidiary’s claim of breach of these covenants was not dismissed because the Court could not conclude that the manufacturer acted in good faith. The Court dismissed the breach of fiduciary duty claim since it failed to find any authority to support the notion that a franchisor owes a fiduciary duty to a franchisee.

The subsidiary argued that the manufacturer violated New Jersey’s Franchise Practices Act, N.J.S.A. 56:10-1 et seq., which prohibits cancellation of franchises without good cause. The Act requires the subsidiary to show that it was granted a license, and that it shared a community of interest with the manufacturer in the marketing of the product. The Act defines the term “license” to mean, “to use as if one’s own.” At a minimum, the subsidiary must have used the manufacturer’s name or logo in such a manner as to create a reasonable belief on the part of the consuming public that there was a connection between them. The fact that the subsidiary was permitted to use the manufacturer’s logo in limited circumstances did not by itself create a license. Additionally, the distributorship was non-exclusive and there was no evidence that the subsidiary’s customers viewed the relationship as anything other than that of manufacturer and distributor. The Court concluded that no reasonable jury could find that the manufacturer granted a license to the subsidiary or the distributor. A “community of interest” exists when (1) the distributor’s investment is substantial and franchise specific, and (2) the distributor is required to make the investment by the parties’ agreement. Cooper Distributing Co. v. Amana Refrigeration, Inc., 63 F.3d 262 (3d Cir. 1995). Since the Court found nothing in the record to indicate that either prong of this test was satisfied, it held that no reasonable jury could conclude that either the distributor or the subsidiary had a community of interest with the manufacturer. Accordingly, the Court dismissed the subsidiary’s claim of violation of the Act.

To establish a valid claim for common law fraud, the subsidiary had to establish false representation of a material fact, made with knowledge of its falsity and with the intent to deceive, and that action was taken in reliance on the representation. Diaz v. Johnson Matthey, Inc., 869 F. Supp. 1155 (D. N.J. 1994). The Court stated that although claims of fraud must be pleaded with particularity under the Federal Rules of Civil Procedure, the Third Circuit has adopted a liberal approach, allowing a plaintiff to simply plead facts sufficient to allow a defendant to respond. The Court refused to dismiss the subsidiary’s fraud claim, holding that it was sufficiently pleaded and supported by enough evidence to be considered by a jury.

To establish a claim for tortious interference with business contracts, the subsidiary had to establish: (1) an existing contractual relationship, (2) malicious, intentional interference with that relationship, and (3) damages resulting from the interference. This claim was dismissed because a party cannot be liable for interfering with its own contract, and the subsidiary failed to produce any other contract with which the manufacturer could have interfered.

The subsidiary also alleged tortious interference with prospective economic advantage. This requires both a showing of a reasonable expectation of economic advantage arising from a contract with a third party, and that this advantage was lost as a result of the manufacturer’s malicious interference with the pursuit of that advantage. Baldasarre v. Butler, 132 N.J. 278 (1993). Even though the distributor pleaded this claim poorly, the Court refused to dismiss it since a jury could conclude that the manufacturer maliciously interfered with the subsidiary’s economic relationships. The Court also refused to dismiss the subsidiary’s claim of unfair competition because the facts indicated that the manufacturer may have misappropriated and used confidential information.

The subsidiary alleged defamation as a result of the manufacturer falsely informing other distributors that the subsidiary would not continue as a viable business. The Court granted the manufacturer’s motion for summary judgment even though the statements were defamatory and maligned the subsidiary’s reputation. The Court first stated that the manufacturer had a qualified privilege with regard to these communications, which exists when both the disclosing party and the party to whom the information is disclosed have “an interest” in the subject matter disclosed and, therefore, the public interest in permitting free speech without threat of a defamation suit outweighs the policies behind the law of defamation. This qualified privilege can be overcome if a plaintiff can prove that a statement was made with knowledge of its falsehood, or reckless disregard for its truth. Furthermore, since a defamation claim requires an analysis of state of mind, courts are reluctant to dismiss them on motions for summary judgment. Despite these caveats, the District Court dismissed the defamation claim, concluding that the subsidiary failed to produce evidence which would enable a jury could find that the manufacturer acted with malice.

Finally, the subsidiary alleged a conspiracy by the manufacturer to pass confidential information about one of the subsidiary’s customers to another distributor for use in the solicitation of that customer’s business. The focus of a civil conspiracy is on the underlying wrong. Lopez v. Sawyer, 62 N.J. 267 (1973). The wrong asserted in this case is unfair competition through the unauthorized use of allegedly confidential information. Since the confidentiality of the information was still at issue, as was the question of whether the manufacturer and another distributor conspired to use that information to compete unfairly, the Court refused to dismiss this claim.