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American Estates, Inc. v. Marietta Cellars Incorporated

2011 WL 1560823 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

FRANCHISES — To avail itself of the protections of New Jersey’s franchise laws, a purported franchisee must make specific pleadings that conform with the jurisdictional requirements of the franchise laws, but if the pleadings suggest that a franchisor arrangement existed, but are in artfully pled, a court may allow the purported franchise to replead its case.

For twenty years, a wine-distributing company, incorporated in New York with its principal place of business in New Jersey, was the primary distributor for a particular brand of wine. The distributor alleged that, over those years, it made enormous investments and sacrifices, including bearing costs and credit risks on behalf of the wine producer. As a result, the distributor’s region became the highest grossing one for the wine supplier. The supplier, without notice, terminated its agreement with the distributor just before the busiest season of the year. This rendered the distributor unable to sell the supplier’s wine.

The distributor sued in a New Jersey state court, alleging its supplier’s violation of the New Jersey Franchise Practices Act, breach of contract, violation of the obligation to deal fairly and in good faith, promissory estoppel, unjust enrichment, and conspiracy to interfere with prospective economic advantage. The action was removed to the United States District Court without challenge.

The supplier argued that the distributor was barred from bringing suit in either a state or federal court in New Jersey because it failed to meet various statutory registration requirements. The Court observed that a foreign corporation transacting business in New Jersey without a certificate of authority may not maintain any action or proceeding in a state court until it has obtained such a certificate. The distributor obtained a certificate after the supplier filed a motion to dismiss. Thus, according to the Court, this objection was moot.

However, the Court observed that New Jersey law provides that foreign corporations failing to make timely reports under the New Jersey Corporation Business Reporting Act are barred from using the courts of the state for contract disputes and causes of action. The supplier claimed that the distributor’s failure to file those reports barred the actions. The distributor claimed it was exempt from the requirements because it always filed its tax returns in New Jersey and always paid its taxes to the state. The Court found that sworn declarations from the distributor’s accountant and president were sufficient to establish the fact that the company did pay regular taxes in the state. In any event, the Court held the correct remedy for a technical deficiency of this type would be to permit the corporation to remedy the deficiency and plead again.

The supplier next argued that the complaint failed to state a claim because it did not adequately plead the existence of a franchise between the parties. Specifically, the supplier claimed that the complaint failed to plead the existence of a written arrangement; failed to plead that the distributor had met the Gross Sales requirement; failed to plead that the distributor maintained a place of business in New Jersey as defined in the Act; and failed to plead a community of interest. The Court agreed that even though the pleading contained a conclusory declaration that a franchise existed, the distributor’s failure to allege the existence of any writings between the parties doomed the distributor’s claim under the Act. Such a statement, however, did tend to indicate the existence of a written agreement, since a written agreement is required under law for a franchise to exist, but the Court rejected it because it was not an allegation of fact.

Next, the Court observed that the New Jersey Supreme Court has interpreted the twelve-month limitation of a New Jersey law regarding the gross sales requirement to apply only to ongoing franchises that were in business when the suit was started. Thus, for discontinued franchises, a claimant meets the requirement by having its gross sales calculated for the last twelve months of their existence. The distributor met this requirement, but the pleading was again flawed because it failed to allege any specific gross sales figure. Thus, it again failed to state a claim for violation of the Act.

On the other hand, the Court found that the complaint sufficiently alleged that the distributor had maintained the required place of business in New Jersey by virtue of various allegations of fact in the pleading that, when taken together, suggested that the agreement contemplated that the distributor would maintain a place of business in New Jersey. Finally, it found that the complaint sufficiently alleged a community of interest because the distributor claimed it made enormous investments of its resources, reputation, and good will, and those could only be interpreted to be franchise-specific endeavors.

The Court concluded that the complaint’s failures were likely the result of inartful pleading and thus dismissed the distributor’s claim without prejudice, allowing it fourteen days to amend the complaint to address the deficiencies identified.

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