Cooper Distributing Co., Inc. v. Amana Refrigeration, Inc.

180 F.3d 542 (3rd. Cir. 1999)
  • Opinion Date: June 18, 1999

FRANCHISES—Under the New Jersey Franchise Practices Act, valuation of the terminated business is to be determined on the basis of its value to third parties.

This was the second appeal of a damage award for wrongful termination of a franchise under the New Jersey Franchise Practice Act. For 30 years, pursuant to a contract, a distributor bought products at a wholesale discount from a manufacturer and resold them to retailers. Although the distributor did not have exclusive rights under the contract, it was the only distributor of the manufacturer’s products in the territory and the products constituted about 80% of the distributor’s business. The manufacturer, motivated by a nationwide business strategy rather than unsatisfactory performance by the distributor, gave ten days notice to terminate this distribution relationship, citing a provision in the distribution contract allowing either party to do so. Ultimately, the Court of Appeals found in favor of the distributor on a single theory, i.e. that the manufacturer had violated the distributor’s rights under the New Jersey Franchise Practices Act. The matter was returned to the District Court with instructions to value the franchise as of the date on which it actually was terminated. Upon remand, the District Court ruled prior to trial that the “only issue” in the case was the franchise’s fair market value to a hypothetical buyer and seller as of that date. Thus, the distributor was barred from presenting evidence relating to additional damage theories, including the value of the franchise to the actual parties and the amount of lost profits allegedly suffered by it before the valuation date. Those issues became the basis of this second appeal. Under New Jersey law, a franchisor who in good faith and for a bona fide reason terminates, cancels or fails to renew a franchise for any reason other than the franchisee’s substantial breach has violated [the Act] and is liable to the franchisee for the loss occasioned thereby, namely, the reasonable value of the business less the amount realizable on liquidation.” That case continued as follows: “[r]easonable value would be that price upon which willing parties, buyer and seller, would agree for the sale of the franchisee’s business as a going concern.” Consequently, the prior case would suggest the opposite of the distributor’s theory that it should have been permitted to present evidence of the franchise’s value to the parties themselves. Valuing the franchise business in accordance with third-party standards suggests an objective, not subjective, measure of the franchise’s value. Accordingly, the Court believed that the lower court correctly determined that the purported value of the franchise to the distributor and manufacturer themselves was not a proper measure of damages.

With respect to lost profits, the distributor argued that although the manufacturer did not actually succeed in terminating the franchise until a later date, its uncertain status before that date caused it to lose profits. Thus, it contended that its pre-termination lost profits should have been included in the damages calculation in order to make it whole. The manufacturer, on the other hand, argued that because case law identified only one measure of damages (fair market value at the time of termination) it implicitly forbid other measures such as lost profits prior to termination. The Court agreed with the distributor, believing that it was error to preclude it from presenting evidence on the issue. While such a component of damages was not expressly commanded in prior case law, the Court held that it was undeniably a part of the loss suffered by the distributor as a result of the manufacturer’s unlawful termination of the franchise. The distributor also contended that its damages should have included the value of what it called “complementary lines,” that is, product lines carried by it for the sole purpose of complementing products from the manufacturer. Here, the Court was less sympathetic. While it might have been true that the distributor would have not have purchased the complementary lines if it did not also sell the manufacturer’s products, such a fact was found to have no legal significance. According to the Court, the complementary lines fell squarely within the category of assets retained by the franchisee and their value was properly excluded from the calculated damages.