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Leary v. Pepperidge Farm, Inc.

C-012033-04 (N.J. Super. Ch. Div. 2004) (Unpublished)

FRANCHISES—Where a distributor sells goods on a commission basis, there are no “gross sales” between it and its supplier; therefore, it does not qualify as a franchisee under the New Jersey Franchise Practices Act.

Two distributors of a bakery had exclusive territories adjacent to each other and near a major roadway. The first had rights to distribute to customers along the major roadway; the other did not. Each agreement defined the distributor’s territory as “establishments fronting on any boundary.” A potential customer of a distributor was deemed to “front” on a boundary if its primary entrance faced the adjacent thoroughfare. Pursuant to the distribution agreements, the bakery agreed not to sell or deliver or authorize any others to sell or deliver the same products to retail stores within a distributor’s territory.

A new shopping mall was constructed within the second distributor’s territory, with the storefronts of its larger stores facing an inner parking lot rather than fronting the major roadway. The first distributor assumed these stores were in his territory because their addresses indicated that they were along the roadway. Therefore, when the bakery granted distribution rights within the shopping center to the second distributor, the first distributor sued and sought a preliminary injunction. He claimed that he would suffer irreparable harm if the second distributor were allowed to service the stores during the pendency of the matter. Specifically, he argued that his strong business relationships with customers along the route would be jeopardized if they questioned why he was not servicing one of the larger stores in the mall. In addition, he argued that if the other distributor were allowed to service this particular store during the course of the litigation, and the litigation was not going well, the other distributor would devote less time to the store. This would then damage the bakery’s relationship with the store manager, potentially causing the loss of goodwill and permanent damage to the first distributor when it was eventually awarded the store. He further asserted that such damage could not be measured monetarily and therefore he would be left without an effective remedy if he weren’t awarded preliminary relief.

To support his argument that it was likely his action would be successful, he pointed to New Jersey’s Franchise Practices Act (Act). Under the Act, a franchisor is prohibited from imposing unreasonable standards of performance upon a franchisee. According to the distributor, the bakery’s definition of “fronting” and the use of that term to dictate a protected location was unreasonable and violated the Act. Therefore, he claimed that since he had shown a substantial likelihood of success on the merits, it would have been unfair to allow the other franchisee to continue to service the larger store in particular.

The bakery responded with the argument that the purpose of a preliminary injunction is to preserve the status quo, which it argued would not happen here. It claimed that the first distributor was requesting that it be awarded the larger store, which had always been serviced by the second distributor, and which was, in effect, the ultimate relief he was seeking. Furthermore, it argued that the first distributor would not suffer irreparable harm if the injunction were not granted. It contended that the first distributor was only speculating as to the other distributor’s anticipated conduct. In addition, since the second distributor had been the only distributor for the store since it opened, it, not the first, would be the one suffering harm if the requested preliminary relief were granted. Finally, the bakery claimed that the first distributor could not qualify for relief under the Act because he was a distributor of goods sold on a consignment basis, and therefore did not own a franchise. According to the bakery, the first distributor operated his business out of a warehouse that functioned as a distribution depot and he did not buy and resell the bakery’s products, but rather earned commissions on the delivery of product to retail establishments.

The Court held that the complaining distributor failed to sufficiently demonstrate that the harm he feared was irreparable or imminent. In equity, harm is considered irreparable if it cannot be redressed adequately by monetary damages. Here, if the complaining distributor succeeded, he would have been entitled to the commissions generated and paid to the other distributor during the months the other distributor served the store. The Court also held that his “strong business relationships” argument was highly speculative and did not demonstrate a “pressure of an urgent necessity,” as required for injunctive relief. There was no evidence that the distributor’s current customers questioned why he was not servicing the large store. The Court felt that the complaining distributor’s reputation was more likely to be judged by his own performance in each of it own customer’s stores, than by speculation as to why he was not serving other stores.

The Court also concluded that even if the complaining distributor had demonstrated irreparable harm, it was not convinced he had sufficiently shown a likelihood of success on the merits. A preliminary injunction cannot be issued unless all the material facts are known. In this case, there were still factual determinations to be made, including what was the intent of the parties with relation to the agreements. For those reasons, the Court denied the distributor’s motion for preliminary relief.

As to the issue of specific performance, the Court first held that the distributor’s remedy would be an award of damages. Nothing in the complaint indicated that the contract in question was of a “special nature” or of “peculiar value” where damages could not be ascertained by applying traditional legal rules. The agreement giving the distributor an exclusive route to deliver products. It was commonplace in the retail industry. If there was a breach, damages could be calculated with minimal difficulty. Further, the Court refused to compel the retail customer in question to maintain a business relationship with the complaining distributor.

The Court also held that the complaining distributor had failed to sufficiently plead facts to maintain a claim under the Act. The Act only applies to a franchise. To be a franchise, the franchisee must establish or maintain a place of business within the State, and the gross sales of products or services between the franchisor and franchisee must exceed $35,000 for the twelve months preceding a suit. Here, the distributorship agreement did not require the distributor to maintain a fixed place of business within the State or at any specified geographical location. Furthermore, as a consignment arrangement, there were no sales of any products, obviously falling short of the $35,000 requirement for twelve months. The distributor only received a commission based on what the individual retail stores paid the distributor. Finally, the Court held that the purpose of the Act was to counteract the unequal bargaining power between a franchisor and its franchisee, which would allow a franchisor to leverage its bargaining strength so as to insert provisions in its private agreements with franchisees that would allow it to sever the franchise relationship at will. Here, there was no allegation that the bakery was attempting to sever any relationship.

Therefore, the Court rejected the complaining distributor’s motion for injunctive relief, denied its request for specific performance, and transferred the matter to the Law Division to determine what damages, if any, were to be awarded.

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