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Maintainco, Inc. v. Mitsubishi Caterpillar Forklift America, Inc.

408 N.J. Super. 461, 975 A2.d 510 (App. Div. 2009)

FRANCHISES — New Jersey’s Franchise Practices Act does not interpret a permissible “good cause” termination by a franchisor to include consideration of the franchisor’s legitimate business reasons to terminate the agreement in the absence of a substantial failure by its franchisee to comply with the agreement and the Act prohibits constructive termination to the same extent as it prohibits actual termination of the franchise agreement.

A distributor entered into a dealership-franchise agreement with a national forklift company. The twelve northernmost counties in New Jersey were the franchisee’s area of prime responsibility (APR). Under the agreement, the distributor was not required to exclusively sell the franchisor’s forklifts. A “form” provision typically found in the franchisor’s agreements which would have permitted the franchisor to change the APR and appoint more than one dealer for the same APR had been deleted. The franchisor repeatedly assured the dealer that this change gave the franchisor an “exclusive.”

Several years after the agreement was signed, the franchisee was warned that if it didn’t make satisfactory progress toward increasing market share, the franchisor would explore other means to increase its market share in the dealer’s APR. The franchisor also proposed various agreements with many of its major dealers in the northeast, keeping them secret only from the franchisee. The franchisor subsequently began forming “platform dealerships.” This involved regional consolidation of dealers and APRs. Several internal memos from the franchisor stated that such arrangements would lead to terminating the franchisee on the basis that the new organizational structure did not include it.

The franchisor knew that New Jersey’s franchise law prevented it from unilaterally terminating the franchise agreement. So, it hoped the franchisee would decide on its own to “do something else.” It even sent a letter to the distributor stating that it was its intent to begin to search for another distributor to represent it within the franchisee’s APR and end the franchisee’s ability to purchase new forklifts and parts. The franchisee refused to accept termination. Despite the franchise agreement, the franchisor executed a letter of intent with a second distributor for the same APR. This would be the first time the franchisor had two dealers for the same brand in the same territory. When the franchisee learned of these plans, it sued for breach of the dealership agreement and for terminating its franchise in violation of the New Jersey Franchise Practices Act. The franchisor drafted an announcement letter telling all of its current forklift users they could contact the new distributor. The letter did not mention the franchisee. The new distributor sent the letter to the franchisee’s customers. This resulted in a sales decline for the franchisee.

The franchisee sued and the Chancery Division ruled that the franchisor had breached the franchise agreement and violated the Act when it terminated the franchise “without good cause.” It awarded compensatory damages based on the sales made by the new distributor within the franchisee’s APR, attorneys’ fees and costs, and expert’s fees. The Court found that the franchisor’s course of conduct was geared toward terminating the distributor’s franchise. It held that the franchisor appointed the new distributor hoping to “destroy” the original distributor’s franchise. The lower court rejected the franchisor’s argument that the Act prohibited only actual termination as opposed to constructive termination. It also opined that the letter sent to the franchisee mentioning the franchisor’s intent to find another distributor was a termination letter. It ruled that the franchisor’s officers were well aware that the Act prohibited them from terminating the franchise agreement without good cause and yet they deliberately attempted to force the original distributor franchisee out of the market. According to the lower court, the franchisee did not fail to substantially meet the agreement’s performance requirements.

On appeal, the Appellate Division affirmed the lower court’s ruling. It held that “good cause” is defined by the Act as “failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.” It agreed with the lower court that the franchisor did not have good cause to terminate the agreement because the franchisee was in compliance with the agreement. It noted that, unlike in Connecticut, good cause does not include a franchisor’s legitimate business reasons to terminate the agreement in the absence of substantial failure of franchisee compliance. It also agreed with the lower court that the Act accommodates the common law of contract by recognizing the doctrine of constructive termination. It bolstered that argument by noting that the Act expressly prohibits a franchisor from “indirectly” terminating a franchisee without good cause. It also stated that to conclude otherwise would undercut the Act’s remedial purposes by allowing a franchisor to engage in conduct to constructively terminate a franchisee, but escape liability because it did not entirely succeed. It further found the lower court was correct to find that the franchisor’s conduct was aimed at terminating the dealer’s franchise.

The Court then ruled that whether the loss of exclusively, in and of itself, qualified as constructive termination was a question that had not previously been decided by a New Jersey court. A New York federal court, applying New Jersey law, however, found that it could. The Court agreed with the New York federal court. It reasoned that the elimination of the contractual right of “exclusivity” was essentially a termination or failure to renew the franchise. Here, it believed the franchisor went even further since it would have eliminated the franchisee as a distributor by ending its ability to purchase new forklifts and parts. Finally, it reiterated that a successful claimant may recover damages sustained by reason of any violation of the Act, including reasonable attorney’s fees.

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