XID Corporation v. Costruzioni Elettroniche Industriali Automatismi, S.P.A.

96-414 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)
  • Opinion Date: February 17, 1998

FRANCHISES; CONTRACTS—A distributor may deserve protection under the New Jersey Franchise Practices Act even when its exclusive distribution contract is validly terminated by its supplier. A distributor of goods is not a consumer of those goods under the Consumer Fraud Act.

When a foreign supplier terminated a distributorship agreement and entered into an exclusive agreement with another distributor for related but different products, the initial distributor filed a complaint for breach of contract, tortious interference, violation of the Franchise Practices Act and the Consumer Fraud Act, and unjust enrichment against the supplier and the successor distributor. All parties moved for summary judgment. The supplier argued that the original agreement with the initial distributor was only an exclusive agreement with regard to a portion of the supplier’s products, not all of them as the initial distributor claimed, and that the agreement was terminable at will.

The District Court held that the supplier may have breached its contractual obligations, including the implied covenant of good faith and fair dealing, in failing to use the initial distributor as the sole distributor of a particular product. The holding was based in part upon the initial distributor’s making a substantial investment predicated on the continuation of its arrangement with the supplier. Accordingly, summary judgment in favor of the supplier was inappropriate. The Court also refused to grant summary judgment to the supplier on the tortious interference claim, finding a material dispute as to whether the supplier interfered with the initial distributor’s potential contract with a particular customer. However, the Court held that the supplier validly terminated its exclusive distributorship the initial distributor because it only altered, rather than ended, the relationship between the two parties and gave the initial distributor ample time to seek alternative supply arrangements. The Court also dismissed the tortious interference claim against the successor distributor after finding that it did not interfere with the initial distributor’s relationship with the supplier.

The Franchise Practices Act prohibits cancellation of a franchise without good cause. To demonstrate that it was a franchisee under that Act, the initial distributor had to demonstrate that it was granted a license to use the names and trademarks of the supplier, and that it shared a community of interest with the supplier. The term “license” is narrowly defined to mean, “to use as one’s own.” At a minimum, the use of a franchisor’s name must, “create a reasonable belief on the part of the public that there is a connection between the…licensor and licensee by which the licensor vouches…for the activity of the licensee.” Although the supplier argued that the initial distributor did not have a license because there was no written agreement, the Court found sufficient writing for a jury to conclude that the initial distributor had a license. Whether a “community of interest” exists depends on the interdependence of the parties and the utility of investments made by one party in its own company in reliance on its relationship with the other. The District Court found material issues of fact as to whether the initial distributor made investments in its own company based solely on its relationship with the supplier and whether those investments were transferable to that part of it’s business not related to the supplier. In short, it may deserve franchisee protection because it was so intimately connected with the supplier even though its status as an exclusive distributor was validly terminated by the supplier. Although the initial distributor’s claims under the Franchise Practices Act were not dismissed, the District Court held the Consumer Fraud Act claims to be inapplicable because it did not meet the requirements of a consumer of the supplier’s goods.

Finally, the Appellate Division considered the initial distributor’s unjust enrichment claim. To sustain a claim of unjust enrichment, a party must show that another received a benefit, and that retention of the benefit without payment would be unjust. The party must also show that it expected payment at the time it performed. The Court dismissed this claim against the supplier and the successor distributor after concluding that the initial distributor conferred no benefit on either of them for which it expected to be paid.