"For Cause" Termination Prerequisite to Franchisor's Right to Preliminary Injunction in New Jersey

The New Jersey Superior Court recently held that a franchisor cannot preliminarily enjoin a terminated franchisee from operating its franchise and using its franchisor's federally-registered trademarks unless the franchisor can establish that it properly terminated the franchise for cause.

In Ispahani v. Dunkin Donuts, Inc., et al., Ispahani, a multiple-unit Dunkin Donuts franchisee, sued Dunkin' Donuts ("Dunkin") alleging that Dunkin had wrongfully withheld approval of a franchise location and violated the New Jersey Franchise Practices Act ("NJFPA"). Dunkin counterclaimed, alleging that the franchisee breached the franchise agreements by failing to pay royalty fees and advertising contributions. As a result of the franchisee's alleged failure to cure its defaults, Dunkin terminated the franchises and sought to enjoin the franchisee from operating during the pendency of the litigation. The Appellate Division affirmed the motion court's denial of the injunction motion, finding that because Dunkin failed to establish that it was legally entitled to terminate the franchise agreements, it failed to meet its burden of establishing a likelihood of success on the merits.

In New Jersey, a terminating franchisor must comply with the termination provisions of the NJFPA in order to obtain injunctive relief. The Ispahani court focused on the absence of evidence showing that the franchises were terminated for good cause. In support of its motion, Dunkin submitted the certification of its Collection Coordinator which contained an unsupported allegation that plaintiff owed franchise and advertising fees in excess of $45,000. No supporting records were produced. Although the franchisee admitted that he owed fees, he disputed the amount and also alleged that Dunkin had agreed to accept late payments because of its wrongful refusal to approve a new franchise location. While the burden of proof was on Dunkin, the court noted that neither of the parties offered sufficient substantiation of their conclusory statements. Further, neither party offered proof of the typical monthly or yearly fees so that the court could evaluate whether the alleged breach was material.

Ispahani demonstrates that a franchisor seeking to preliminarily enjoin a franchisee's post-termination use of its trademarks in New Jersey must justify the termination by establishing that the franchisee's breach is material and that its own hands are clean. A franchisor cannot unilaterally withdraw its consent to use its marks without complying with state statutory and common law regulating franchise termination. Significantly, the court rejected Dunkin's reliance on S & R Corp. v. Jiffy Lube Int l, which does not recognize wrongful termination as a defense to Lanham Act claims. To the contrary, the Ispahani court held that under New Jersey law, courts must examine whether the termination or nonrenewal was lawful in order to determine whether there has been a violation of the Lanham Act. The court explicitly stated that the termination provisions of the NJFPA are not preempted by the Lanham Act or any other federal law.

This case underscores the importance of substantiating a for cause termination. As illustrated in Ispahani, Dunkin's counterclaim for trademark infringement did not enhance its strategic position; instead, it subjected the termination of the franchise agreement to greater scrutiny. The result in Ispahani may be avoided by taking the extra measure to provide documentary evidence showing the materiality of the franchisee's breach and the franchisor's entitlement to terminate the franchise.

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