Manufacturers Beware: Is Your New Jersey Distributor Really a Franchisee?

Can a manufacturer legally terminate a New Jersey exclusive distributor for legitimate business purposes? This was the issue before a New Jersey federal court in Atlantic City Coin & Slot Service Company, Inc. v. IGT, decided this summer.

In IGT, the Court preliminarily enjoined a slot machine manufacturer from terminating an exclusive distributorship agreement with a New Jersey distributor. In seeking the injunction, the plaintiff relied upon the New Jersey Franchise Practices Act, which prohibits termination of a franchise agreement except for good cause (the Act defines "good cause" as the failure of the franchisee substantially to comply with the requirements of the franchise agreement). The plaintiff had successfully demonstrated that the distributorship had been terminated not for performance reasons, but because the manufacturer desired to sell slot machines to New Jersey casinos directly. The issue to be determined, therefore, was whether the distributor relationship constituted a franchise under the New Jersey Franchise Practices Act.

Applying the "community of interest" test enunciated by the New Jersey Supreme Court in Instructional Sys., Inc. v. Computer Curriculum Corp., the court found that the distributor may be entitled to protection under the Franchise Practices Act because it had made numerous franchise-specific investments (including office facilities, specialized computers to demonstrate software and programs, promotional products, signs bearing the manufacturer’s name, computer upgrades and inventories) which were necessary given the nature of the business relationship. Because the distributor relationship had "sufficient hallmarks" of a "community of interest," and because the distributorship had been terminated without good cause, the court held that the distributor had demonstrated a likelihood of success on the merits on its Franchise Practices Act claim.

In light of this expansive interpretation of what constitutes a franchise under the New Jersey Franchise Practices Act, manufacturers should ensure, before attempting to terminate any New Jersey distributor, that the distributorship is not entitled to the statutory protections afforded by the Franchise Practices Act.

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