Instructional Systems, Inc. v. Computer Curriculum Corp.

D’ANNUNZIO, J.A.D.

(temporarily assigned), dissenting.

The New Jersey Franchise Practices Act (the Act) is very strong medicine. It provides in part that a franchise may not be terminated, cancelled, or non-renewed “without good cause.” N.J.S.A. 56:10-5. The Act narrowly defines “good cause” as “failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.” Ibid. Thus, if a dealer deemed to be a franchisee under the Act is fulfilling its contractual obligations, its supplier would not be permitted to make good faith structural changes in the way it markets its product or service if the changes included termination of the dealer’s “franchise.” See Westfield Centre Serv. v. Cities Serv. Oil Co., 86 N.J. 453 , 432 A.2d 48 (1981); New Jersey American, Inc. v. Allied Corp., 875 F. 2d 58 (3d Cir. 1989); Carlos v. Philips Business Sys., Inc., 556 F.Supp. 769 (E.D.N.Y.), aff'd, 742 F.2d 1432 (2d Cir.1983). Moreover, many attempts by a franchisor to terminate a franchise for good cause will result in litigation, in which a judge or jury will be permitted to review the franchisor’s business decision.

In light of the Act’s restrictions on a franchisor’s business discretion and, therefore, on its ability to adjust to market developments and competitive pressures, and the. Act’s abrogation of common-law principles regarding termination and expiration of contracts, we scrupulously must avoid extending the Act’s reach beyond the Legislature’s intent. See In re Miller, 90 N.J. 210, 218-219 , 447 A.2d 549 (1982) (declaring perpetual contractual performance is not favored in the law); Bak-A-Lum Corp. v. Alcoa Building Prod., Inc., 69 N.J. 123, 129 , 351 *375 A.2d 349 (1976) (holding distributorship agreement terminable without cause on reasonable notice); Owens v. Press Publishing Co., 20 N.J. 537, 550 , 120 A.2d 442 (1956) (explaining that contract ceases to exist upon expiration of its term); Karl’s Sales & Serv. v. Gimbel Bros., 249 N.J.Super. 487, 495 , 592 A.2d 647 (App.Div.) (holding that where right to terminate is absolute, it may be exercised without regard to motive or reasons), certif. denied, 127 N.J. 548 , 606 A.2d 362 (1991); cf. Oswin v. Shaw, 129 N.J. 290, 310-11 , 609 A.2d 415 (1992) (stating that doubt about meaning of statute in derogation of common law “should be resolved in favor of ‘the effect which makes the least rather than the most change in the common law’ ” (quoting 3 Norman J. Singer, Sutherland Statutory Construction § 61.01, at 77 (4th ed. 1986)).

There is no doubt that the Legislature did not intend to reach all supplier-dealer relationships, despite the Legislature’s use of language broad enough to include all such relationships. The parties and the majority concede as much. The use of broad language and the universal acceptance of the premise that the Act’s reach is more limited than the literal application of that language place on the courts the burden of establishing the Act’s limits in more concrete terms, consistent, of course, with the legislative intent. We must do this to decide the present case and to provide the business community with the objective standards it requires for predictability and guidance.

Although our task is to determine what the Legislature intended when it defined the word franchise, its use of that word is significant. Cf. Gabin v. Skyline Cabana Club, 54 N.J. 550, 554 , 258 A.2d 6 (1969) (explaining that title of statute may indicate a legislative intent to apply narrowly the broad language of the enactment); Samuel D. Wasserman, Inc. v. Klahre, 24 N.J.Super. 143, 147 , 93 A.2d 628 (App.Div.1952) (declaring that statute’s title is relevant to its construction); accord Casey v. Male, 72 N.J.Super. 288, 297 , 178 A.2d 249 *376 (Law Div.1962). 1 There is a common understanding of what the word franchise evokes: fast food (McDonald’s; Pizza Hut), ice cream (Carvel; Dairy Queen), hotels (Holiday Inn; Hilton), and automobile service facilities (AAMCO; Midas Muffler) are well known examples of business format franchises. See United States Department of Commerce, Franchise Opportunities Handbook (1991) (hereinafter Opportunities) and Bryce Webster, The Insider’s Guide to Franchising (1986) (for comprehensive lists of businesses offering franchises in the United States). Gasoline stations (Exxon; AMOCO), automobile dealerships (General Motors; Ford), tools (Mac Tools) and water conditioning (Culligan International) are examples of product franchising. See Shell Oil Co. v. Marinello, 63 N.J. 402, 409 , 307 A.2d 598 (1973), cert. denied, 415 U.S. 920 , 94 S.Ct. 1421 , 39 L.Ed.2d 475 (1974); Tynan v. General Motors Corp., 248 N.J.Super. 654 , 591 A.2d 1024 (App.Div.1991), certif. denied, 127 N.J. 548 , 606 A.2d 362 (1991), rev’d in part on dissent, 127 N.J. 269 , 604 A.2d 99 (1992); Opportunities, supra, at 268-69. Manufacturing franchises are less well known, but the soft drink industry relies heavily on the franchising of beverage production. Webster, supra, at 6-7. I agree with the majority that those are the prototypes the Legislature envisioned when it adopted the Act. Indeed, the legislative history indicates that the New Jersey Gasoline Retailers Association and the New Jersey Automobile Dealers Association were principal supporters of the Act. Franchise Practices Act: Hearing on A.2063, Assembly Judiciary Comm., 194th Leg., Sess. (1971).

The prototypes inform us of the legislative intent. The prototypes have two primary characteristics: the product or service is marketed primarily through brand-name recognition; *377 the franchisee adopts the franchisor’s trade name as its own name, presenting itself substantially as a unit of the franchisor. See Colt Indus. Inc. v. Fidelco Pump & Compressor Corp., 844 F.2d 117, 119 (3d Cir.1988); Susser v. Carvel Corp., 206 F.Supp. 636 (S.D.N.Y.1962), aff'd, 332 F.2d 505 (2d Cir.1964), cert. dismissed, 381 U.S. 125 , 85 S.Ct. 1364 , 14 L.Ed.2d 284 (1965); Finlay & Assocs. v. Borg-Warner, 146 N.J.Super. 210, 219 , 369 A.2d 541 (Law Div.1976), aff'd o.b. on other grounds, 155 N.J.Super. 331 , 382 A.2d 933 (App.Div.), certif denied, 77 N.J. 467 , 391 A.2d 483 (1978); see also Webster, supra, at 4-5; Donald D. and Patrick J. Boroian, The Franchise Advantage 16-17 (1987); Harold Brown, Franchising: Trap for the Trusting 89 (1969). But cf. Neptune T. V. & Appliance Serv., Inc. v. Litton Sys., Inc., 190 N.J.Super. 153, 160 , 462 A.2d 595 (App. Div.1983) (defining “franchise” in terms of a public perception that licensor vouches for licensee).

The trial court in Susser v. Carvel Corp., supra, 206 F.Supp. at 640-41 , aptly described some of the characteristics of a franchise:

The plaintiffs’ franchise agreements require the franchisees to operate their stores in accordance with a Standard Operating Procedure Manual (SOP). This SOP regulates the business of the operators in a number of respects. It describes the products which the operators may sell at their store, the advertising which they may use, the color they must paint their store, the hours when they must put on their lights, the amount of insurance they must carry, the colors of their employees’ uniforms, and many other details. To the public the individual franchise operator appears to be part of a national organization which manufactures and distributes a limited type of products of uniform quality. The Carvel SOP refers to each store as “an integral part of the chain.”

... The franchise system creates a class of independent businessmen; it provides the public with an opportunity to get a uniform product at numerous points of sale from small independent contractors, rather than from employees of a vast chain. The franchise system of operation is therefore good for the economy.

However, the cornerstone of a franchise system must be the trademark or trade name of a product. It is this uniformity of product and control of its quality and distribution which causes the public to turn to franchise stores for the product____

*378 It is this uniformity of stores and operation, and this advertising and the knowledge of the public of the uniformity and quality of the product that draws the business to the Carvel operators. The name Carvel constitutes a trademark of great value to the defendant companies and to the franchise operators.

The actual, or perceived, acceptance of a brand name in a national or regional market as representing a useful and quality product or service is what makes the franchise valuable to the potential franchisee. Through a franchise, the franchisee believes that it will reap the benefits of brand recognition that otherwise would be attainable, if at all, only through substantial effort and expense. It is this perceived value that gives a franchisor the upper hand and the ability to dictate the terms of its franchise. And it was that inequality of bargaining power and the resulting onerous terms frequently imposed on franchisees that moved many state legislatures to consider and enact statutes, similar to New Jersey’s Act, purporting to protect franchisees. See Brown, supra.

The major benefit of a franchise — the franchisee’s use, as its own, of the franchisor’s trademark and trade name — becomes a major disadvantage if the franchise is terminated. On termination of a franchise, the franchisee cannot convert to its own benefit the goodwill it has helped to sustain by years of work. See Shell Oil Co. v. Marinello, supra, 63 N.J. at 409 , 307 A.2d 598 . Even if the terminated franchisee retains ownership of the physical plant and equipment, it cannot effectively capitalize on its years of effort by .restyling its former nationally-recognized hamburger fast-food outlet as “Joe’s Hamburger Palace,” or, in the case of a manufacturing franchise, by producing a soft drink whose newly-created trademark and name are unknown to soft drink consumers.

The context in which the Legislature adopted the Act, see Board of Educ., Asbury Park v. Hoek, 38 N.J. 213, 231 , 183 A.2d 633 (1962), and the “background circumstances revealing the evil sought to be remedied,” Oxford Consumer Discount Co. v. Stefanelli, 102 N.J.Super. 549, 565 , 246 A.2d 460 (App. Div.1968), persuade me that the first element of the definition *379 of franchise, “a written arrangement ... in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristics,” N.J.S.A. 56:10-3, refers to a license to use the trade name, etc. substantially as the licensee’s own in circumstances in which the licensee presents itself as a unit, or the alter ego, of the licensor. Cf. Roman v. Sharper, 53 N.J. 338, 342 , 250 A.2d 745 (1969) (holding that legislative intent effected “by adding inferentialIy" the phrase "qualified to vote” to the language of a statute authorizing recall elections). This formulation of the franchise definition, the prototype definition, objectively distinguishes a franchise from other supplier-dealership arrangements, thereby giving effect to the legislative intent and providing guidance and a greater degree of predictability to the business community. Cf. Council of N.J. State College Locals v. State Bd. of Higher Educ., 91 N.J. 18, 36 , 449 A.2d 1244 (1982) (“Statutes should be read in a reasonable manner to include only those situations legitimately contemplated by the Legislature.”).

The prototype definition avoids the subjective and vague definition developed in Neptune T.V. & Appliance Service Inc. v. Litton Systems, Inc., supra, 190 N.J.Super. at 160 , 462 A.2d 595 :

[T]he use of another’s trade name in such a manner as to create a reasonable belief on the part of the consuming public that there is a connection between the trade name licensor and licensee by which the licensor vouches, as it were, for the activity of the licensee in respect of the subject of the trade name.

The Neptune definition is seriously flawed because it relies on the public’s belief. In addition to the difficulty of proving what the public believes, the Neptune definition ignores the statute’s reliance on the grant of authority from the licensor to the licensee. N.J.S.A. 56:10-3a. Under the Act’s definition of a franchise it is the agreement between the parties that is controlling, not the public’s possibly erroneous, and perhaps undeterminable, belief. Moreover, the Neptune definition introduces the new and imprecise element of vouching for the licensee’s activity. That element suffers from the same infirmity as a *380 literal application of the Act’s definition: it probably exists in all licensor-licensee relationships.

The majority is incorrect when it suggests that N.J.S.A. 56:10-4(3) precludes the prototype definition. That section provides that the Act applies only to a franchise ... “where more than 20% of the franchisee’s gross sales are intended to be or are derived from such franchise.” According to the majority, “the inclusion of independently-named businesses is implicit in the Act’s definition of franchise by the Act’s limitation to a franchise” which generates more than 20% of the franchisee’s gross sales. Ante at 354, 614 A.2d at 140. The majority misunderstands the applicability of the 20% limitation. It is applicable to a franchisor who sells products complementary to the franchised product or who has multiple franchises. The operator of a neighborhood gasoline station franchised to sell a national brand of petroleum products may generate more than 80% of its gross sales from tires, batteries, accessories, and mechanical work, see e.g., the facts in Muha v. United Oil Co., Inc., 180 Conn. 720 , 433 A.2d 1009 (1980), or may also be franchised to sell Goodyear tires, or to rent automobiles under a Hertz franchise. In those circumstances the franchisee does not do business in its own name; rather, it adopts the names of its franchisors and presents itself as units of each of the franchisor companies. If one (or more) of the franchises does not generate more than 20% of the franchisee’s gross sales, then the Act is not applicable to that franchise. 2

The relationship between CCC and ISI is not a franchise under the Act. The majority concedes “[tjhat ISI does not use CCC’s name as its own____ ISI has always operated under its *381 own trade name, and admits that it does not use CCC’s name on its stationery, business cards, or on any business signs.” Ante at 353, 614 A. 2d at 139. Of great significance, not mentioned by the majority, is the fact that once ISI makes a sale, the contract of sale is between ISI and the customer.

The agreement between ISI and CCC gives ISI a limited right to the use of CCC’s trade name and trademark. Section 6.02 of the Agreement obligates ISI to “promote CCC’s name, trademark and logo on the Products.” (Emphasis added.) It also authorizes ISI, “subject to the provisions of Part 11 hereof, to use CCC’s name, trademark and logo in its advertising, exhibits, trade shows, public relations materials and manuals as the same relates to the Products.” (Emphasis added.)

Section 6.03 establishes the boundaries of ISI’s authority. It provides that ISI “shall not enjoy any rights in the CCC name, its trademark or logo” except as permitted under section 6.02. Part 11 more specifically restricts ISPs use of CCC’s trademark. Pursuant to section 11.01, “ISI agrees that it shall only use, make reference to, or otherwise designate, either orally or in writing, CCC’s trademarks or its licensors’ trademarks, in the promotion or Sale of the Product.” Section 11.02 imposes additional restrictions. It provides, in part, that when ISI uses CCC’s trademark in connection with CCC’s products, “ISI shall clearly indicate CCC's ownership of the trademark ‘CCC’,” and that “ISI shall not in any matter represent that it has ownership in the trademark ‘CCC’.” Finally, section 11.02 provides that “ISI will at no time adopt for use, without CCC’s prior written consent, any word or mark which is similar to or likely to be confused with the trademark of ‘CCC’.”

The parties’ agreement severely limits ISPs use of CCC’s mark and name to the identification of the products it is selling as CCC products. The agreement does not authorize ISI to use CCC’s name or mark as its own or to present itself as a CCC unit. Thus, not only does ISI not present itself as CCC, it is prohibited from adopting or using CCC’s mark or name as its *382 own. Consequently, the first element of the definition of “franchise” has not been established. ISI is a dealer authorized to sell and service CCC’s products; it is not a franchisee.

I would affirm the judgment of the Appellate Division.

Justice CLIFFORD joins in this dissent.

For reversal and reinstatement — Chief Justice WILENTZ, Justices HANDLER, O’HERN, STEIN, and Judge KING — 5.

For affirmance — Justice CLIFFORD, and Judge D’ANNUNZIO — 2.

The Act is titled: “An Act to prohibit unfair practices in franchising and supplementing Title 56 of the Revised Statutes.” Compare, for example, the Wisconsin statute, which is titled the Wisconsin Fair Dealership Law. Wis. Stat.Ann. § 135.01 to 135.07 (1991). As its title implies, it is broader than the Act. It applies to contracts "by which a person is granted the right to sell or distribute goods or services.” Wis.Stat.Ann. § 135.02(3).

Multi-point automobile dealerships provide another example of multiple franchises. A dealer holding a franchise from a domestic manufacturer may also have a franchise to sell an import. If the import’s sales do not exceed 20% of the dealer’s total sales, then the Act is not applicable to that franchise. Other examples of the applicability of the 20% minimum to prototype franchise situations abound.