New Jersey Franchise Practices Act: When Does It Apply Part 2: “Community of Interest”- When Is There a Power Disparity?

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Franchise Law Attorney

In our last blog, I discussed the general aspects of when the NJFPA applies.  Most of those elements can be established just by looking at an annual sales report.  But there is one, the “community of interest,” that has been the subject of debates in the court system.  Whether the franchisor or franchisee shares this community of interest depends mainly on the power disparity between both entities.  In fact, three of the four factors enunciated by the courts depend on this dynamic.  They include the disparity in bargaining power, economic dependence on the franchisor, and the amount of control the franchisor has over the franchisee, and they are the subject of this blog.

One of the first cases that dealt with this was the case of Neptune T.V. & Appliance Service, Inc. v. Litton Microwave Cooking Prods. Div., Litton Sys., Inc.  In this case, Neptune T.V. was an appliance repair store that entered into a service agreement with Litton.  Under this agreement, Neptune T.V. would repair Litton ovens, with payments made by Litton if under warranty.  The agreement required Neptune T.V. to comply with Litton’s warranty policies when billing, Litton’s training requirements, and Litton’s service manual, and Neptune T.V. could advertise itself as “an authorized Litton service source” within a 50-mile radius.  Reviewing the agreement, the court concluded that there was not a sufficient disparity in bargaining power and economic dependence of the franchisee to the franchisor such that a community of interest existed.  Litton’s only interest in Neptune T.V. was that repairs of its ovens were done satisfactorily to uphold its reputation of providing quality repairs.  It didn’t profit from the repairs, and was unaffected by the volume of other business Neptune T.V. had.  Therefore, the disparity and dependence of Neptune T.V. to Litton was minimal, and the court concluded no community of interest nor franchise relationship existed.

In a similar fashion, an agreement to supply brake linings to a brake pad manufacturer has been shown not to be a franchise agreement.  In New Jersey American, Inc. v. Allied Corp., NJA used brake linings manufactured by Allied to assemble brake disc pads.  The agreement between NJA and Allied provided for Allied to inspect NJA’s facilities, review its financial statements, and review its quality control procedures.  This agreement made clear NJA was only an independent contractor for Allied, only one of several suppliers NJA used for its brake disc pads.  NJA would put Allied’s name on the brake pads, and would receive some form of compensation for doing this.  The reliance that NJA had on Allied was minimal, as NJA had other suppliers it could use for brake linings.  It was not dependent economically on Allied’s supply of linings, as the two companies merely did business together, and the court therefore concluded that a community of interest did not exist.

However, a greater involvement in the business could implicate the safeguards of the NJFPA.  In Atlantic City Coin & Slot Serv. Co. v. IGT, Atlantic City Coin & Slot Service Company executed a much more stringent agreement with IGT regarding the sale and service of IGT slot machines.  It was required to use IGT’s promotional materials, maintain adequate facilities, train and educate customers, use specific order forms, restrict the number of sales representatives to be employed, and submit its sales reports to IGT.  Furthermore, 76% of Atlantic City Coin & Slot Service Company’s revenue came from the sale and service of IGT products.  The economic dependence on IGT and requirements to follow IGT’s practices in a number of areas led the court to conclude that a community of interest could likely be established.

Contracts where the franchisee relies on the franchisor for direction on how to sell or use the product in question are likely going to be considered contracts subject to the NJFPA.  In the same vein, a court will also look to see if the business the franchisee does with the franchisor generates a vast percentage of its revenue, and the franchisor is not simply just one of many suppliers that does business with the franchisee.  There is an economic component to this analysis, and we will discuss this in our next blog on this issue.

To discuss your NJ Franchise matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

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