Key Terms and Definitions Under the NJ Franchise Practices Act
A franchise is a unique business and economic concept. The following are terms and definitions you should familiarize yourself with if you are contemplating a franchise relationship.
“Franchise” – A franchise is a written agreement in which a person grants to another person a license to use a trade name, trademark, service mark and related processes and operational procedures which creates a complete system of doing business in the marketing and sale of goods or services at wholesale, retail, or otherwise.” In a nutshell, the franchisee purchases access to someone else’s expertise, experience and method of doing business.
A “franchisee” is “a person or entity (i.e., LLC, corporation, proprietorship) to whom a franchise is offered or granted”.
A “franchisor” is “a person or entity who sells a franchise to a franchisee under a franchise agreement.”
When Does the Franchise Act Apply in New Jersey?
The Act applies to franchises when (1) the performance of the franchise requires that the franchisee establish or maintain a place of business in New Jersey; (2) gross sales of product or services between the franchisor and franchisee exceed $35,000 during a 12 month period; (3) and more than twenty percent (20%) of the franchisee’s gross sales are from the operation of a franchise.
New Jersey Laws Strictly Regulate the Termination of a Franchise Relationship Located in New Jersey
The Requirement of Notice of Termination of a Franchise
Because of the considerable investment costs of a franchise and the superior economic power and position of the franchisee, NJ has adopted some limited protections on behalf of franchise owners. A franchisor may not terminate, cancel, or fail to renew a franchise without first giving written notice setting forth all the reasons for such termination, cancellation, or intent not to renew the franchisee at least 60 days in advance of such termination, cancellation or intent not to renew. The law imposes a good faith and “commercially reasonable standard” to any purported franchise termination consistent with the underlying terms of the franchise agreement.
When is a Franchise Termination Permissible in NJ?
Criteria for Permissible Termination
In NJ a franchisor can terminate a franchise only when:
- The franchisee has voluntarily abandoned the franchise;
- The franchisee is convicted of an indictable offense which is directly related to the franchised business being terminated; or
- There is “good cause” for the termination.
What Does the Law Mean “For Good Cause” to Terminate a NJ Franchise?
“Good cause” is defined as the failure of the franchisee to substantially comply with the contractual requirements imposed upon him or her under the franchise document. Under NJ law, “good cause” exists if the franchisee breaches an expressed or implied requirement of the franchise agreement. “Good cause” does not exist when the franchise documents are unreasonable. The Act prohibits the franchisor from imposing “unreasonable standards for the performance of the franchise upon a franchisee.”
Do you have a question(s) on NJ franchise law which has not been addressed here? If so, contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org to schedule a consultation about your particular needs. He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Franchise Law Attorney