The New Jersey Franchise Practices Act prohibits termination or non-renewal of a defined franchise except for “good cause,” which is defined by the failure of a franchisee to perform the material obligations of the franchise agreement. Because the act basically requires material breach for termination or non-renewal, many of the disputes in franchise cases under the act challenge the existence of a “franchise” as defined by the act. In the recent case of McPeak v. S-L Distribution, 2012 U.S. Dist. LEXIS 17983 (D. NJ), the district court determined that Joseph A. McPeak failed to plead facts sufficient to establish that S-L granted a trademark license necessary to sustain a cause of action under the act.

Pursuant to a 2006 distributorship agreement, McPeak was granted an exclusive right to sell and distribute certain products within a geographic region of Southern New Jersey. The agreement disclaimed the existence of a franchise or a “marketing system” and characterized McPeak as an independent contractor. The agreement prohibited the conduct of business under the defendant’s name or under the trade name or trademarks of any of the products, absent written consent. The agreement required McPeak to use best efforts to sell products, comply with the standard operating guidelines, develop new accounts and to establish and maintain the good will of the products.

Until November 2011, McPeak had invested capital, labor and specialized skills into the business with a 25 percent sales increase. But then S-L sent a letter advising that it was terminating the agreement. In January, S-L offered and McPeak accepted a new agreement reducing the exclusive territory and resulting in lost sales volume of 50 percent. The new agreement did repeat the disclaimer of a franchise and the prohibition against use of the trade names and trademarks.

McPeak filed a complaint in January alleging that his franchise was terminated in violation of the act. In March, McPeak sold his distributorship back to S-L, which then filed a motion to dismiss claiming that McPeak failed to state a claim upon which relief can be granted and that McPeak no longer had standing because of the sale back to S-L. The court concluded that McPeak had standing because he sought redress for the difference between the fair market value of the business under the original agreement and the price actually received from the sale back to S-L. With standing established, the court turned to the issue whether a franchise had been alleged within the meaning of the act.

Under the act, a franchise is defined as a “written agreement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement or otherwise.” Quoting the New Jersey Supreme Court, the district court stated that not every grant of permission to use a trademark in the sale of goods or services is a “license” within the meaning of the act. The district court noted that “the hallmark of the franchise relationship is the use of another’s trade name in such 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 … as such, the license contemplated by the act is one in which the franchisee wraps himself with the trade name of the franchisor and relies on the franchisor’s good will to induce the public to buy.”

The district court examined the allegations of the complaint and concluded that the facts pled could not plausibly support the claim that a license was granted. The court concluded that the right to exclusively sell branded products within certain geography did not confer a license; otherwise, any business selling a branded product would be considered a licensee. Nor did McPeak claim that he was using the trademark for the operation of his business, or that he was even allowed to do so. The lack of express granting language in the agreement granting a license, coupled with the fact that no actual use by McPeak could have established a license, proved fatal to his claim that a franchise was granted under the act.

The case is instructive in clarifying when a license is actually granted, or should be considered as existing, under New Jersey law. The case does explain the history of amendment of the act in 2010 to expand the act to prevent courts from limiting its application. Nevertheless, this court found that, notwithstanding the intended protections of the act, the act would not be triggered in the absence of a trademark license.

Craig R. Tractenberg is a partner in the Philadelphia and New York offices of Nixon Peabody and an adjunct professor teaching franchise law at Temple University’s Beasley School of Law.