When Does the Franchise Act Apply in New Jersey

New Jersey adopted the Franchise Practices Act (FPA) in 1971. The law was written to prevent the exploitation of franchisees in New Jersey by franchisors with superior bargaining power.

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 must 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.

The law also regulates the Termination of a Franchise Agreement in New Jersey.

Selling, Assigning or Transferring Ownership of an Existing

Franchise in NJ

Before transferring, assigning or selling a franchise or interest in a franchise, the franchisee must notify the franchisor in writing.  The notice must include (1) the transferee’s name, address, financial qualification and (2) business experience during the previous five (5) years.

Failure to notify the franchisor before a transfer, assignment or sale permits a franchisor to allege a breach of the franchise agreement and to terminate the franchise.

After notice is given, the franchisor has sixty (60) days to send a written response to the franchisee either approving the transfer or setting forth the reasons for denying the transfer.  If the franchisor does not respond to the notice within sixty (60) days, the law deems the transfer approved by the franchisor.

Again, in NJ a commercially good faith standard exists between a franchisor and franchisee and the franchisor must act in good faith when refusing to approve a transfer.

When is a Franchise Termination Permissible in NJ 

Legal Requirements 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.

CRITERIA FOR PERMISSIBLE TERMINATION

In NJ a franchisor can terminate a franchise only when: 

i.    The franchisee has voluntarily abandoned the franchise.  In such a 
      case, only 15 days’ notice is necessary;

ii.    The franchisee is convicted of an indictable offense which is directly
      related to the franchise business in which case termination is effective
      immediately; or

iii.   There is "good cause’ for the termination.

"Good cause” is defined as the failure of the franchisee to substantially comply with the contractual requirements imposed upon him under the franchise document.  "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.”  Please see www.njllclawattorney.com.

Attorneys’ Fees and Court Costs

A franchisee may recover attorney's fees for all successful claims. Unsuccessful claims do not result in an entitlement to attorney’s fees.  Because of the unfair leverage that franchisors have as compared to their franchisees, state law allows a court to award counsel fees and costs to the franchisee if a successful claim is made and proven.  Many potential causes of action can be successfully alleged based on long-standing NJ case law and principles of law outside of the state's franchise statutes; for example, contract law, corporation law, the law of commercial business relationships, and more.  Unsuccessful claims made against the franchisor, however, will not result in an entitlement of attorney's fees.

Do you have a question(s) not addressed here?  If so, contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com 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.