Distribution Agreements That Merely "Contemplate" Doing Business in New Jersey May Be Subject to the Act, Which Limits the Contractual Right to Terminate Relationship
On March 13, 2013, the United States District Court, District of New Jersey, in Strassle v. Bimbo Foods Bakeries Distrib., Inc., No. 12-3313 (Mar. 13, 2013), held that a distribution agreement may be subject to the New Jersey Franchise Practices Act (NJFPA) even though it merely anticipated a situation where the distributor might establish a fixed place of business in New Jersey.
Plaintiffs are distributors of bakery products who each signed a distribution agreement with a bakery goods distribution company which gave them the exclusive right to buy certain baked bread and roll products, and resell them to New Jersey stores in a designated territory. Defendant Bimbo Foods acquired the bakery goods distribution company with which plaintiffs had the distribution agreement and assumed the obligations under the agreement. Plaintiffs filed a putative class action complaint asserting that Bimbo Foods breached its obligations under the distribution agreement by refusing to allow plaintiffs to purchase various types of bread products. Plaintiffs asserted claims for breach of contract, but also asserted that Bimbo Foods' actions gave rise to violations under the NJFPA. Bimbo Foods moved to dismiss, asserting, in part, that the NJFPA does not apply to the parties' distribution agreement.
In analyzing the applicability of the NJFPA to the distribution agreement, the court noted that the Act creates "an exception to the general rule that two businesses are free to terminate their business relationship according to the terms of their contract." At issue here was whether the distribution agreement fell within the NJFPA's threshold requirement that performance of the agreement "contemplates or requires the franchisee to establish or maintain a place of business within the state of New Jersey." N.J.S.A. § 56:10-4(a)(1). The statutory definition of a place of business requires a fixed business location and specifically provides that a motor vehicle is excluded from the definition. Plaintiffs operated by loading bakery products onto their trucks at the suppliers' warehouse and delivering them directly to stores. Thus, defendant argued, the statutory requirement had not been satisfied. The court noted that the inclusion of the word "contemplates" in the statutory language seems "clearly to indicate that maintaining a place of business in New Jersey is not absolutely required in order to trigger the NJFPA's protections." Rather, the court held, the Act can apply to "arrangements in which the parties simply anticipate that the franchisee will set up a bricks and mortar location in New Jersey (thus signaling that they 'contemplated' this course of action), even if such plans never coming [sic] to fruition."
The court noted that plaintiffs made no explicit agreement to maintain a place of business in New Jersey, nor did the distribution agreement overtly require them to do so. However, the court held that plaintiffs "may still carry their pleading burden" if they show that the distribution agreement "contemplated" that they maintain or establish places of business in New Jersey. However, "showing that it is merely possible" to establish a place of business in New Jersey under a distribution agreement "is not enough." Instead, there must be evidence sufficient to indicate that the parties "had in mind" that the distributor could have a place of business in New Jersey.
The court looked to the language of the distribution agreement to find this evidence. In a section entitled "Change in Delivery Method," the agreement contemplates a situation where, in the event a retail customer "makes an independent determination to accept delivery of the Products by any method other than store door delivery... [Plaintiffs] shall have the first right to effect such alternative service." Interpreting this provision, the court noted that the agreement "specifically anticipates a situation in which Plaintiffs provide bread products without actually going" to their customers' locations. If the plaintiffs are not going to their customers' locations, the court reasoned, "then presumably the customers would be coming to pick up their bread at some fixed place of business belonging either to Plaintiffs or some third party." Accordingly, this provision was "just enough" to show that plaintiffs and Bimbo Foods "had in mind" that plaintiffs would establish or maintain a place of business in New Jersey in furtherance of the distribution agreement.
The court's opinion in Strassle is yet another example of how easily a distribution agreement may be considered to be a franchise agreement under the NJFPA, which, among other things, places significant restrictions on the ability of a supplier to terminate or fail to renew a distribution agreement, notwithstanding its unambiguous terms. Even if a distributor does not do business in New Jersey, if the agreement can be construed to even contemplate doing business in New Jersey at a future date, it may be subject to the NJFPA. Accordingly, even when drafting distribution agreements that do not require the distributor to maintain a place of business in New Jersey, care should be taken to avoid language that may imply that the parties "contemplated" the distributor establishing or maintaining a place of business in New Jersey at a future time.