The basic legal relationship between a franchisor and a franchisee is, of course, memorialized in  the franchise agreement. However, several states have statutes which can outright cancel certain clauses in a franchisor’s standard agreement.  These state laws simply strike and replace certain clauses that the parties may have seemed to agree upon in the Franchise Agreement. The raison d’etre for these statutes is that certain provisions in the franchise agreement are imposed upon franchisees because of the franchisor’s unequal bargaining power. Those legislative enactments are theoretically designed to help level the playing field.

A somewhat common example of those statutes are laws that prohibit a franchisor from obligating a franchisee to pursue legal claims in the state where the franchisor is located. Those clauses that are commonly known as “forum – selection clauses.”

New Jersey is one such state that is rather famous (or infamous, depending on your point of view) in franchise legal circles for its New Jersey Franchise Practices Act (the “NJFPA”). That  law  has been in effect since 1989. It is not that that the NJFPA has radically different provisions than those found in some other states, it is more that the statute is written rather nebulously and thus is open to much litigation and court interpretation.

New Jersey also has a statute similar to the NJFPA that applies only to automobile dealerships. In a well known New Jersey decision from 1996, Kubis & Persyzk, Inc. v Sun Microsystems, Inc., the New Jersey Supreme Court decided to simply borrow the  provision that prohibits forum-selection clauses in the automobile dealership law into the NJFPA. Thus, the prohibition in the automobile dealership law prohibiting forum-selection clauses in automobile dealership agreements also became a prohibition in all franchise agreements with New Jersey residents.

Recently, we were involved in a case where a disappointed distributor argued that the reasoning in the Kubis case should also be extended to franchise agreement that contain a jury trial waiver. The automobile dealership law contains a prohibition against waiving a jury trial, but the NJFPA does not.

At first glance, that would appear to be a logical extension of the reasoning in the Kubis case, especially since some other state franchise statutes specifically prohibit waiver of a jury trial in franchise agreements. However, a closer look at the equities of the two situations reveals a significant difference between the two types of clauses. It is hard to imagine any circumstance where a franchisee would agree to litigate outside its home state unless it had little choice. For example, in Kubis, the franchisee, a New Jersey resident, would have been forced by the agreement to bring its claims in California. 

On the other hand, waiving a jury trial could be beneficial to both parties. If both parties wanted a dispute between them to be resolved relatively quickly, without the costs attendant to arbitration, a jury trial waiver would be one such method of accomplishing that. That is especially true since the cost of arbitration has risen substantially over the years. A franchisee could conceivably  want to agree to simply trying a claim against the franchisor  to a judge without a jury.  Although the court in our case did not delve into its reasoning in detail, it did deny the distributor’s request to extend the automobile dealership law prohibition on jury trial waivers to the NJFPA. 

That said,, this is certainly not the last of these kinds of issues that will continue to be raised and litigated under the New Jersey Franchise Practice Act.