The New Jersey Franchise Practices Act: Beware the “Constructive Termination”

In any franchise relationship, a franchisor may wish to terminate a franchisee for reasons having nothing to do with a franchisee’s performance. Perhaps the franchisor seeks to downsize the number of franchisees in its fleet or distribute its products through a new business plan in which the franchisee no longer fits.  In any event, a New Jersey franchisor likely knows that, absent good cause, the New Jersey Franchise Practices Act generally prohibits a franchisor from terminating a franchisee.  In other words, the franchisor’s hands may be tied.

What if, however, the franchisee decides to back out of the franchise relationship on its own?  Could a savvy franchisor avoid the prohibitions of the Franchise Practices Act by simply making its franchisee’s life so miserable that the franchisee decides to leave the franchise?  

Not likely.

The Franchise Practices Act generally prohibits both express termination and “constructive termination” of a franchisee without good cause.  As explained by the Appellate Division in Maintainco, Inc. v. Mitsubishi Caterpillar Forklift American, Inc., 408 N.J. Super 461, 479 (App. Div. 2009), “the word “ ‘termination’ in the [Franchise Practices Act] includes constructive termination in accordance with traditional contract law principles.”  

What conduct constitutes a “constructive termination”?  Generally, where a franchisee gives up a franchise because a franchisor acts in a manner that would force a reasonable franchisee to leave a franchise, the franchisor’s conduct may give rise to a “constructive termination” claim.  Indeed, a change in the terms of the relationship could count as a “constructive termination”.  For example, where a franchisor removes a franchisee’s designation as the “exclusive” distributor while still permitting the franchisee to be a non-exclusive distributor of its products, this action may constitute a “constructive termination” under the Franchise Practices Act.  See 408 N.J. Super 479-480.

Bottom line -- franchisors should think twice before attempting to push a franchisee to leave a franchise “voluntarily” or engaging in conduct that would force a reasonable franchisee to give up the franchise.   The franchisor’s actions may constitute a “constructive termination” under the Franchise Practices Act and result in the same repercussions as an express termination of the franchisee.