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Neptune T.V. & Appliance Service Inc. v. Litton Microwave Cooking Products Division

Decided: June 7, 1983.


On appeal from the Superior Court, Law Division, Monmouth County.

Michels, Pressler and Trautwein. The opinion of the court was delivered by Pressler, J.A.D.


This appeal projects substantial questions regarding the definition of a franchise entitled to the protection of the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1, et seq. We agree with the determination of the trial judge, but not for the reasons relied upon by him, that the contract here in issue did not constitute a franchise agreement within the statutory intendment. Accordingly, we affirm the summary judgment here appealed from dismissing the complaint which sought relief pursuant to the Act.

Plaintiff, Neptune T.V. & Appliance Service, Inc. (Neptune), was in the appliance repair business in Monmouth County in 1974 when it entered into what was denominated as a service contract agreement with defendant Litton Microwave Cooking Products Division, Litton Systems, Inc. (Litton), a manufacturer of microwave ovens sold both to commercial and domestic customers. Pursuant to the terms of that contract, Neptune was designated as "an Authorized Litton service source" for "Freehold, N.J. (50-mile radius)." Neptune's undertaking was to repair Litton's ovens at the behest of the customer both during and after the warranty period. Warranty repairs were to be billed directly to and paid for by Litton. Post-warranty repairs were to be billed to and paid for by the customer. The contract

incorporated the terms and conditions of the Litton Service Policy and Procedural Guide, a manual containing detailed provisions regarding the performing of and billing for warranty work, parts inventory requirements, attendance at Litton training sessions, the handling of customer complaints and the like.

Although the contract expressly stipulated that Neptune was an independent contractor and neither an agent nor an employee of Litton, Neptune was nevertheless authorized to represent and hold itself out as an authorized Litton service source in its advertising, letterheads, calling cards and service vehicle markings. Finally, the contract provided for termination by either party with or without cause on 30 days notice, Litton to have the option on termination of repurchasing Neptune's remaining inventory of Litton repair parts.

The agreement continued in effect until December 1981 when Litton, without any indication of reason, gave Neptune notice of termination pursuant to the terms of the contract. By that time, according to Neptune's certification, it was doing an annual gross sales volume with Litton of $70,000 and the Litton work accounted for 38% of its own gross income. Litton disputed these calculations, claiming that the actual gross sales as between it and Neptune for the twelve months preceding the termination was less than $35,000 and accounted for less than 20% of Neptune's over-all gross business receipts.*fn1 In any

event, Neptune's calculations did not clearly distinguish between the in-warranty and out-of-warranty work although it appears that a substantial portion of its repairs of Litton's ovens were out-of-warranty. Finally, it is not disputed that while the effect of the termination is to withhold from Neptune the in-warranty work and the right to hold itself out as an authorized Litton service source, Neptune nevertheless remains free to continue to service and repair Litton ovens after warranty expiration.

Upon receipt of the termination notice, Neptune commenced this action to enjoin the termination, claiming that its contract with Litton constituted a protectible franchise under the New Jersey Franchise Practices Act, and hence that the termination without cause contravened N.J.S.A. 56:10-5. On Litton's summary judgment motion, the court concluded, based on the foregoing facts, that the contract did not constitute a franchise. Accordingly, it dismissed the complaint. We agree that the arrangement between the parties here was not a franchise.

A franchise within the statutory intendment is defined by N.J.S.A. 56:10-3(a) as

There are thus two definitional criteria of a franchise, both of which must be met in order for the agreement to come within the statutory orbit. The first is a grant by the alleged franchisor to the alleged franchisee of a license permitting him to use the franchisor's trade name. The second is the sharing by both parties of a community of interest in a business enterprise. The basis of the trial judge's determination was his view that the agreement failed to meet the first of the definitional criteria. While we disagree with that conclusion, we are nevertheless ...

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