In order to trigger the Act's protection, (1) the performance of the franchise must contemplate or require the franchisee to establish or maintain a place of business within the State of New Jersey; (2) gross sales of products or services between franchisor and franchisee must have exceeded $ 35,000.00 for the 12 months preceding the filing of any claim under the Act; and (3) more than 20% of the franchisee's gross sales must be derived from such franchise. See N.J. STAT. ANN. 56:10-4 (West 1989).
It is a violation of the Act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of the Act, "good cause" is limited to failure by the franchisee substantially to comply with the requirements imposed upon him by the franchise. See N.J. STAT. ANN. 56:10-5 (West 1989). The courts of New Jersey have consistently given effect to the plain meaning of this provision. See, e.g., Dunkin' Donuts of America v. Middletown Donut Corp., 100 N.J. 166, 178, 495 A.2d 66, 72 (1985); Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973), cert. denied, 415 U.S. 920, 39 L. Ed. 2d 475, 94 S. Ct. 1421 (1974).
The Act reflects the legislative concern over long-standing abuses in the franchise relationship. Shell Oil Co. v. Marinello, 63 N.J. at 409, 307 A.2d at 602. The legislature recognized the franchisor's superior bargaining position in the franchise relationship, and "the inevitable intertwining of the franchisee's livelihood with the franchise." Amerada Hess Corp. v. Quinn, 143 N.J. Super. 237, 253, 362 A.2d 1258, 1267 (Law Div. 1976). Despite their common interest in the success of the franchise, the franchisor and the franchisee also have vastly divergent interests. As long as the franchisor benefits from the increased public exposure and distribution of its goods, it matters little to the franchisor whether a particular franchisee remains in business, as there will always be another franchisee available to take that place in the distribution network. Neptune T.V. & Appliance Serv., Inc. v. Litton Microwave Cooking Prods. Div., 190 N.J. Super. 153, 163, 462 A.2d 595, 600 (App. Div. 1983). Once a franchisee has succeeded, through the expenditure of his own efforts and capital, to establish a local reputation for the franchise name, his franchise is vulnerable to termination. Id. It is the potential for abuse attendant upon an arbitrary and uncompensated termination of a franchise which the Franchise Practices Act was intended to address. Id. at 164, 462 A.2d at 601.
It is undisputed that Gallo operates as a franchisee of GMC. The issue in question is whether, as GMC claims, the franchise agreement is contained in the parties' dealer agreement, or whether, as Gallo asserts, Gallo operated under three separate franchise agreements, each embodied in the combination of the dealer agreement with a separate addendum. If the former is true, then the franchise is still in effect, and was not affected by GMC's withdrawal from the heavy duty truck market. If the latter is the case, however, GMC's cancellation of Gallo's heavy duty truck addendum constitutes one of those franchises.
B. The Franchise Agreement
The dealer agreement between GMC and Gallo grants Gallo the non-exclusive right (1) to buy those vehicles identified in the Motor Vehicle Addendum, and (2) to identify itself as an authorized GMC Truck dealer. Each of the three Motor Vehicle Addenda to which the dealer agreement refers lists the specific truck models in that class which Gallo is authorized to sell.
Also attached to Gallo's dealer agreement is a "Notice of Primary Responsibility," which designates, for each of the three classes of truck listed in the addenda, Gallo's area of primary responsibility. Designated as Gallo's area of primary responsibility for light and medium duty trucks are the communities of Vineland and Rosehyn, in Cumberland County, New Jersey, and for heavy duty trucks, the counties of Atlantic, Cumberland, Cape May and Salem.
Clearly, the agreement between Gallo and GMC regarding the sale of heavy duty trucks is itself a franchise, as defined by the Franchise Practices Act, § 56:10-3a. The agreement was a written arrangement whereby GMC licensed Gallo to identify itself as an authorized GMC Truck dealer. Furthermore, there existed under that agreement a community of interest in the marketing and servicing of GMC heavy duty trucks and in the sale of related parts and accessories. Not only did each party depend, at least in part, upon the other party's success in the marketplace, but in addition, there existed some element of control by GMC which indicated that Gallo's heavy duty truck dealership was part of the class that is protected by the Act. See Neptune, 190 N.J. Super. at 163-64, 462 A.2d at 601; Colt Indus., Inc. v. Fidelco Pump & Compressor Corp., 844 F.2d 117, 120 (3d Cir. 1988).
GMC does not deny the existence of a franchise relationship between itself and Gallo. GMC asserts, however, that there has always been but one franchise agreement, embodied in the dealer agreement, and that it was unaffected by the cancellation of the heavy duty truck addendum. Since Gallo continues to operate under an effective dealer agreement, GMC argues that Gallo retains the "license to use" GMC trademarks and that a "community of interest" continues to exist between Gallo and GMC in the marketing of GMC trucks.
Although the dealer agreement does expressly provide that Gallo has the license to use GMC's trademarks, it does not, standing alone, provide for a community of interest regarding the marketing of GMC trucks. The dealer agreement authorizes Gallo to "buy the new GMC Truck motor vehicles identified in the Motor Vehicle Addendum hereto and related Parts and Accessories." The dealer agreement itself, however, does not identify the heavy duty truck models that Gallo is authorized to sell. Those models are listed only in the heavy duty truck Motor Vehicle Addendum. Without that addendum, therefore, Gallo is not authorized to sell any GMC trucks. The existence of a franchise agreement in this case requires a co-existence of both a dealer agreement and a valid Motor Vehicle Addendum.
GMC argues that a franchise continues to exist between itself and Gallo despite the cancellation of Gallo's heavy duty truck addendum, because along with the dealer agreement Gallo retains two valid Motor Vehicle Addenda, one for light duty trucks and one for medium duty trucks.
GMC's conceptualization of the franchise agreement suggests that as long as there remains at least one valid Motor Vehicle addendum to accompany the dealer agreement, the community of interest thrives. In other words, one franchise is composed of one dealer agreement plus any number of valid Motor Vehicle Addenda.
The language of the dealer agreement, however, suggests a more rigid relationship between the two documents. The dealer agreement provides that a dealer has a non-exclusive right to buy those GMC trucks "identified in the Motor Vehicle Addendum hereto." The use of the singular noun "Addendum" indicates that the parties contemplated that one franchise consists of one dealer agreement plus one Motor Vehicle Addendum, and not any combination of addenda. Therefore, Gallo had three franchise agreements with GMC: a light duty truck franchise covered by the combination of the dealer agreement and the light duty truck addendum; a medium duty truck franchise covered by the dealer agreement combined with the medium duty truck addendum; and a heavy duty truck franchise agreement, contained in the combination of the dealer agreement and the heavy duty truck addendum.
Gallo's heavy duty truck franchise falls under the protection of the Franchise Act, as it satisfies the three requirements of § 56:10-4: (1) The franchise agreement requires Gallo to maintain a place of business in Vineland, New Jersey; (2) gross sales of heavy duty truck products between GMC and Gallo for the 12-month period preceding Gallo's counterclaim totaled approximately $ 2,022,821.00, exceeding the $ 35,000.00 required by the Act; and (3) approximately 31% of Gallo's gross sales were derived from its heavy duty franchise, exceeding the 20% required by the Act. See N.J. STAT. ANN. 56:10-4.
C. Termination of the Franchise
Having determined that the heavy duty truck addendum incorporated into the dealer agreement constituted a separate franchise agreement between GMC and Gallo, this court holds that GMC's cancellation of Gallo's heavy duty truck addendum was a termination of that franchise under the Franchise Act. It is true that Gallo still enjoys effective light duty truck and medium duty truck franchise agreements, since Gallo's dealer agreement, light duty addendum and medium duty addendum remain in effect. However, GMC's cancellation of Gallo's heavy duty truck addendum extinguished Gallo's right to market GMC heavy duty trucks, thereby terminating Gallo's heavy duty truck franchise.
This Court also finds that GMC's termination of Gallo's heavy duty truck franchise lacked good cause, and is therefore a violation of § 56:10-5 of the Franchise Practices Act. The Act provides that the only "good cause" for such termination is the failure of the franchisee substantially to comply with the requirements of the franchise agreement. GMC does not assert anywhere in its pleadings or affidavits that Gallo has failed to abide by the terms of the franchise, but claims that the cancellation of the heavy duty truck addendum was precipitated by GMC's decision to withdraw from the heavy duty truck market. It is a violation of the Act, however, to cancel a franchise for any reason other than the franchisee's substantial breach, even if the franchisor acts in good faith and for a bona fide reason. Westfield Centre Serv., Inc. v. Cities Serv. Oil Co., 86 N.J. 453, 469, 432 A.2d 48, 55 (1981).
In Westfield, a franchisor elected to dispose of a service station franchise in a state-wide effort to reverse a two-year trend of negative earnings in its retail gasoline division. The franchisor based its decision on a finding that a gasoline station at the franchisee's location was not "economically feasible." The Supreme Court of New Jersey held that since the franchisee had not breached the terms of the franchise agreement, the franchisor's termination of that franchise lacked good cause, and was therefore in violation of the plain meaning of the Franchise Practices Act. 86 N.J. at 469, 432 A.2d at 57.
GMC argues that the Franchise Act was not intended to regulate the business affairs of franchisers by prohibiting terminations motivated by good faith responses to the laws of economics. GMC postulates that if under the Act a franchiser is forced to continue to do business with a franchise that it determines is "uneconomical," then the resulting "diseconomies" would cause a "misallocation of resources" and higher, "noncompetitive" prices for the franchisor's products. This result, GMC claims, would inevitably cause manufacturers, dealers and the public to suffer. In the instant case, however, Gallo has not requested injunctive relief to force GMC to continue operating in the heavy duty truck market; it has merely requested damages to compensate it for the losses caused by GMC's termination of its heavy duty truck franchise. The Westfield court considered the concerns expressed by GMC regarding the economical consequences of an award of money damages for violations of the Franchise Act, but concluded that
the economic effect of compensating the franchisee for the reasonable value of its business when balanced against the evil that the Legislature sought to eliminate is a reasonable accommodation of the rights of the franchisor and the general public in franchise arrangements.
86 N.J. at 469, 432 A.2d at 57 (footnote omitted).
This court's decision is consistent with the finding of the United States District Court for the District of New Jersey in Frank's GMC Truck Center, Inc. v. GMC, No. 87-4839 (D.N.J. Jan. 7, 1988), rev'd on other grounds, 847 F.2d 100 (3d Cir. 1988). In a written transcript statement, supplementing its oral opinion granting a franchisee's request for a preliminary injunction against GMC, the court found that by cancelling the franchisee's heavy duty addendum, GMC had in fact terminated its heavy duty truck franchise, as defined in the Act. Id. at 2. The court recognized the difference between a termination made in "good faith" and a termination for "good cause" as required by the Act. Id. Despite GMC's claim that it had terminated the franchise in good faith and for valid economic reasons, the court found that GMC had failed to demonstrate good cause for that termination. Id.
GMC's decision to withdraw from the heavy duty truck market has given rise to numerous actions nationwide, filed by dealers whose heavy duty truck businesses were similarly terminated. Several holdings from among those cases support this court's conclusion that the cancellation of Gallo's heavy duty truck addendum constitutes the termination of a franchise.
In In re General Motors Corp. and Volvo White Corp. -- Heavy Truck Dealers, No. 8760 0812, slip op. (Dec. 17, 1982), the Department of State, Bureau of Professional and Occupational Affairs of the Commonwealth of Pennsylvania, rejected GMC's argument that the discontinuation of its heavy duty truck line was merely a cancellation of some of its products. Pennsylvania law defines "franchise" as
the written agreement or contract between any new vehicle manufacturer or importer and any new vehicle dealer or distributor which purports to fix the legal rights and liabilities of parties to such agreement or contract, and pursuant to which the dealer purchases and resells the franchise product or leases or rents the dealership premises.
63 PA. STAT. § 818.2 (1983). GMC and Volvo White testified that the heavy duty truck industry is considered to be separate and distinct from the light and medium duty truck industries. The Board found that GMC's heavy duty truck market was different from the light and medium duty truck markets, and that in fact GMC has treated its heavy duty truck line distinctly. Refusing to place "the form of the dealer agreement over its substance, particularly as the form of a dealer agreement is controlled by the manufacturer," the Board found that there was nothing which would require a finding that the heavy duty arrangement was anything other than a franchise. In re General Motors, No. 8760 08l2, slip op. at 17. However, because Pennsylvania's franchise statute, unlike the New Jersey act, recognizes an exception for the termination of a franchise for "good cause and in good faith," the Board found that GMC's actions were justified, and therefore not in violation of that act. Id. at 18. See 63 PA. STAT. § 818.9(c) (1983).
In Mid-State Truck Serv., Inc. v. General Motors Corp., No. 87-C-995-S, slip op. (W.D. Wis. Mar. 28, 1988), a GMC truck dealership had operated under a dealership agreement similar to Gallo's, with addenda for light and medium duty trucks, and a heavy duty truck addendum which was cancelled when GMC entered into the joint venture with Volvo. Under the relevant statute governing motor vehicle dealers, WIS. STAT. ANN. § 218.01 (West 1982), the definition of a "franchise" is equivalent to that of a "dealership" as defined under the Wisconsin Fair Dealership Law. A dealership is defined as
a contract or agreement either expressed or implied, whether oral or written, between 2 or more persons, by which a person is granted the right to sell or distribute goods or services, or use a tradename, trademark, servicemark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling or distributing goods or services at wholesale, retail, by lease, agreement or otherwise.