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Instructional Systems Inc. v. Computer Curriculum Corp.

Decided: July 16, 1990.

INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT,
v.
COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE, DEFENDANT-APPELLANT



On appeal from the Superior Court of New Jersey, Chancery Division, Passaic County.

Michels, Deighan and Brochin.

Per Curiam

In this case we consider whether the contractual relationship between a computer manufacturer and one of its resellers may be construed as a "franchise" within the meaning of the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 et seq. For the following reasons, we hold that the relationship does not constitute a franchise and that the manufacturer's termination of its relationship with the reseller in several states therefore does not provide the reseller with a cause of action under the Act.

Defendant Computer Curriculum Corporation (CCC) is a Delaware corporation headquartered in Palo Alto, California. It produces and markets an integrated learning system which uses computer hardware and proprietary software to teach and monitor a student's progress in such areas as mathematics, reading, language skills and computer science. Plaintiff Instructional Systems, Inc. (ISI), a New Jersey corporation with its primary place of business in New Jersey, has served as the exclusive reseller of CCC products in New England and the Middle Atlantic states for the past 15 years.

On July 12, 1984, CCC and ISI entered into the contract at issue here. By that contract, CCC appointed ISI as the exclusive

reseller of CCC products to certain categories of customers in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Washington, D.C. Paragraph 13.01 of the contract provided that "This agreement shall . . . continue in effect until July 31, 1989." In addition, the contract contained a choice of law provision which provided that the parties' agreement "shall be construed and interpreted, and the legal relations created by it shall be determined, in accordance with the laws of the State of California."

By the late 1980's, a substantial portion of ISI's revenues was generated through the sale of CCC products. ISI also made a profit sublicensing CCC's proprietary software and training customers how to operate the CCC systems it sold. In 1988, however, CCC informed ISI that it was unhappy with ISI's allegedly poor performance in several states and rejected a proposal by ISI to renew the reseller agreement for another year. As an alternative, CCC offered ISI a new two-year contract covering the three states where it considered the company to be performing adequately: New Jersey, New York and Massachusetts. Following extended discussions, CCC and ISI entered into this contract on January 30, 1989.

Immediately after entering into the 1989 agreement, ISI filed a complaint against CCC in the Chancery Division. The complaint alleged that the 1984 agreement contemplated renewal, that CCC had coerced ISI into signing the 1989 agreement, and that CCC had violated the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 and following, by imposing "unreasonable standards of performance" on ISI. In addition, it set forth claims for breach of contract, breach of implied covenant, tortious interference with prospective economic advantage, unfair competition, unjust enrichment and breach of fiduciary duty. CCC removed the suit from the Superior Court of New Jersey to the United States District Court for the District of New Jersey on the basis of diversity of citizenship.

Following discovery, ISI moved before the United States District Court for the District of New Jersey for a preliminary injunction enjoining CCC from enforcing the 1989 agreement and directing the parties to abide by the terms of the 1984 agreement pending further action by the court, as well as for a partial summary judgment stating that the 1984 agreement constituted a franchise within the meaning of the Franchise Practices Act. CCC opposed this motion, arguing in part that the 1984 agreement was not a franchise. In the alternative, it claimed that even if the agreement was a franchise, the Act could not be used to enjoin an out-of-state company from terminating franchises in states other than New Jersey without violating the Commerce Clause of the United States Constitution, Art. 1, ยง 8, cl. 3.

In light of the issues raised under the Franchise Practices Act, ISI moved before the United States District Court for an order remanding the state law aspects of the case to the New Jersey courts under the doctrine of " Pullman abstention." See Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971 (1941).*fn1 Pursuant to this motion, the judge announced his intention to ...


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