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INSTRUCTIONAL SYS. v. COMPUTER CURRICULUM CORP.

June 2, 1993

INSTRUCTIONAL SYSTEMS, INC., Plaintiff,
v.
COMPUTER CURRICULUM CORP., Defendant.



The opinion of the court was delivered by: ALFRED J. LECHNER, JR.

 LECHNER, District Judge

 For the reasons that follow, the motion for partial summary judgment is granted. Extraterritorial application of the Franchise Practices Act, as described below, violates the Commerce Clause.

 Facts

 A. The Parties and Their Relationship

 CCC is a Delaware corporation with its principal place of business in Sunnyvale, California. CCC 12G Statement, P 1; Moving Brief at 3. Since the mid-1970s, CCC has developed and produced computer software, hardware and other products known as integrated learning systems (the "Integrated Learning Systems"). *fn2" CCC 12G Statement, P 2; Declaration of Patrick Suppes (the "Suppes Decl."), P 2 (attached as Exhibit A to Rosdeitcher Aff.). CCC sells the Integrated Learning Systems to purchasers located throughout the United States. CCC 12G Statement, P 2. School districts are the primary purchasers of Integrated Learning Systems. Suppes Decl., P 2.

 ISI is a New Jersey corporation with its sole place of business in Hackensack, New Jersey. ISI 12G Statement, P 1. All of ISI's sales force and consultants work out of ISI's New Jersey facility. Certification of Phyllis Kaminer (the "Kaminer Cert."), P 13 (attached as Exhibit 2 to Rochford Cert.). Since 1974, ISI has been the exclusive re-seller of CCC products, including Integrated Learning Systems, in the northeast United States. *fn3" ISI 12G Statement, P 2; Suppes Decl., P 4. In this regard, the parties entered into a series of written contracts, each for a definite term. *fn4"

 On 12 July 1984, CCC and ISI entered into an agreement (the "1984 Agreement") appointing ISI as the exclusive re-seller of certain CCC products, including Integrated Learning Systems, in the Marketing Territory. CCC 12G Statement, P 3; see 1984 Agreement, P 2.01 (attached as Exhibit H to Rosdeitcher Aff.). By its own terms, the 1984 Agreement was to expire on 31 July 1989. CCC 12G Statement, P 4; 1984 Agreement, P 13.01. Construction of the 1984 Agreement, as well as any legal relations which it created, was to be governed by California State law. CCC 12G Statement, P 4; 1984 Agreement, P 14.10. The 1984 Agreement contained no provision requiring renewal beyond the expiration date.

 The 1984 Agreement required ISI to "use its best efforts to promote demand for and to re-sell CCC's products to the market within the Territory," to "maintain adequate facilities for such purposes" *fn5" and to "employ no less than four full-time sales representatives to accomplish this purpose." 1984 Agreement, P 6.01; ISI 12G Statement, PP 2, 5. Moreover, in order to qualify for certain discounts on CCC products, the 1984 Agreement required ISI to adhere to a sales quota for the Marketing Territory as a whole. *fn6" ISI 12G Statement, P 5; Suppes Decl., P 9; 1984 Agreement, PP 4.02-4.03.

 In return, the 1984 Agreement granted certain software and hardware user licenses to ISI and authorized ISI "to use CCC's name, trademark and logo in its advertising, trade shows, public relations materials and manuals." 1984 Agreement, PP 3.01-3.03, 6.02. It was expressly provided that these licenses and rights terminated upon expiration of the 1984 Agreement. Id., PP 3.04, 6.02. Moreover, the 1984 Agreement expressly stated that "ISI shall not enjoy any rights in the CCC name, its trademarks or logo." Id., P 6.03; see also id., PP 11.01-11.02.

 CCC asserts that, during the course of the 1984 Agreement, it met with ISI and "expressed concern with ISI's performance and ability to compete" in the Marketing Territory. *fn7" Moving Brief at 6; see also Suppes Decl., PP 8, 10. CCC perceived that ISI was concentrating its sales efforts in three states -- New York, New Jersey and Massachusetts -- and not adequately serving the seven other states and the District of Columbia (the "Eight States") within the Marketing Territory. *fn8" Moving Brief at 6; Suppes Decl., P 8; see also Letter, dated 14 January 1988, from CCC to ISI (discussing uneven marketing efforts of ISI) (attached as Exhibit D to Rosdeitcher Aff.); Letter, dated 24 June 1988, from CCC to ISI (same) (attached as Exhibit E To Rosdeitcher Aff.).

 CCC states: "ISI was doing little or no business in . . . Connecticut, Delaware, the District of Columbia, Maine, Maryland, New Hampshire, Rhode Island and Vermont." Moving Brief at 6. For instance, it appears ISI made no sales in New Hampshire or Vermont from 1981 to 1989. *fn9" Moving Brief at 6; Deposition Transcript of Phyllis Kaminer ("Kaminer Dep. Tr."), dated 9 May 1989, 315-16 (attached as Exhibit B to Rosdeitcher Aff.). Over the same nine-year period, ISI made only two sales in Maine. Kaminer Dep. Tr. at 316.

 Allegedly based upon ISI's performance, CCC determined that decreasing the area of the Marketing Territory was necessary. Suppes Decl., PP 8-14. According to CCC:

 
By neglecting parts of the Marketing Territory, ISI was irretrievably damaging CCC. Competition is strong in the Integrated Learning Systems business, and once a competitor's system is installed in a particular school district, the district is not likely to switch to CCC's system. *fn10" CCC's economic interests and its ability to effectively market its products [were] threatened by ISI's failure to market the disputed states. . . . There was no justification for CCC to continue to remain a passive observer while its competitors make inroads into the states ISI had largely ignored.

 Suppes Decl., P 10.

 In opposition, ISI explains that, in the latter part of 1988, its representatives met with CCC personnel to explain the reason for this disparity in sales. ISI states:

 
[ISI] presented [CCC] with documentary evidence showing that the states with which [CCC] was concerned were either being significantly marketed by ISI and/or that there were factors . . . which made it difficult to penetrate those states with respect to sales of Integrated Learning Systems. These factors include the high percentage of small school districts in these states, the relative paucity of entitlement funds to purchase Integrated Learning Systems, resistance of educators and taxing authorities to expenditure of funds in these smaller states, increased telephone charges in these smaller states which cause a disproportionate expense for the use of Integrated Learning Systems and various similar factors.

 Kaminer Cert., P 68.

 CCC recounts that, in July 1988, its dissatisfaction with ISI's performance led CCC to (1) inform ISI that it desired to begin direct marketing of CCC products in the Eight States and (2) offer ISI a new exclusive distribution contract limiting ISI's Marketing Territory to New York, New Jersey and Massachusetts. *fn11" Moving Brief at 6-7. CCC emphasizes that it "intended to take over personally the marketing of its products" in the Eight States. *fn12" Suppes Decl., P 8.

 On 30 January 1989, ISI signed a new re-seller agreement (the "1989 Agreement") which limited its Marketing Territory to New York, New Jersey and Massachusetts. *fn13" Moving Brief at 7; see also 1989 Agreement, P 1.10 (attached as Exhibit I to Rosdeitcher Aff.). On that same day, 30 January 1989, ISI filed this lawsuit. *fn14" See Complaint (the "Complaint"), filed 30 January 1989.

 B. The Complaint

 The complaint alleges that, although the 1984 Agreement contained a specific expiration date, it was "always understood that the relationship between [ISI and CCC] would not be terminated except for good cause." Complaint, PP 14, 18. The Complaint further alleges that, consistent with the 1984 Agreement, "ISI has fully and completely complied with the requirements of its arrangements with CCC and has successfully utilized its best efforts to develop a demand for CCC's products in the geographical area assigned to it." Id., P 24.

 According to ISI, it signed the 1989 Agreement "under business duress created by CCC, and without waiving its rights to test the legality of the [1989 Agreement]." Id., P 41. ISI describes this alleged business duress as follows:

 
CCC . . . demanded that ISI sign the [1989 Agreement] and deliver it to CCC by January 31, 1989, together with certain ISI financial statements and the personal guarantee of [ISI's principal] Phyllis Kaminer. If ISI [did] not, CCC . . . threatened to revoke its offer and begin immediately to make alternate marketing arrangements to distribute its products in New Jersey, New York and Massachusetts.
 
CCC . . . refused to enter into any meaningful negotiation to change or alter the terms of the proposed contract. . . .
 
The offer of the [1989 Agreement] by CCC, CCC's refusal to negotiate any of its terms and the ultimatum basis on which it was presented are part of CCC's deliberate and intentional plan to destroy ISI and its business and appropriate the goodwill and property rights that ISI has created for itself in its territory since 1974. . . .
 
In furtherance of this plan to destroy ISI, CCC . . . refused to provide ISI with any necessary technical, pricing and discount information with respect to the new IBM CCC hardware program now being offered . . . unless and until ISI executed and delivered the [1989 Agreement] without change by ISI, together with the requisite financial information.

 Id., PP 36-37, 39-40; see also Kaminer Cert., PP 68-69.

 ISI alleges, inter alia, that the 1984 Agreement constitutes a franchise under New Jersey Law, as defined in N.J.S.A. § 56:10-3(a). Complaint, P 32. ISI further alleges that CCC's actions with respect to the 1989 Agreement -- namely, failing to renew the 1984 Agreement without good cause and "attempting to impose unreasonable standards of performance upon ISI" -- violate the Franchise Practices Act, N.J.S.A. §§ 56:10-5 and 56:10-7 (the "Franchise Practices Act Claim"). *fn15" See Complaint, P 14. ISI seeks injunctive relief "restraining CCC from terminating its relationship with ISI as substantially set forth in the [1984] Agreement." Id., P 44(a). ISI also seeks damages and a declaration of ISI's and CCC's rights under their relationship. Id., P 44(b),(d).

 C. The Franchise Practices Act Claim

 Section 10-3(a) of the Franchise Practices Act, N.J.S.A. § 56:10-3(a) defines "franchise" as follows:

 
[A] written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.

 Id.

 Section 10-5 of the Franchise Practices Act, N.J.S.A. § 56:10-5, sets forth exacting requirements for the termination of a franchise defined under the Act. Section 10-5 provides in pertinent part:

 
It shall be a violation of this act for any franchisor directly or indirectly through any officer, agent, or employee to terminate, cancel or fail to renew a franchise without having first given written notice setting forth all the reasons for such termination, cancellation, or intent not to renew to the franchise at least 60 days in advance of such termination, cancellation, or failure to renew. . . . It shall [also] be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of this act, good cause for terminating, canceling, or failing to renew a franchise shall be limited to failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.

 N.J.S.A. § 56:10-5 (emphasis added).

 As the Third Circuit has stated, this section of the Franchise Practices Act creates "an exception to the general rule that two businesses are free to terminate their business relationship according to the terms of their contract." New Jersey Am., Inc. v. Allied Corp., 875 F.2d 58, 61 (3d Cir. 1989). Moreover, "good cause" for termination does not include bona fide business reasons for discontinuing the franchise relationship. See Westfield Centre Serv., Inc. v. Cities Serv. Oil Co., 86 N.J. 453, 465-66, 432 A.2d 48 (1981).

 Finally, Section 10-7 of the Franchise Practices Act, N.J.S.A. § 56:10-7, prohibits certain practices by franchisors. Specifically, pursuant to Section 10-7(e), it is a violation of the Franchise Practices Act for any franchisor "to impose unreasonable standards of performance upon a franchisee." Id., § 56:107(e).

 D. Procedural History

 In June 1989, ISI moved for a preliminary injunction to prevent the 1989 Agreement from taking effect such that the Marketing Territory would be curtailed to three states. Opp. Brief at 8-9. CCC opposed the motion for preliminary injunction and cross-moved for partial summary judgment on the Franchise Practices Act Claims. Id. at 9. In support of its cross-motion for partial summary judgment, CCC argued that applying the Franchise Practices Act to this case would be an unconstitutional restraint on interstate commerce (the "Commerce Clause Argument"). See Memorandum of Points and Authorities in Opposition to the Application for Preliminary Injunction and Motion for Partial Summary Judgment, 12 (citing Healy v. Beer Instit., 491 U.S. 324, 105 L. Ed. 2d 275, 109 S. Ct. 2491 (1988)).

 In response to the Commerce Clause Argument posed by CCC, ISI moved to have this court abstain and remand the Franchise Practices Act issues in this case to the New Jersey Superior Court, to afford the New Jersey state courts a fair opportunity to decide those issues, pursuant to Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496, 85 L. Ed. 971, 61 S. Ct. 643 (1941).

 By an opinion, filed 20 July 1989 (the "20 July 1989 Decision"), the ISI motion for abstention was granted. 20 July 1989 Decision at 3. It was stated:

 Id. at 13.

 Accordingly, Count One of the Complaint -- the Franchise Practices Act Claim -- was remanded to state court. Id. at 16. Specifically, the following issues were identified for resolution by the New Jersey State courts: (1) Whether the Franchise Practices Act has extraterritorial reach beyond the State of New Jersey and, if so, to what extent and (2) what are the definitions and standards of "community of interest," "license" and "place of business" under the Franchise Practices Act. Order, filed 27 July 1989 (the "27 July 1989 Order") at 1. The 27 July 1989 Order was subsequently clarified to allow the New Jersey State courts to also determine (1) whether there is a "community of interest" between ISI and CCC and (2) whether ISI has a "place of business" within the meaning of the Franchise Practices Act.

 The remaining counts of the Complaint were administratively terminated pending the state court resolution of the Franchise Practices Act Claim. Id. at 1-2. Jurisdiction was retained to apply the law established by the New Jersey courts to the facts of this case, to resolve any constitutional challenge to the Franchise Practices Act and to determine any application for injunctive relief. Id.

 E. Resolution of the Franchise Practices Act By the New Jersey Supreme Court

 In Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324, 614 A.2d 124 (1992), after three years of post-remand proceedings, the New Jersey Supreme Court reached a decision on the remanded issues.

 The New Jersey Supreme Court determined the relationship between ISI and CCC contained all the elements necessary to constitute a franchise within the meaning of the Franchise Practices Act. *fn16" First, the court found that "there was sufficient evidence to support a finding of fact that the 1984 Agreement 'contemplated' that ISI would have a 'fixed business location' in New Jersey." Id. at 348-51.

 Second, the New Jersey Supreme Court determined that CCC had granted ISI a license within the meaning of the Franchise Practices Act, by allowing ISI to use CCC's name, by requiring ISI to use its "best efforts" to promote CCC's name, trademark and logo," and by establishing ISI as the exclusive distributor of CCC products in the Marketing Territory. Id. at 351-55. The court reached this result despite the fact that ISI conducted business under its own name and did not pay a franchise fee to CCC. Id.

 Third, the New Jersey Supreme Court held that sufficient facts existed to determine that the CCC/ISI relationship showed a "community of interest," as the term is used by the Franchise Practices Act. Id. at 366. The court explained that the "community-of-interest requirement addressees the inequality of bargaining power between the parties and is critical in distinguishing franchises from other types of businesses." Id. at 356. The court explained:

 
The Act's concern is that once a business has made substantial franchise-specific investments it loses all or virtually all of its original bargaining power regarding continuation of the franchise. Specifically, the franchise cannot do anything that risks termination, because that would result in ...

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