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Kubis & Perszyk Associates, Inc. v. Sun Microsystems

July 23, 1996

KUBIS & PERSZYK ASSOCIATES, INC., D/B/A ENTRE COMPUTER, PLAINTIFF-APPELLANT,
v.
SUN MICROSYSTEMS, INC., SUN MICROSYSTEMS COMPUTER CORPORATION, KARL E. HOLZTHUM, ELLIOT MAYO, AND ROBERT B. KLOPMAN, DEFENDANTS-RESPONDENTS.



On certification to the Superior Court, Appellate Division.

The opinion of the Court was delivered by Stein, J. Justices Handler, O'hern and Coleman join in Justice STEIN's opinion. Justice Garibaldi filed a separate Dissenting opinion in which Justice Pollock joins. Chief Justice Wilentz did not participate.

The opinion of the court was delivered by: Stein

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

KUBIS & PERSZYK ASSOCIATES, INC. V. SUN MICROSYSTEMS, INC., ET AL. (A-104-95)

Argued February 26, 1996 -- Decided July 23, 1996

STEIN, J., writing for a majority of the Court.

In this appeal, the Court addresses the enforceability of forum-selection clauses in franchise agreements subject to the New Jersey Franchise Practices Act (Franchise Act).

Kubis & Perszyk Associates, Inc., doing business as Entre Computer (Entre), was a New Jersey corporation founded in 1983. From 1983 to mid-1990, Entre was a franchisee of Entre Computer Centers, Inc., engaging in the sale of personal computers manufactured by IBM, Compaq, and others.

Sun Microsystems, Inc. is a California corporation engaged in the distribution of computing technologies, products, and services. Its subsidiary, Sun Microsystems Computer Corp. (Sun Computer), is primarily responsible for marketing the computer-hardware segment of Sun Microsystems' business. Allegedly Sun Microsystems and Sun Computer (collectively, Sun) command a large share of the growing market for computer workstations and servers.

In 1990, Sun solicited Entre to serve as a reseller of Sun products. Entre agreed and became a Sun distributor. The parties entered into a Value Added Dealer Agreement as of December 21, 1990. That agreement was superseded as of April 9, 1993, by a new Indirect Value Added Reseller Agreement (IVAR Agreement). Pursuant to that agreement, Entre was obligated to use its best efforts to promote the sale of Sun products and to market those products in accordance with the Sun-approved business plan. According to Entre, sales of Sun products in both 1991 and 1992 constituted over 85% of its total sales.

The IVAR Agreement provided that the parties were independent contractors. The agreement also provided that any related action would be governed by California law. The contract had a forum-selection clause, requiring that any suit related to the agreement "be brought exclusively in the United States District Court for Northern California or the California Superior Court for the County of Santa Clara."

Sun terminated the agreement with Entre in October 1993. Entre alleges that Sun's decision was without good cause and was precipitated by the actions of Karl E. Holzthum, Elliot Mayo and Robert B. Klopman (the individual defendants) who were employed by Sun as part of its direct sales force in New Jersey. Entre sued Sun and the individual defendants in December 1993, alleging in part that the termination of the IVAR Agreement violated the Franchise Act and that the defendants tortiously interfered with Entre's business relationships. Entre sought to enjoin termination of its contract, and also sought damages and counsel fees.

Sun moved for dismissal of the complaint on the basis of the forum-selection clause. Without addressing whether the underlying contract was subject to the Franchise Act, the Law Division dismissed the complaint on the basis of the forum-selection clause.

On appeal, the Appellate Division affirmed the dismissal on the condition that the California court apply New Jersey law if it concluded that the IVAR Agreement constituted a franchise subject to the Act. The court temporarily enjoined termination of the agreement until the application for injunctive relief could be filed with and adjudicated by the designated California court.

The Supreme Court granted Entre's petition for certification.

HELD :

Forum-selection clauses in franchise agreements are presumptively invalid, and should not be enforced unless the franchisor can satisfy the burden of proving that such a clause was not imposed on the franchisee unfairly on the basis of the franchisor's superior bargaining power.

1. Enforceability of the forum-selection clause should be determined prior to final resolution of the question whether Sun's agreement with Entre constitutes a franchise subject to the Franchise Act. The latter issue should be resolved on remand by the Law Division, informed by the analysis of the definitional components of a franchise set forth in Instructional Systems Inc., v. Computer Curriculum Corp.. For purposes of resolving the enforceability issue, it will be assumed that the Sun-Entre agreement is a franchise subject to the Franchise Act. (pp. 7-11)

2. The Franchise Act was enacted in an attempt to remedy the effects of unequal bargaining power by prohibiting the inclusion in the contact of provisions that would relieve franchisors of liability under the Act or would unfairly prejudice the franchisee in the operation of its franchise. The Franchise Act was amended in 1989 to effectively invalidate forum-selection clauses in franchise agreements covering automobile dealerships. The legislative findings persuade the Court that the Legislature considered such clauses in general to be inimical to the rights afforded all franchisees under the Act. (pp. 11-14)

3. The prevailing approach to the enforceability of forum-selection clauses is based on M/S Bremen v. Zapata Off-Shore Co., a U.S. Supreme Court case. In Bremen, the Court held that a freely negotiated forum-selection clause should be enforced unless the resisting party proves that the clause is unreasonable or enforcement would contravene the strong public policy of the forum in which suit is brought. However, some courts applying the Bremen standard have determined that forum-selection clauses need not invariably be honored.

(pp. 14-23)

4. Enforcement of forum-selection clauses in contracts subject to the Franchise Act would substantially undermine the protections that the Legislature intended to afford to all New Jersey franchisees. Forum-selection clauses in such contracts are presumptively invalid because they fundamentally conflict with the basic legislative objectives of protecting franchisees from the superior bargaining power of franchisors and providing swift and effective judicial relief against franchisors that violate the Act. If unchallenged by the franchisee, a forum-selection clause can materially diminish the rights guaranteed by the Act because the franchisee must assert those rights in an unfamiliar and distant forum, with out-of-state counsel, and bear the added expense of litigating in the franchisor's designated forum. (pp. 23-27)

5. Forum selection clauses in franchise agreements are presumptively invalid because the general enforcement of such clauses would frustrate the legislative purpose of leveling the playing field for franchisees and preventing their exploitation by franchisors with superior economic resources, and would substantially circumvent the public policy underlying the Franchise Act. Evidence that the forum-selection clause was included as part of the standard franchise agreement, without more, is insufficient to overcome the presumption of invalidity. Unless the franchisor provides persuasive proof that the clause was not imposed on the franchisee against its will, the clause will not be enforceable. (pp. 27-30)

Judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Law Division for further proceedings consistent with this opinion.

JUSTICE GARIBALDI, Dissenting, in which JUSTICE POLLOCK joins, is of the view that the plain language of the Franchise Act, as well as the legislative history, provide that forum-selection clauses should ordinarily be enforced,unless one of the Bremen exceptions apply. Because none of those exceptions apply in this case, Entre's suit should be dismissed and Entre should pursue its action in California.

JUSTICES HANDLER, O'HERN and COLEMAN join in JUSTICE STEIN's opinion. JUSTICE GARIBALDI filed a separate Dissenting opinion in which JUSTICE POLLOCK joins. CHIEF JUSTICE WILENTZ did not participate.

The opinion of the Court was delivered by

STEIN, J.

In Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324, 614 A.2d 124 (1992), we declined to enforce a provision in a franchise agreement subject to the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to -15 (Franchise Act), mandating that the agreement and the relationships of the signatory parties be governed by California law. We determined that application of California law to the franchise agreement in issue "would be contrary to a fundamental policy of [New Jersey] which has a materially greater interest than [California] in the determination of the particular issue and which * * * would be the state of the applicable law in the absence of an effective choice of law by the parties." Id. at 342 (quoting Restatement (Second) of Conflict of Laws § 187(2)(b) (1969)).

The franchise agreement involved in this appeal also provides that it shall be governed by California law, and in the same sub-paragraph requires that any suit related to the agreement "be brought exclusively in the United States District Court for Northern California or the California Superior Court for the County of Santa Clara." When the franchisor terminated the agreement in October 1993, the franchisee instituted suit in the Law Division of the Superior Court of New Jersey, and that court dismissed the action on the franchisor's motion, holding that the forum-selection clause was enforceable. In an unreported opinion, the Appellate Division affirmed the dismissal on the condition that the California court apply New Jersey law if it concluded that the agreement between the parties constituted a franchise subject to the Act, and temporarily enjoined termination of the agreement until an application for injunctive relief could be filed with and adjudicated by the designated California court.

We granted plaintiff's petition for certification, 142 N.J. 571 (1995), to consider the enforceability of forum-selection clauses in franchise agreements subject to the Act. We reverse.

I

Plaintiff, Kubis & Perszyk Associates, Inc., doing business as Entre Computer (Entre), was a New Jersey corporation founded in 1983 by its sole owners, Robert Kubis and Benedict Perszyk. From 1983 to mid-1990, Entre was a franchisee of Entre Computer Centers, Inc., engaging in the sale of personal computers manufactured by IBM, Compaq, and other producers.

Defendant Sun Microsystems, Inc. is a California corporation engaged in the distribution of computing technologies, products, and services. Its subsidiary, defendant Sun Microsystems Computer Corp. (Sun Computer), is primarily responsible for marketing the computer-hardware segment of Sun Microsystems' business, including workstations, servers, central processing units, and operating systems. Sun Computer sells its products through a direct sales force as well as through indirect resellers. Allegedly, Sun Microsystems and Sun Computer (collectively "Sun") command a large share of the growing market for computer workstations and servers. Sun maintains three New Jersey offices.

Sun solicited Entre in 1990 to serve as a reseller of Sun products. Entre elected to become a Sun distributor, committing itself to de-emphasizing the sale of personal computers to concentrate on marketing Sun's more sophisticated workstations and operating systems. Sun and Entre entered into a Value Added Dealer Agreement as of December 21, 1990. That agreement was superseded as of April 9, 1993, by a new Indirect Value Added Reseller Agreement (IVAR Agreement). Pursuant to the IVAR Agreement, Entre was obligated to use its best efforts to promote the sale of Sun products and to market those products in accordance with a Sun-approved business plan. Entre agreed to maintain a prescribed inventory of Sun demonstration products at its sales office, and to employ a Sun-trained sales representative and systems engineer. Entre was also authorized to distribute and sub-license Sun software for use on Sun Central Processing Units sold to Entre customers, and to use the Sun Value Added Reseller logo and Sun trademarks in its advertising and marketing materials. Entre alleges that its sales of Sun products totaled $4,866,490.23 in 1991, constituting 86.3% of Entre's total sales, and $4,052,479.07 in 1992, comprising 85.7% of Entre's sales.

The IVAR Agreement described the contracting parties as independent contractors, stating expressly that no other relationship was contemplated: "The parties are independent contractors under this Agreement and no other relationship is intended, including a partnership, franchise, joint venture, agency, employer/employee, or master/servant relationship."

The critical provision of the IVAR Agreement is subparagraph 17A, entitled Dispute Resolution, which provides:

Any action related to this Agreement will be governed by California law, excluding choice of law rules, and will be brought exclusively in the United States District Court for Northern California or the California Superior Court of the County of Santa Clara. The parties hereby submit to the personal jurisdiction and venue of such courts.

Sun states that Entre's principals did not object to the forumselection clause before signing the IVAR Agreement and asserts that the clause was negotiable. Entre characterizes the forumselection clause as a "boilerplate" provision in Sun's standard contract, and Entre's principals assert that they did not believe that the clause was negotiable.

Entre alleges that Sun's decision to terminate their relationship was precipitated by the individual defendants who were employed by Sun as part of its direct sales force in New Jersey. Entre contends that those defendants interfered with a large Entre sale of Sun products to AT&T, disparaged Entre's abilities and services to potential customers, and refused to provide information and assistance contemplated by the IVAR Agreement. According to Entre, those defendants allegedly induced Sun to terminate the IVAR Agreement by letter of October 1, 1993, effective as of December 31, 1993. Entre asserts that the termination was without good cause.

Entre instituted this action against Sun and the individual defendants in December 1993, alleging in part that the termination of the IVAR Agreement violated the Franchise Act and that the defendants tortiously interfered with Entre's business relationships. Entre sought to enjoin termination of its contract, and also sought damages and counsel fees. Sun moved for dismissal of the complaint on the basis of the forum-selection clause. Without addressing whether the underlying contract was subject to the Franchise Act, the Law Division dismissed the complaint, concluding that the forum-selection clause was enforceable. Prior to resolving Entre's appeal, the ...


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