On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-300-00.
The opinion of the court was delivered by: Lisa, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Lisa, Reisner and Sapp-Peterson.
The dispute in this appeal involves application of provisions of the Franchise Practices Act (Act), N.J.S.A. 56:10-1 to -15. After a bench trial, the court found that defendant, the franchisor, breached the franchise agreement and violated the Act. The court awarded plaintiff compensatory damages of $724,000. Plaintiff then sought a counsel fee award as authorized by the Act. See N.J.S.A. 56:10-10. The court awarded attorney's fees of $3,533,642.50, and costs of $724,817.21, which included expert fees of $477,611.46.
We must determine whether constructive termination violates the Act. A threshold issue is whether the record supports the trial court's finding that defendant's conduct breached the franchise agreement and constituted an attempt to terminate the contract, which was prevented only by plaintiff's initiation of this action. We must also determine whether expert fees are allowable under the Act. We hold that constructive termination constitutes a violation of the Act, but that expert fees are not allowable.*fn1
In 1958, James Picarillo, Sr. founded plaintiff Maintainco, Inc. He operated out of a 500 square foot facility in Union City, repairing and rebuilding forklifts. By the mid-1970s, plaintiff was selling several different brands of new forklifts, and it continued providing repairs and service. The business facilities and number of employees grew. Eventually, James Picarillo, Sr.'s sons, James Picarillo, Jr. and Raymond Picarillo, joined their father in the business.
In 1982, after learning that Mitsubishi*fn2 no longer had a New Jersey distributor, plaintiff approached Mitsubishi and expressed an interest in marketing Mitsubishi forklifts along with its other brands. Plaintiff and Mitsubishi entered into a dealership agreement in July 1982. Plaintiff's territory, or "area of prime responsibility" (APR), comprised the twelve northernmost counties in New Jersey. The agreement "appointed" plaintiff a dealer, and required that it "shall exert its very best efforts to promote the sales and servicing of Products in furtherance of its appointment." Paragraph 3(d) provided that plaintiff's APR could be changed from time to time by Mitsubishi, and that Mitsubishi could "appoint more than one dealer to share all, or any portion, of [plaintiff's APR]." Mitsubishi reserved the right to designate certain customers as "national accounts" and to sell its products to them directly, with deliveries to the customers' facilities made by the dealer in whose territory a facility was located. Mitsubishi also reserved the right to sell directly to federal or foreign government agencies, exporters, and other manufacturers in plaintiff's APR.
Notwithstanding Paragraph 3(d), various Mitsubishi officers testified that the industry custom was for an APR to be a dealer's exclusive territory, that dealers were aware of the custom, and, whenever asked about exclusivity, they were assured they were exclusive. Mitsubishi did not have nationwide dealer coverage, and its market share at that time was below 2%. Therefore, Mitsubishi looked for dealers who were willing to take on a new brand, and those dealers were not expected to make Mitsubishi their sole or "primary line." No such demand was ever made of plaintiff.
"Best efforts" was not defined in the contract. According to Mitsubishi's dealer development manager, it was a common term in the industry. It did not require dealers to maintain a separate facility or separate sales force for the Mitsubishi line. It basically required dealers to perform in accordance with an approved marketing plan.
In 1983, both plaintiff and the Mitsubishi dealer for the state of Connecticut, Tri-Lift, which had a branch location in Bergen County, complained to Mitsubishi that their territories overlapped. In February 1984, plaintiff continued to complain, threatened to take on another supplier, and informed Mitsubishi it had already spoken to other manufacturers, including Caterpillar and Toyota. The problem resolved itself later that year when Tri-Lift ceased carrying a Mitsubishi line.
However, when the time came for a new contract, plaintiff insisted on exclusivity and it was assured by Mitsubishi's dealer development manager that the new contract would confer it. In the new 1985 agreement, Paragraph 3(d) was deleted. The "best efforts" clause was modified to require plaintiff to "use its best efforts to develop the market for the Products in the APR" and to "concentrate its efforts within the APR to that end." Mitsubishi again reserved the right to sell forklifts in plaintiff's APR to national accounts and other specified categories of customers, similar to those named in the prior agreement.
Mitsubishi's dealer development manager acknowledged that he repeatedly assured plaintiff that the elimination of Paragraph 3(d) served as a grant of exclusivity, in line with the company's policy and intent. Further, the reservation provision authorized Mitsubishi limited rights to sell directly to certain specified entities or categories of customers, but not to another dealer in plaintiff's APR. The general manager of Mitsubishi testified that Mitsubishi deleted Paragraph 3(d) from the form of agreement it was then using because the provision had always "raised questions" when signing new dealers, who he realized would "like to have a specific area where they didn't have to compete with another dealer."
During this same time frame, Mitsubishi asked plaintiff to become its new dealer in Connecticut. Plaintiff agreed on condition of being granted exclusivity. Plaintiff's principals formed Starlift Equipment Company, which, in December 1985, executed the same form of dealer agreement as plaintiff's 1985 agreement. Defendant never appointed a second Mitsubishi dealer in Starlift's territory, and it would later protect Starlift's exclusivity by imposing fees on a Massachusetts dealer for its encroachments and then crediting those amounts as Starlift earnings.
In 1988, a domestic forklift manufacturer filed a federal anti-dumping petition against Mitsubishi and other Japanese manufacturers. The resulting punitive tariffs and negative publicity hindered plaintiff's efforts to promote the Mitsubishi brand. By 1990, Mitsubishi incurred substantial losses and decided to pursue a joint venture with Caterpillar to manufacture forklifts domestically and distribute them under both brands. Plaintiff feared that Mitsubishi dealers would no longer have a distinctive product line and would be poorly positioned to compete with the Caterpillar brand's iconic status. Plaintiff also feared that the joint venture would disadvantage Mitsubishi's sales to national accounts in its APR, which accounted for nearly half of all Mitsubishi forklifts sold there. The joint venture formally began with the 1992 formation of defendant. Mitsubishi and Caterpillar forklifts were manufactured side-by-side, with minor differences in design details and warranties.
Plaintiff believed that defendant gave the Caterpillar brand certain marketing advantages, including a longer warranty, guaranteed free parts if not immediately available, and dealer discounts. Further, under the joint venture, shipments of forklifts to dealers were often delayed and the units were of lower quality than previously. Mitsubishi was initially unresponsive to complaints about these problems.
As a result of these events, plaintiff added another product line. In February 1992, it entered into a dealer agreement with Toyota. Its APR was the nine most northeasterly counties of New Jersey, the same as its Mitsubishi APR minus Sussex, Warren and Hunterdon counties. Plaintiff was given a nonexclusive right to sell Toyota forklifts in that APR. Plaintiff was obligated to "actively and effectively" promote the sales of Toyota products in its APR, to "organize and maintain a qualified and trained sales organization," and "to establish and enforce effective policies to solicit all actual and potential customers" within its APR. The phrase "best efforts" appeared only once in the agreement, requiring Toyota to use its best efforts to provide plaintiff with sufficient quantities of its products.
Defendant was well aware that plaintiff took on the Toyota line. Plaintiff did not establish separate sales forces for Mitsubishi and Toyota, and this was also known to defendant. Plaintiff's policy was that its sales persons would show whichever brand the customer requested. Plaintiff's records revealed that it sold 200 Mitsubishi forklifts at an average price of $17,000 to "Toyota customers," while selling sixty- eight Toyota forklifts at an average price of $18,629 to "Mitsubishi customers." Toyota was considered the industry innovator, with features such as anti-tipping and load-leveling systems that customers quickly came to view as necessary. Plaintiff incorporated a greater profit on Toyota forklifts in order to give the Mitsubishi brand a general price differential to help offset Toyota's superior brand recognition.
Defendant gave plaintiff an "outstanding sales achievement" award for 1992, marking its full satisfaction with defendant's sales. In 1993, defendant proffered a new form of agreement to plaintiff that would have eliminated its exclusivity. The new form would also have required plaintiff to drop the Toyota brand if it failed to maintain a market share in its APR equal to Mitsubishi's national market share. Plaintiff refused to sign it. At the end of 1993, and again in 1994, plaintiff received from defendant additional "outstanding sales achievement" awards.
In 1995, in an ostensible effort to assist plaintiff in increasing its market share of Mitsubishi sales, defendant granted plaintiff a 50% price discount instead of its standard 48% discount, on the condition that plaintiff order 100 more units, which increased the marketing plan from 110 to 210 units. Defendant's employees expected that the revised plan would require ...