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Leary v. Pepperidge Farm

August 10, 2009


On appeal from the Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-1049-04.

Per curiam.


Argued: February 4, 2009

Before Judges Cuff, Fisher and Baxter.

Plaintiff Robert Leary, Jr., and defendant Michael Reilly are distributors of the biscuit product line of Pepperidge Farm, Inc. (Pepperidge Farm). They are governed by Pepperidge Farm's standard consignment agreement, and each agreement contains a detailed description of their exclusive service territory. Plaintiff's relationship with Pepperidge Farm commenced in 1985; Reilly's in 1998.

This case centers on three stores in a shopping center on the north side of Route 22 on the border of Somerset and Union Counties. Plaintiff began servicing the first two, but Pepperidge Farm assigned the third to Reilly, who thought that the first two should also have been assigned to him. Plaintiff complained that Pepperidge Farm unfairly assigned the third store to Reilly by applying definitions of key contractual terms that it invented long after plaintiff executed his agreement, while Reilly agreed with Pepperidge Farm that those definitions had always been applied because they were unambiguous and necessary.

Plaintiff brought this action for a declaration of his exclusive right to service the third store and for injunctive relief.*fn1 Reilly responded with a damage claim against plaintiff and Pepperidge Farm for the income he should have earned from servicing the first two stores. Pepperidge Farm asserted that the terms in the agreement were unambiguous, and its assignment of the third store to Reilly was consistent with those terms.

Pepperidge Farm moved for summary judgment against both plaintiff and Reilly, and plaintiff cross-moved for summary judgment. Reilly settled his damage claim against Pepperidge Farm and joined its motion against plaintiff. The court granted Pepperidge Farm's motion and then modified its opinion to add that it was also granting Reilly an enforceable exclusive right from that time forward to service the first two stores. Plaintiff appeals the grant of Pepperidge Farm's motion, as well as the affirmative relief to Reilly. We reverse.

Pepperidge Farm has nearly 3000 distributors for its "biscuit" products, and a separate set of distributors for its "bakery" products. Each distributor has an exclusive service territory in their individual consignment agreements. Disputes over which distributor may service a particular store near the border of two territories, like the three stores at issue here, arise because their contracts include, not only the geographical delineation of their territories, but also functional tests that can outweigh the delineation for such stores.

On March 25, 1985, plaintiff entered into a consignment agreement with Pepperidge Farm. It conferred on plaintiff the exclusive right to distribute Pepperidge Farm's biscuit products to retailers and other facilities located "within the territory" defined in Schedule A. There was no term, and plaintiff could terminate on thirty days' written notice. Pepperidge Farm could terminate without cause, but it would have to pay plaintiff 125% of "the fair market value of this franchise on the termination date" to be determined by mutual agreement or arbitration. An integration clause prevented the agreement from being "amended orally or by custom or conduct" in the absence of a writing executed by both parties. Another clause provided that "any ambiguities shall be construed and any inconsistencies shall be reconciled" so as to "effect [the agreement's] true intent and meaning."

Schedule A to plaintiff's agreement is the "description of territory." It commences with a "note" then provides the geographic delineation of the territory's boundary (the Note). The Note contained the agreement's first references to "route customers" and "fronting," without defining either term:

NOTE: Route customer's [sic] establishments fronting on any thoroughfare or boundary described herein (unless specified otherwise) are deemed to belong to this franchised territory.

Schedule A sets forth in detail the perimeter of plaintiff's territory. The portion implicated by this case is the northern boundary, which is a segment of Route 22 approximately seven miles long, running east from Somerset Street in Plainfield to Springfield Avenue in Springfield. Schedule A named numerous other streets, political borders, and geographical features as forming the border of plaintiff's territory, and it used the phrase "excluding all route customers" after three of them, but not for any part of Route 22.

On June 29, 1998, Reilly and Pepperidge Farm entered into a consignment agreement that had the same provisions as plaintiff's. Reilly's agreement contained its own Schedule A titled "description of territory," and the description was preceded by the same "note" as in plaintiff's agreement, except for the addition of quotation marks around the word "fronting."

Reilly's territory was north of plaintiff's territory, and a portion of its southern boarder was formed by the same segment of Route 22 named in plaintiff's agreement. The words "excluding all route customers" came immediately after the naming of Route 22 as the border, as follows: "thence southwest along the northwesterly side of U.S. Route #22, excluding all route customers, to the intersection with Mountain Avenue in the Township of Bridgewater."*fn2

On June 13, 1996, Pepperidge Farm issued an inter-office memo to its field sales directors explaining the term "fronting" as used in consignment agreements.

We have recently had a number of problems with respect to territorial descriptions resulting from a misunderstanding of the meaning of the term "fronting" in our territorial descriptions.

The term "fronting," as used in our Consignment Agreements means quite simply "facing." A store is "fronting" on the road which its primary entrance is facing. The street address of that store, while relevant, is not determinative of the road on which it is "fronting."

Thus, for example, a store which is located on the corner of Broad and Market Streets which has its primary entrance facing Market Street is "fronting" on Market Street, even if it has a Broad Street address.

Similarly, if a store is part of a Shopping Center, the determinative issue is the direction that the main entrance of the store is facing. The direction that the main entrance of the Shopping Center is facing and the address of the store and/or the Shopping Center are relevant, but not determinative. Thus, if there is a grocery store in an "L" shaped Shopping Center at the corner of Broad and Market Streets and the main entrance of the grocery store is facing Market Street, then that store is "fronting" on Market Street even if other stores are facing Broad Street and even if the main entrance of the Shopping Center is facing Broad Street and the address of both the Shopping Center and the store are Broad Street.

To avoid future problems, please be certain, at your next DSM [district sales manager] meeting to make sure that each DSM understands this distinction. Issues of this type are complicated and important, so please encourage your DSM's to get in touch with the Legal Department in the event of any ambiguity or doubt.

This memo instructed the field sales directors to make sure that each district sales manager understands these issues, and to encourage them to contact Pepperidge Farm's legal department "in the event of any ambiguity or doubt." The record does not indicate that plaintiff ...

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