Colt Industries v. Fidelco Pump & Compressor Corp.

• Decision Date: 29 May 1987
• Docket Number: Civ. A. No. 87-1347.
• Citation: 700 F. Supp. 1330
• Court: U.S. District Court — District of New Jersey
• Parties: COLT INDUSTRIES, INC., Plaintiff, v. FIDELCO PUMP & COMPRESSOR CORP. and Fidelco Equipment Corporation, Defendants.

700 F. Supp. 1330

COLT INDUSTRIES, INC., Plaintiff, v. FIDELCO PUMP & COMPRESSOR CORP. and Fidelco Equipment Corporation, Defendants.

Civ. A. No. 87-1347.

United States District Court, D. New Jersey.

May 29, 1987.

John J. Carlin, Jr., Florham Park, N.J., for plaintiff.

Budd, Larner, Gross, Picillo, Rosenbaum, Greenberg & Sade, P.C., Short Hills, N.J. by Michael M. Rosenbaum, for defendants.

OPINION

BARRY, District Judge.

Plaintiff Colt Industries ("Colt") brings this action against defendants Fidelco Pump & Compressor Corporation (Fidelco-New Jersey) and Fidelco Equipment Corporation (Fidelco-Connecticut) (collectively "Fidelco") alleging the breach of an agreement to pay monthly charges arising from defendants' sale of plaintiff's products in New Jersey and Connecticut. Defendants, contending that two other separate agreements, one between Colt and Fidelco-New Jersey and one between Colt and Fidelco-Connecticut, constitute franchise agreements between the parties, now move for a preliminary injunction enjoining plaintiff's attempted termination of the latter two agreements as violative of New Jersey's Franchise Practices Act, N.J.Stat.Ann. 56:10-1 to -15 (West Cum.Supp.1986-87) and the Connecticut Franchise Act, Conn. Gen.Stat.Ann. § 42-133e to -133g (West 1987). The relief sought by defendants will be denied.

Findings of Fact

1. Plaintiff, through its Quincy Compressor Division, manufactures and sells a line of compressors.

2. Defendants are branches of a large multi-state company that sells and services numerous brands of industrial pumps, compressors and similar products.

3. On December 12, 1985, Colt and Fidelco entered into an agreement in which Colt agreed a) to dismiss with prejudice a state court lawsuit against an entity known as the General Electrical Equipment Company ("General Electrical") and b) to appoint Fidelco as a distributor and "Authorized Warranty Service" in New Jersey and in Connecticut for Quincy products, in exchange for Fidelco's promise to assume General Electrical's debt to Colt. The total amount due Colt from General Electrical — $87,588.85 — was to be paid by Fidelco overpaying by 5% on invoices of Quincy products. Any balance remaining at the end of a one-year period was to paid in a lump sum. Pursuant to this agreement, certain unnamed representatives of Colt visited Fidelco's Newark, New Jersey facility and insisted that the facility be upgraded to adequately display and service Quincy products.

4. On January 15, 1986, plaintiff and the defendant Fidelco-New Jersey entered into a non-exclusive "Distributor Agreement" granting Fidelco-New Jersey the right to sell Quincy products in Northern New Jersey. On the same day, plaintiff and defendant Fidelco-Connecticut entered into an identical nonexclusive agreement granting Fidelco-Connecticut a distributorship for the sale of Quincy compressors in Connecticut. There is no specific reference in either of these two agreements to "Authorized Warranty Service."

5. The agreements were to expire at the end of one year and in fact did expire at the end of that term. An additional renewal term of one year could have been entered into "by the mutual written consent of the parties." Although this provision was not exercised, the parties have continued their business relationship without the benefit of a written agreement on an ad hoc basis to this date. On their face, the agreements may be terminated without cause by either party upon sixty days notice.

6. The agreements grant defendants the right to display the Quincy trademark, in a manner consistent with Quincy's advertising policies, in conjunction with advertising the product and identifying Fidelco as a "distributor," but prohibit use of the Quincy mark "as part of the Distributor's business name."

7. The agreements require the defendants to establish and maintain an "aggressive sales effort." According to the agreement "this includes advertising, stocking of Quincy Compressors and genuine Quincy replacement parts and accessories." In addition, the parties are called upon to arrive at "mutually agreed upon sales goals." Plaintiff exercises no control over the training, hiring, number, or qualifications of Fidelco employees. Plaintiff exercises no control over the management of Fidelco, does not train its managers, does not prescribe the hours of operation, or — other than suggesting list prices — in any manner set the price for the sale of its compressors by Fidelco. Other than the shared interest in the sale of Quincy products, the parties have no financial interest in the affairs of the other.

8. During the course of the relationship between the parties they engaged in a cooperative sales program in which a) they jointly paid for Fidelco advertisements in the "yellow pages" listing Fidelco as a Quincy distributor and service center, b) Quincy representatives conducted sales meetings at the Fidelco facilities in which new products were introduced, technical questions answered, and product differences explained, c) Quincy provided sales incentives to Fidelco salesmen and distributed a news letter designed to promote Quincy products and motivate sales, d) Quincy suggested ways of directly soliciting customers by mail, and e) Quincy representatives would call on Fidelco customers in an effort to help close sales and would at times agree to lower prices to that end.

9. The agreements acknowledge Fidelco's status as an independent agent without the actual or implied power to bind plaintiff.

10. The agreements call for shipment of goods f.o.b. factory, invoiced and billed under "the terms in effect at the time of the shipment." Plaintiff reserves the right to receive satisfactory evidence of defendants' financial responsibility not less than once a year. Goods can be returned for credit but only after prior written permission.

11. During the twelve months directly preceding the filing of this suit, defendants purchased more than $35,000.00 in goods and services from plaintiff.

12. In identical letters dated March 26, 1987, plaintiff notified defendants that it was exercising its right under the agreements to terminate the distributorships upon sixty days notice. Although the termination was not premised upon the outstanding debt which is the subject of this suit, plaintiff reminded the defendants in this letter of defendants' failure to satisfy all of its financial obligations under the December 12, 1985 agreement. On April 13, 1987, plaintiff filed this suit against defendants alleging an outstanding debt under the the December 12, 1985 agreement of $41,593.46.

CONCLUSIONS OF LAW

On a motion for the extraordinary relief of a preliminary injunction the moving party has the burden to demonstrate 1) a reasonable probability of success on the merits; 2) irreparable harm if the relief is denied; 3) that the issuance of an injunction will not result in greater harm to the non-moving party; and 4) if applicable, that the issuance of the injunction will be in the public interest. ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir.1987). I now hold that because the defendants have failed to demonstrate a reasonable probability of success on the merits of their claim that Fidelco was a Quincy franchisee, as that term is defined in the New Jersey and Connecticut Acts, the injunction will not issue.

In the 1960's and 1970's numerous state legislatures passed laws to regulate the proliferation of the use of franchises as a device for rapid business expansion. These laws were passed in response to the concern that the typical franchisor-franchisee relationship is rife with abuse:

Despite characteristics of mutuality of interest, there is ... a divergence of interest between the franchisor and franchisee. Thus, where the franchise is for the distribution of the franchisor's products, the franchisor is primarily interested in the volume of the franchisee's sales, not necessarily the franchisee's profitability. So long as the franchisor benefits from the increased public exposure and distribution of its goods, it matters little to him whether or not a particular franchisee can continue in business since there will always be another franchisee available to assume that place in the distribution network ... Conversely, once a franchisee has succeeded by his efforts and capital in establishing a local reputation for the franchise name, he is vulnerable to termination of the franchise, forfeiture of the business good will and the inability to realize the benefits of his business by selling it to another prospective franchisee. Thus, the reputation and good will of the network, created primarily by the efforts of each of the individual franchisees, passes back to the franchisor without compensation to the franchisee.

Neptune T.V. & Appliance Service, Inc. v. Litton Microwave Cooking Products Division, Litton Systems, Inc., 190 N.J.Super. 153, 163-64, 462 A.2d 595 (App.Div.1983) (citation and footnote omitted). In order to remedy this perceived imbalance, the legislative scheme alters the normal contractual freedom of the parties engaged in a franchise relationship by prohibiting the franchisor from terminating a franchisee without just cause. Both the New Jersey Act and the Connecticut Act contain such a provision. See N.J.Stat.Ann. 56:10-5; Conn.Gen.Stat.Ann. § 42-133f. Under either act, as long as the franchisee "substantially complies" with the franchise agreement the relationship will continue indefinitely. See N.J.Stat.Ann. 56:10-5; Conn.Gen.Stat.Ann. § 42-133f(a).

In the instant case, defendants allege that since the distribution agreements between Fidelco-New Jersey and Colt, and between Fidelco-Connecticut and Colt, constitute franchise agreements under the respective state acts, plaintiff may not rely, as it does, on a purported contractual right to terminate without cause. See Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973) (contractual provision in...