Instructional Systems, Inc. v. Computer Curriculum Corp.

• Citation: 614 A.2d 124,130 N.J. 324
• Parties: INSTRUCTIONAL SYSTEMS, INC., a Corporation of the State of New Jersey, Plaintiff-Appellant and Cross-Respondent, v. COMPUTER CURRICULUM CORPORATION, a Corporation of the State of Delaware, Defendant-Respondent and Cross-Appellant.
• Decision Date: 19 October 1992
• Court: United States State Supreme Court (New Jersey)

Page 324

130 N.J. 324

614 A.2d 124

INSTRUCTIONAL SYSTEMS, INC., a Corporation of the State of

New Jersey, Plaintiff-Appellant and Cross-Respondent, v. COMPUTER CURRICULUM CORPORATION, a Corporation of the State

of Delaware, Defendant-Respondent and Cross-Appellant.

Supreme Court of New Jersey.

Argued May 4, 1992.

Decided Oct. 19, 1992.

Peter N. Perretti, Jr., Morristown, for plaintiff-appellant and cross-respondent (Riker, Danzig, Scherer, Hyland & Perretti, Morristown, and Dunn, Pashman, Sponzilli, Swick & Finnerty, Hackensack, attorneys; David W. Garland, Jeanne M. Bratsafolis, Morristown, Robert E. Rochford, Warren S. Robins, Joseph Dunn, Hackensack, Anne M. Patterson, and Jeffrey J. Miller, Morristown, on the briefs).

Jay Greenfield, New York City, a member of the New York bar, for defendant-respondent and cross-appellant (McCarter and English, Newark, attorneys; Mr. Greenfield, New York City, Andrew T. Berry, Teresa L. Moore, Rosanne C. Kemmet, Newark, Debra Ann Livingston, a member of the New York bar, and Michael E. Gerber, New York City, a member of the New York bar, of counsel; Ms. Moore, Newark, Ms. Livingston, and Mr. Gerber, New York City, on the briefs).

Michael J. Ferrara, Hackensack, submitted a brief on behalf of amicus curiae Fair Franchising Coalition (Greenberg, Ferrara, Covitz, Turitz, Harraka & Goldberg, Hackensack, attorneys; Jere W. Glover, Washington, D.C., a member of the District of Columbia bar, of counsel).

The opinion of the Court was delivered by

O'HERN, J.

This appeal requires us to adapt legislation enacted over twenty years ago on the model of franchise stereotypes, such as a fast-food outlet, an automobile dealership, or a gasoline service station, to the rapidly-evolving complexities of the computer

industry[614 A.2d 126] and its various distribution channels. We hold that the contractual relationship between the producer of a computerized educational-learning system and its exclusive regional distributor, a business incorporated in New Jersey, sustains a finding of a "franchise" within the meaning of the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to -15 (the Act). The Appellate Division held that the relationship between the producer and the New Jersey entity did not constitute a franchise because the producer had not granted the New Jersey entity a "license to use" its trade name or trademark within the meaning of the Act. N.J.S.A. 56:10-3a. However, the contract documents expressly conferred on the New Jersey entity both the right to use the producer's "name, trademark and logo in its advertising, exhibits, trade shows, public relations materials and manuals," and the duty to use its "best efforts" to promote the producer's products. Although our second determination involves a much closer question, we hold that the evidence sustains the finding of a "community of interest" required under the Act to establish a franchise. N.J.S.A. 56:10-3a. We thus reverse the judgment of the Appellate Division

I--BACKGROUND

A. Facts and Procedural History

For purposes of this appeal, we adopt generally the procedural history and the facts of the case as set forth in the brief of defendant, Computer Curriculum Corporation (CCC).

CCC is a Delaware corporation headquartered in Palo Alto, California. It produces and markets an integrated learning system that uses computer technology to teach and monitor a student's progress in such subjects as mathematics, reading, language skills, and computer-science education. From 1974 to 1989, plaintiff, Instructional Systems, Inc. (ISI), a New Jersey corporation with its primary place of business in New Jersey, has served as the exclusive distributor of products sold by CCC in the Northeast. ISI has done so pursuant to a series of written contracts negotiated between the principals of the two companies.

On July 12, 1984, CCC and ISI entered into the contract at issue, entitled "Reseller Agreement." Under that contract, CCC appointed ISI as the exclusive "reseller" of CCC products to certain categories of customers in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington D.C. The contract provided that the agreement "shall * * * continue in effect until July 31, 1989."

In the fall of 1988, ISI proposed that CCC extend the 1984 Reseller Agreement for one more year. CCC declined to do so. CCC believed that ISI was spending a disproportionate amount of its efforts selling in three states--New Jersey, New York, and Massachusetts--and was practically ignoring the rest of its sales territory. From 1985 to 1987, ISI's sales outside those three states accounted for only eleven percent of its total sales, notwithstanding the fact that thirty percent of the student population in ISI's territory resided there. In two states, Vermont and New Hampshire, ISI made no sales during that period. In Maine, ISI made no sales in either 1986 or 1987. In the District of Columbia, one of the principal population centers in ISI's territory, ISI's sales for the 1985-1987 time period were less than one percent of ISI's total revenues.

When CCC approached ISI about its allegedly poor sales performance in those states, ISI claimed that its only obligation was to meet certain territory-wide sale quotas. In CCC's view, ISI had told CCC "that it was none of CCC's business" within which territory ISI concentrated its sale efforts.

Instead of allowing the 1984 Reseller Agreement to lapse when it expired, CCC offered ISI a new two-year contract for the three states in which ISI had its major sales activity--New Jersey, New York, and Massachusetts. CCC decided to take over the marketing of its products in the former ISI territory. Following lengthy discussions, ISI and CCC entered into a new contract on January 30, 1989. On August 1, 1989, CCC began to distribute its products in the former ISI territory. ISI continues to sell CCC products in New Jersey, New York, and Massachusetts.

The same day that ISI executed the new agreement with CCC, ISI filed suit against CCC in the Chancery Division. The complaint alleged that the 1984 Reseller Agreement contemplated renewal, that CCC had coerced ISI into signing the new contract, and that CCC had violated the Act by imposing "unreasonable standards of performance" on ISI. The complaint also set forth claims for breach of contract, breach of implied covenant, tortious interference with prospective economic advantage, unfair competition, unjust enrichment, and breach of fiduciary duty.

CCC removed the suit to the United States District Court for the District of New Jersey on the basis of diversity of citizenship. Following discovery, ISI moved for a preliminary injunction enjoining CCC from enforcing the 1989 agreement and for partial summary judgment on its claims under the Act. CCC made a cross-motion for summary judgment, arguing that if the Act could be used to enjoin it from terminating ISI's purported franchise in states other than New Jersey, the Act would violate the Commerce Clause of the United States Constitution. U.S. Const. art. I, § 8, cl. 3.

ISI responded to the cross-motion by moving before the District Court for an order remanding the state-law issues to the New Jersey courts under the Pullman abstention doctrine. See Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941). The District Court retained jurisdiction over the case and "[a]pplication of the principles of the law determined by the state court to the facts of this case," but "administratively * * * terminated" the matter and remitted to the New Jersey courts the following issues:

(a) [w]hether the Act has extraterritorial reach beyond the State of New Jersey and, if so, to what extent; and

(b) [w]hat are the definitions and standards of "community of interest," "license" and "place of business" under the Act[?]

After ISI protested that the limited scope of the remand instructions was tantamount to directing the state court to render an advisory opinion, the court clarified its order. That order authorized the New Jersey court to determine "whether When the matter was returned to the Chancery Division, ISI filed a new complaint alleging that the 1984 Reseller Agreement had created a "franchise" and that CCC had violated the Act by failing to renew the agreement without "good cause" and by imposing unreasonable standards of performance. The complaint sought "a declaration of the rights and liabilities of CCC and ISI under their relationship," an order enjoining CCC from terminating its relationship with ISI, damages, attorneys' fees, and costs. Both parties agreed to submit the case to the Chancery Division based on the District Court's record and without further discovery.

or not there is a community of interest between ISI and CCC," and "whether ISI has a place of business" within the meaning of the Act. The District Court acknowledged that the state court would have to consider the facts of the case in deciding those issues and whether the Act could be applied extraterritorially.

The Chancery Division issued a declaratory judgment that the relationship between the parties constituted a "franchise" and that that relationship was subject to the Act.

The Chancery Division ruled first that the importance of New Jersey's interest in protecting its franchisees nullified the 1984 agreement's California choice-of-law provision. Next, the court found there could be "no other reasonable conclusion" but that CCC and ISI had "contemplated" that plaintiff would have a "place of business" in New Jersey as required by the Act for coverage. The court then found that CCC had granted to ISI a license to use its trade name. The court based that finding on the conclusions that the school districts buying CCC products had perceived ISI and CCC to be the same entities, and that CCC had "vouched" for ISI's competence by having ISI train customers...