INSTRUCTIONAL SYSTEMS v. Computer Curriculum Corp.
| Decision Date | 02 June 1993 |
| Docket Number | Civ. A. No. 89-502 (AJL). |
| Citation | 826 F. Supp. 831 |
| Parties | INSTRUCTIONAL SYSTEMS, INC., Plaintiff, v. COMPUTER CURRICULUM CORP., Defendant. |
| Court | U.S. District Court — District of New Jersey |
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Peter N. Perretti, Douglas S. Eakeley, Riker, Danzig, Scherer, Hyland & Perretti, Morristown, NJ, Robert Rochford, Dunn, Pashman, Sponzilli, Swick & Finnerty, Hackensack, NJ, for plaintiff.
Andrew T. Berry, Seth T. Taube, McCarter & English, Newark, NJ, Sidney S. Rosdeitcher, Gary Stein, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant.
Bertram P. Goltz, Jr., Deputy Atty. Gen., Newark, NJ, for intervenor State of N.J.
Currently before the court is the motion of defendant Computer Curriculum Corp. ("CCC") for partial summary judgment pursuant to Fed.R.Civ.P. 56.1 The issue to be decided raises an important question of Federal constitutional interpretation. Specifically, it must be decided whether extraterritorial application of the New Jersey Franchise Practices Act (the "Franchise Practices Act"), N.J.S.A. §§ 56:10 et seq., violates the Commerce Clause of the United States Constitution (the "Commerce Clause"). U.S. Const. Art. I, § 8, cl. 3.
For the reasons that follow, the motion for partial summary judgment is granted. Extraterritorial application of the Franchise Practices Act, as described below, violates the Commerce Clause.
CCC is a Delaware corporation with its principal place of business in Sunnyvale, California. CCC 12G Statement, ¶ 1; Moving Brief at 3. Since the mid-1970s, CCC has developed and produced computer software, hardware and other products known as integrated learning systems (the "Integrated Learning Systems").2 CCC 12G Statement, ¶ 2; Declaration of Patrick Suppes (the "Suppes Decl."), ¶ 2 (attached as Exhibit A to Rosdeitcher Aff.). CCC sells the Integrated Learning Systems to purchasers located throughout the United States. CCC 12G Statement, ¶ 2. School districts are the primary purchasers of Integrated Learning Systems. Suppes Decl., ¶ 2.
ISI is a New Jersey corporation with its sole place of business in Hackensack, New Jersey. ISI 12G Statement, ¶ 1. All of ISI's sales force and consultants work out of ISI's New Jersey facility. Certification of Phyllis Kaminer (the "Kaminer Cert."), ¶ 13 (attached as Exhibit 2 to Rochford Cert.). Since 1974, ISI has been the exclusive reseller of CCC products, including Integrated Learning Systems, in the northeast United States.3 ISI 12G Statement, ¶ 2; Suppes Decl., ¶ 4. In this regard, the parties entered into a series of written contracts, each for a definite term.4
As a re-seller of CCC products, ISI purchased and licensed those products from CCC and, in turn, sold and sublicensed those products to end-users in the Marketing Territory. ISI 12G Statement, ¶ 4. According to ISI, "at all times, the end users were customers of ISI and had no direct relationship with CCC." ISI 12G Statement, ¶ 4. It appears ISI does not and has not "paid a franchise fee or fee of any kind to be a reseller of CCC's products." Suppes Decl., ¶ 4. Moreover, ISI conducts its business under its own name, rather than CCC's. Id., ¶ 7. Neither CCC's name nor logo appears on ISI's stationary or business cards. Id. From 1985 through 1989, sales of CCC's products constituted 97 percent of ISI's total sales revenues. Kaminer Cert., ¶ 80.
On 12 July 1984, CCC and ISI entered into an agreement (the "1984 Agreement") appointing ISI as the exclusive re-seller of certain CCC products, including Integrated Learning Systems, in the Marketing Territory. CCC 12G Statement, ¶ 3; see 1984 Agreement, ¶ 2.01 (attached as Exhibit H to Rosdeitcher Aff.). By its own terms, the 1984 Agreement was to expire on 31 July 1989. CCC 12G Statement, ¶ 4; 1984 Agreement, ¶ 13.01. Construction of the 1984 Agreement, as well as any legal relations which it created, was to be governed by California State law. CCC 12G Statement, ¶ 4; 1984 Agreement, ¶ 14.10. The 1984 Agreement contained no provision requiring renewal beyond the expiration date.
The 1984 Agreement required ISI to "use its best efforts to promote demand for and to re-sell CCC's products to the market within the Territory," to "maintain adequate facilities for such purposes"5 and to "employ no less than four full-time sales representatives to accomplish this purpose." 1984 Agreement, ¶ 6.01; ISI 12G Statement, ¶¶ 2, 5. Moreover, in order to qualify for certain discounts on CCC products, the 1984 Agreement required ISI to adhere to a sales quota for the Marketing Territory as a whole.6 ISI 12G Statement, ¶ 5; Suppes Decl., ¶ 9; 1984 Agreement, ¶¶ 4.02-4.03.
In return, the 1984 Agreement granted certain software and hardware user licenses to ISI and authorized ISI "to use CCC's name, trademark and logo in its advertising, trade shows, public relations materials and manuals." 1984 Agreement, ¶¶ 3.01-3.03, 6.02. It was expressly provided that these licenses and rights terminated upon expiration of the 1984 Agreement. Id., ¶¶ 3.04, 6.02. Moreover, the 1984 Agreement expressly stated that "ISI shall not enjoy any rights in the CCC name, its trademarks or logo." Id., ¶ 6.03; see also id., ¶¶ 11.01-11.02.
CCC asserts that, during the course of the 1984 Agreement, it met with ISI and "expressed concern with ISI's performance and ability to compete" in the Marketing Territory.7 Moving Brief at 6; see also Suppes Decl., ¶¶ 8, 10. CCC perceived that ISI was concentrating its sales efforts in three states — New York, New Jersey and Massachusetts — and not adequately serving the seven other states and the District of Columbia (the "Eight States") within the Marketing Territory.8 Moving Brief at 6; Suppes Decl., ¶ 8; see also Letter, dated 14 January 1988, from CCC to ISI (discussing uneven marketing efforts of ISI) (attached as Exhibit D to Rosdeitcher Aff.); Letter, dated 24 June 1988, from CCC to ISI (same) (attached as Exhibit E to Rosdeitcher Aff.).
CCC states: "ISI was doing little or no business in ... Connecticut, Delaware, the District of Columbia, Maine, Maryland, New Hampshire, Rhode Island and Vermont." Moving Brief at 6. For instance, it appears ISI made no sales in New Hampshire or Vermont from 1981 to 1989.9 Moving Brief at 6; Deposition Transcript of Phyllis Kaminer ("Kaminer Dep. Tr."), dated 9 May 1989, 315-16 (attached as Exhibit B to Rosdeitcher Aff.). Over the same nine-year period, ISI made only two sales in Maine. Kaminer Dep. Tr. at 316.
Allegedly based upon ISI's performance, CCC determined that decreasing the area of the Marketing Territory was necessary. Suppes Decl., ¶¶ 8-14. According to CCC:
By neglecting parts of the Marketing Territory, ISI was irretrievably damaging CCC. Competition is strong in the Integrated Learning Systems business, and once a competitor's system is installed in a particular school district, the district is not likely to switch to CCC's system.10 CCC's economic interests and its ability to effectively market its products were threatened by ISI's failure to market the disputed states.... There was no justification for CCC to continue to remain a passive observer while its competitors make inroads into the states ISI had largely ignored.
In opposition, ISI explains that, in the latter part of 1988, its representatives met with CCC personnel to explain the reason for this disparity in sales. ISI states:
ISI presented CCC with documentary evidence showing that the states with which CCC was concerned were either being significantly marketed by ISI and/or that there were factors ... which made it difficult to penetrate those states with respect to sales of Integrated Learning Systems. These factors include the high percentage of small school districts in these states, the relative paucity of entitlement funds to purchase Integrated Learning Systems, resistance of educators and taxing authorities to expenditure of funds in these smaller states, increased telephone charges in these smaller states which cause a disproportionate expense for the use of Integrated Learning Systems and various similar factors.
CCC recounts that, in July 1988, its dissatisfaction with ISI's performance led CCC to (1) inform ISI that it desired to begin direct marketing of CCC products in the Eight States and (2) offer ISI a new exclusive distribution contract limiting ISI's Marketing Territory to New York, New Jersey and Massachusetts.11 Moving Brief at 6-7. CCC emphasizes that it "intended to take over personally the marketing of its products" in the Eight States.12 Suppes Decl., ¶ 8.
On 30 January 1989, ISI signed a new reseller agreement (the "1989 Agreement") which limited its Marketing Territory to New York, New Jersey and Massachusetts.13 Moving Brief at 7; see also 1989 Agreement, ¶ 1.10 (attached as Exhibit I to Rosdeitcher Aff.). On that same day, 30 January 1989, ISI filed this lawsuit.14 See Complaint (the "Complaint"), filed 30 January 1989.
The Complaint alleges that, although the 1984 Agreement contained a specific expiration date, it was "always understood that the relationship between ISI and CCC would not be terminated except for good cause." Complaint, ¶¶ 14, 18. The Complaint further alleges that, consistent with the 1984 Agreement, "ISI has fully and completely complied with the requirements of its arrangements with CCC and has successfully utilized its best efforts to develop a demand for CCC's products in the geographical area assigned to it." Id., ¶ 24.
According to ISI, it signed the 1989 Agreement "under business duress created by CCC, and without waiving its rights to test the legality of the 1989 Agreement." Id., ¶ 41. ISI describes this alleged business duress as follows:
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