Lots of Meat Left on the Bone for Franchisees & Franchise Lawyers

During my preparation of an analysis of a very recent New Jersey federal court decision involving a gasoline franchise dispute (South Gas v. ExxonMobil,  2016), I was sidetracked by a fourteen year-old franchise decision by the same court -- Beilowitz v. General Motors Corp., 233 F. Supp.2d 631 (D.N.J. 2002). Although the Beilowtiz case always held an honored place in my semi-consciousness, these conjured thoughts were limited only to non-specific good feelings about a franchisee’s ability to demonstrate irreparable harm in a preliminary injunction context. After going back and re-reading the Beilowitz case, it is clear that the case is much more; indeed, for franchisees Beilowitz is a Meisterstuck.

In Beilowitz, the United States District Court for the District of New Jersey found that the franchisor defendant General Motors Corporation (“GM”), had violated the NJFPA by forcing the Plaintiff franchisee, Steven Beilowitz (“Beilowitz”), either to accede to GM’s new business plan, which would have resulted in the loss of forty percent of Beilowitz’s revenue, or, after a twenty-three-year-long relationship with GM, to be cut out of doing any business with GM at all.  Not only did the franchisee win, obtaining a preliminary injunction preventing the franchisor from terminating the franchisee, but the case blazed a jurisprudential trail in establishing the outer reaches of the New Jersey Franchise Practices Act, by giving expansive pro-franchisee meaning to two of the most important operative terms in the Act: “good cause termination” and “unreasonable standard of performance.” The case not only sowed the seeds of potentially robust legal rights for New Jersey franchises under the NJFPA, but was also correctly decided.

Beilowitz was the owner of Sibco Distributors and Genuine Car Parts in Pennsauken, New Jersey, and was a major distributor of multiple lines of General Motors’ AC Delco brand auto parts. Sales of AC Delco auto parts comprised over ninety-seven percent of his business, which he had operated for over twenty-three years as an authorized distributor of AC Delco parts. Beilowitz sold to a variety of customers, including car dealerships, gas stations, fleet accounts, and jobbers, which are smaller sub-distributors that in turn resold products to gas stations and automotive repair centers. During their twenty-three years dealing with each other, GM had imposed no geographic restrictions on the locations in which Beilowitz could sell his auto parts, and in 2001, he sold AC Delco auto parts in at least eleven states and the District of Columbia. Beilowitz also had a very large inventory of over 28,000 AC Delco part numbers, including parts that other AC Delco distributors did not, and the value of his inventory at the time of the suit was $4.5 million.

On January 23, 2002, GM offered Beilowitz a new version of the AC Delco Direct Account Supply Agreement, the so-called Dedicated Distribution Agreement (“DDA”), which, for the first time, created the Dedicated Distribution Group (“DDG”) Program. At the time, the DDG Program was part of GM’s new overall growth strategy, to take advantage of opportunities in the automobile “aftermarket,” or replacement parts, business. GM demanded that Beilowitz sign the new distribution agreement with the threat that if he refused to sign it, he would lose his status as an authorized AC Delco distributor.

Under the new DDG Program, only a select group of distributors known as the Dedicated Distribution Group were to have the right to market AC Delco products. Further, under the DDA’s geographic restrictions, Beilowitz would no longer be permitted to sell AC Delco products throughout the country, but would be limited to an assigned “Direct Marketing Area,” or “DMA,” in the Philadelphia area. Under these arrangements, Beilowitz would be prohibited from selling to its existing customers located outside of the Philadelphia DMA.

Without much support, the GM Zone Sales Manager who prepared business plans for AC Delco distributors under the DDG program predicted that Beilowitz could make $35 million in sales in 2002 under the DMA. The Court, however, quickly discounted this testimony as it was “unclear what the basis for Reynolds’ optimistic prediction was.” Supporting this view was that the GM executive admitted that “he did not even know the boundaries of the Philadelphia DMA.” Further, there was direct testimony that GM’s target for Beilowitz was not reasonably attainable. Beilowitz’s expert testified that GM’s performance projections were unrealistic because the independent automobile parts aftermarket was a “mature market,” characterized by a slowdown in sales growth because the products have achieved acceptance by buyers.

Further, that GM would be unlikely to capture thirty-four percent of the independent automobile parts aftermarket could also be inferred from the fact that although GM at the time of the case had a thirty percent share of the then-current domestic automobile market, it also had less than a four percent share of the automobile parts aftermarket. Also making future prospects for Beilowitz even worse, according to the expert, was declining sales in the automobile after-parts market, which GM attributed the declining trend to improved vehicle quality, which results in repairs being pushed to later stagesin the vehicle’s life cycle. Beilowitz’s expert concluded that GM’s optimistic projections of Beilowitz’s ability to increase sales of its AC Delco parts under the DDG program were “not reasonably attainable” and in fact were “impossible.”

The final nail in the coffin for GM on its ersatz projections was the franchisee’s expert’s estimate that implementation of the DDG program would cause Beilowitz to lose at least $11 million dollars, which was approximately forty percent of its total sales. This conclusion was supported by GM’s own internal correspondence. The Court found that the franchisee expert’s inferences were credible and persuasive. In light of such projected losses, the Court agreed with Beilowitz that he “could not sustain a loss of this magnitude without going out of business and laying off employees.”

Beilowitz’s Direct Account Supply Agreement with AC Delco expired as of December 31, 2000, and by letter dated May 14, 2001, GM notified Beilowitz that AC Delco was extending the Direct Account Supply Agreement on the same terms and conditions as contained in their previous 1999 agreement, until the implementation of the DDG program. Thereafter, the relationship between GM and Beilowitz conformed to this arrangement. In August 2002, however, GM notified Beilowitz that as of August 1, 2002, the date the DDG program was implemented nationwide, the Direct Account Supply Agreement had expired and that AC Delco expected Beilowitz’s compliance with the DDA. Thereafter, on October 10, 2002, GM notified Beilowitz that he was in violation of the DDG program, and was therefore subject to sanctions, including termination.

In order to obtain a preliminary injunction, which was being sought by Beilowitz, the Court noted that he had to prove: (1) that he is reasonably likely to prevail eventually in the litigation; and (2) that he is likely to suffer irreparable injury without such injunctive relief. In the event these threshold showings were made, the Court explained that it must then consider, to the extent relevant: (3) whether an injunction would harm the defendant more than denying relief would harm the plaintiff; and (4) whether granting injunctive relief would serve the public interest.

Following the above legal menu, the Court stated that Beilowitz was required to show a reasonable likelihood of success on his claims under the New Jersey Franchise Practices Act. (“NJFPA”). Specifically, under Section 7(e) it is a violation of the NJFPA for a franchisor “to impose unreasonable standards of performance upon a franchisee.” Although this term was then -- and remains to this day -- not defined under the Act, the Court seemed to be promptly persuaded that “it is reasonably likely that the DDG program will be found to impose an unreasonable standard of performance on Beilowitz because it requires Beilowitz to sacrifice $11 million in sales outside the Philadelphia DMA, which constitutes approximately forty percent of Beilowitz’s overall sales.”

Further bolstering the Court’s view as to the significant financial effects of the DDG program on Beilowitz, the Court pointed out that Beilowitz “is reasonably likely to incur pre-tax operating losses between $1,000,000 and $1,612,069 during the first three years of operation under the DDG Program.” Based on these findings, the Court held that “it is clearly an ‘unreasonable standard of performance’ within the meaning of the NJFPA to require a franchisee to operate at a substantial financial loss while the franchisor attempts to implement a new and unproven marketing strategy.”

The Court later in its decision, when discussing public interest, also showed its respect for a broad reading of the NJFPA. Specifically, the Court declared, “the NJFPA was enacted because ‘distribution and sales through franchise arrangements in the State of New Jersey vitally affect the general economy of the State, the public interest and the public welfare.’” Similarly, as the Court stated: “As the Supreme Court of New Jersey has explained, ‘the Act reflects the legislative concern over long-standing abuses in the franchise relationship, particularly provisions giving the franchisor the right to terminate, cancel or fail to renew the franchise.’”

The Court next turned to the other substantive claim in the case that GM had violated another provision of the NJFPA -- Section 10-5, which prohibits a franchisor’s termination, cancellation, or failure to renew a franchise without good cause. The Court initially noted the NJFPA is notably restrictive in its view of what constitutes “good cause” for termination in that “it is a violation of the NJFPA to cancel a franchise for any reason other than the franchisee’s substantial breach, even if the franchisor acts in good faith and for a bona fide reason.”  Most important, under this view, GM had not alleged that Beilowitz substantially breached the Direct Account Supply Agreement, as required by the NJFPA to terminate him. As the Court stated: “Indeed, there is absolutely no evidence of such a breach, and GM had generously lauded Beilowitz for his successful sales achievements in one of GM’s internal trade publications, and awarded Beilowitz two prizes for his outstanding sales performance.”

Last, it was clear to the Court that in addition to the absence of any wrongdoing by Beilowitz, the sole and primary motivation behind GM’s implementation of the DDG program was a unilateral change in business strategy. Accordingly, the Court ruled that “Because GM has offered no reason, other than a change in its business strategy, for its failure to renew the AC Delco franchise with Beilowitz after their twenty-three-yearlong business relationship, I conclude that Beilowitz has a reasonable likelihood of success on his claims under Section 10-5." 

After easily finding that Beilowitz was likely to succeed at trial in proving the two underlying substantive violations of the NJFPA, the Court turned to examine whether Beilowitz had proven that he would suffer irreparable harm if he were denied the preliminary injunction. The Court began its analysis by specifying the traditional general rule that purely economic injury, compensable in money, cannot satisfy the irreparable injury requirement. In the same breath, however, the Court also carved out an exception to the rule for those cases where economic injury is so severe as to warrant preliminary injunctive relief: “The loss of business and good will, and the threatened loss of the enterprise itself, constitute irreparable injury to the plaintiff sufficient to justify the issuance of a preliminary injunction.” Citing prior pro-plaintiff case law, the Court stated: “The right to continue a business in which plaintiff had engaged for twenty years ... is not measurable in monetary terms.” Similarly, the Court pointed to relevant Third Circuit case law that “recognizes loss of market share as a form of irreparable injury that may warrant the grant of a preliminary injunction.”

            The Court energetically applied the above legal framework to Beilowitz’s allegations of irreparable harm that were likely to befall him absent the Court’s entering a preliminary injunction preventing his termination. First, because under the DDG program Beilowitz was prohibited from making sales to customers outside the Philadelphia DMA, it stood to lose at least $11 million dollars, which was 40% of its revenue. The Court found these monetary losses to be so substantial that it would prevent Beilowitz from being able to cover his payroll, insurance, day-to-day operating expenses, as well as from proving inventory and delivery services. Last, the Court noted that  it had inferred irreparable harm not just from the projected monetary losses, but from the anticipated loss of market share as well, since “already, competitors assigned to the Philadelphia DMA have begun to solicit Beilowitz’s existing customers.” The Court then concurred with Beilowitz’s view that “the DDG program would immediately destroy his business.”

            As an interesting aside, the Court appeared exasperated by GM’s outlandish argument that Beilowitz’s personal wealth was sufficient to allow him to fund his GM business during times of financial distress resulting from the effect of the DDG program. “In essence, GM is asking Beilowitz, the owner of a successful business, to transform his business into a money–losing operation at his personal expense and risk, until a final determination of this action on the merits.” In response to this contention, the Court stated that “GM’s position, which would force Beilowtiz to operate at a loss, is untenable as a matter of logic and public policy because it would permit any powerful franchisor to make an end-run around the protections that the NJFPA affords to franchisees.” Under GM’s theory, a franchisor could drive a franchisee to financial ruin by adopting a new, financially destructive, “business strategy.”  Thus, the Court held that Beilowitz had sufficiently demonstrated a likelihood of irreparable injury if he were not granted preliminary injunctive relief.

In addition to the above, Beilowitz also decided a few other weighty issues in favor of franchisees, most notably regarding extending jurisdictional coverage of the NJFPA to distribution agreements not usually viewed to be traditional franchises.  The other rules decided in Beilowitz, discussed above, were momentous, and except for the issue of unreasonableness, were, thereafter, readily and easily applied (e.g., “good cause” under the NJFPA must pivot off of improper franchisee conduct, not altruistic or reasonable franchisor conduct). However, the boundaries of the prohibition against “unreasonable standards of performance”, in particular, were not theoretically curbed in any meaningful manner.

In fact, other than embracing an “I know it when I see it” definition of the term, the Court did not set forth any substantive definition of the term. The jurisprudential lacuna created by the failure to substantively define the term in detail by the Beilowitz Court has since 2002 left a loaded gun in the hands of franchisees in New Jersey. Unexplainably, the statutory provision has been used very infrequently by franchisee lawyers. However, a case decided a few weeks ago involving claims of the imposition of unreasonable standards of performance by Exxon gasoline dealers shows that, despite a lack of definition, some courts will resort to the ‘wow’ factor to determine the existence of an unreasonable standard of performance. In Exxon, the pricing provisions imposed on the franchisees were so labyrinthine, pervasive, and financially damaging that the court, like the Beilowitz court, appeared to have been willingly sucked into the “unreasonable standard of performance” vacuum left by the New Jersey Legislature, the NJFPA itself, and prior courts that considered such claims. 

Jeffrey M. Goldstein

Goldstein Law Firm, PLLC

(202) 293-3947

www.goldlawgroup.com

Representing Franchisees & Dealers Nationally

 

*/         The author thanks Noah Adam Goldstein for his assistance in proofreading