A recent New Jersey appellate court decision provides valuable guidance for franchisors and their in-house legal teams on structuring and protecting franchise relationships. The court affirmed that a terminated retailer of custom outdoor kitchens was not in a franchise relationship with a manufacturer of outdoor grills and that the New Jersey Franchise Practices Act (NJFPA) did not apply to the retailer’s termination. This case underscores the importance of clearly defining franchise relationships through written agreements to avoid unintended legal consequences.
Background of the Case
In N.A.R., Inc. v. Eastern Outdoor Furnishings, 2025 WL 287497 (N.J. Super. Ct. App. Div. Jan. 24, 2025), Eastern Outdoor Furnishings, a retailer of custom outdoor kitchens, had been selling AMD Direct’s outdoor grills since 2010 under a wholesale distributorship arrangement. In 2019, AMD terminated Eastern Outdoor’s distributorship in favor of a competitor. At the time, Eastern Outdoor had AMD grills in its possession that it had ordered but not yet paid for.
A collection agency, N.A.R., Inc., acting as an assignee of the purported debt, sued Eastern Outdoor to recover payment. In response, Eastern Outdoor filed a third-party complaint against AMD, alleging that the termination violated its franchise rights under the NJFPA. AMD moved for summary judgment, seeking dismissal of the franchise-related claims.
Key Legal Issue: Was There a Franchise Relationship?
The central legal question was whether Eastern Outdoor could establish a franchise relationship under the NJFPA, which requires proof of:
- A written agreement granting the use of a trade name, trademark, service mark, or related characteristics.
- A community of interest in the marketing of goods or services.
The trial court granted summary judgment in favor of AMD, ruling that Eastern Outdoor could not prove the existence of a written agreement meeting the first element of the NJFPA test. Eastern Outdoor appealed this decision.
Appellate Court’s Analysis and Affirmation
The appellate court upheld the trial court’s decision, concluding that Eastern Outdoor failed to demonstrate a written agreement establishing a franchise. Key takeaways from the appellate court’s ruling include:
- A Franchise Agreement Must Be Evidenced in Writing: Eastern Outdoor argued that the NJFPA does not require a formal contract, asserting that a series of writings could constitute a franchise agreement. While the appellate court acknowledged that multiple documents could collectively establish a franchise, they must explicitly grant a license to use a trade name, trademark, or related characteristics.
- Insufficient Evidence of a Granted License: Eastern Outdoor submitted various documents to support its claim, including:
- Invoices.
- An email referring to AMD and Eastern Outdoor as “trusted partners.”
- AMD’s website listings identifying Eastern Outdoor as a distributor or Director of Sales.
- Marketing materials, such as AMD catalogs labeled “Summerset…by Eastern Outdoor.”
- A letter referencing the “distributor arrangement.”
Despite these materials, the appellate court found that they merely reflected the history of the business relationship and did not constitute a written grant of a trademark license.
- Trademark Use Alone Does Not Establish a Franchise: Eastern Outdoor had used AMD’s branding and logos in selling its products, but AMD never explicitly granted Eastern Outdoor a license to do so in writing. The absence of this written license was a decisive factor in the court’s ruling.
Key Takeaways for Franchisors and Legal Departments
This case highlights several critical lessons for franchisors and their in-house legal teams:
- Ensure a Clearly Defined Franchise Agreement: If a company intends to create a franchise relationship, a formal, written agreement granting trademark or trade name rights is essential to comply with franchise laws like the NJFPA.
- Avoid Unintentional Franchise Designations: Manufacturers and suppliers should carefully structure distributor relationships to prevent claims of franchise status. If franchise laws do not apply, agreements should explicitly state that no franchise relationship exists.
- Trademark Licensing Must Be Explicit: Even if a distributor uses branding and marketing materials, courts require clear, written evidence that a franchisor has explicitly granted such rights.
- Monitor Business Descriptions and Communications: Informal references to “partners,” “distributors,” or sales directors on websites, emails, and marketing materials can be used as evidence in legal disputes. Franchisors should ensure that all representations align with the intended business relationship.
- Understand State-Specific Franchise Laws: The NJFPA, like other state franchise laws, has specific requirements that differ from federal franchise regulations. Franchisors must ensure compliance with state laws in jurisdictions where they operate.
Conclusion
The N.A.R., Inc. v. Eastern Outdoor Furnishings decision reinforces the necessity for franchisors to properly document and define their relationships with retailers and distributors. In-house legal teams should take proactive steps to draft clear agreements, explicitly grant (or withhold) trademark rights, and carefully manage how business relationships are portrayed. By doing so, franchisors can mitigate legal risks and prevent unintended franchise claims under state laws like the NJFPA.