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New Jersey American Inc. v. Allied Corp.

filed: May 17, 1989; As Corrected May 22, 1989. As Corrected July 14, 1989.

NEW JERSEY AMERICAN, INC., APPELLANT
v.
THE ALLIED CORPORATION AND ITS BENDIX AFTERMARKET BRAKE DIVISION AND ITS ALLIED AFTERMARKET DIVISION, APPELLEE



On Appeal from the United States District Court for the District of New Jersey, D.C. Civil No. 86-4310.

Becker, Hutchinson and Scirica, Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge

Plaintiff-appellant New Jersey American, Inc. ("NJA") assembles automobile brake disc pads and drum shoes and sells them in the automotive replacement parts market. An important component of disc pads and drum shoes is the brake lining. Defendant-appellee The Allied Corporation ("Allied") is a manufacturer of the Bendix brand of brake linings, which it supplied to NJA for six years, until Allied terminated its business relationship with NJA. NJA brought suit in the district court for the District of New Jersey alleging, inter alia, that Allied's termination had violated the New Jersey Franchise Practices Act ("Act"), N.J.Stat.Ann. ยงยง 56:10-1 to 10-15 (West 1989), which proscribes the termination of franchise agreements without good cause.*fn1

After discovery, the district court granted summary judgment for Allied on the ground that the good cause requirement of the Act was inapplicable because NJA had not presented evidence from which a reasonable fact finder could conclude that NJA was a franchisee of Allied within the meaning of the Act. NJA appealed, and the principal question before us on this appeal is whether NJA was a franchisee. Our review is plenary. See E.E.O.C. v. City of Mt. Lebanon, 842 F.2d 1480, 1485 (3d Cir. 1988).

The case presents an extremely close question of construction of the Act, and particularly of the meaning of its requirement that there be a "community of interest" between franchisor and franchisee for a franchise to exist within the meaning (and protection) of the Act. Indeed, this case is at the dead center of the countervailing views that forged the New Jersey Act. No New Jersey case gives us significant guidance and the legislative history is of little help. As will be seen, the question is whether, in the absence of direction from the New Jersey Supreme Court, we should apply a test which focuses more on NJA's investment in the brake products industry, in which case NJA looks more like a franchisee (since there was such investment), or in its specific investment in Allied, in which case NJA looks less like a franchisee (since there was no such investment). The test to be devised is, of course, a caliper for measuring putative inequality of bargaining power, which is what the community of interest test, in effect, seeks to measure.

For the reasons that follow, we conclude that the district court was correct in determining that a reasonable fact finder could not find that NJA is a franchisee. Hence we will affirm.*fn2

I. THE FACTS OF RECORD

From 1980 to November 15, 1986, Allied supplied NJA with Bendix brand brake linings. In 1986, NJA had gross sales of $13,591,626. Sales of brake parts incorporating Bendix linings accounted for 38% of its gross sales. However, sales of brake parts incorporating linings manufactured by Fasa Friction Laboratory Inc. ("Fasa") accounted for 43% of its gross sales. Joseph Fresta, the president and founder of NJA, is also the president and 50% owner of Fasa. Sales of brake parts incorporating linings manufactured by six other companies accounted for the remaining 18% of NJA's gross sales. From 1980 through 1986, NJA purchased linings from fourteen companies other than Allied.

Allied's sale to NJA of the Bendix linings was conditioned upon NJA's compliance with the Friction Materials Agreement ("Agreement") drafted by Allied. The Agreement was not a sales contract; rather, it set the terms under which future agreements to sell would be made. The Agreement permitted NJA to advertise that it sold brake parts incorporating Bendix linings, to include this information on the cartons of the brake parts that it assembled, and to display the Bendix trademark on point of sale displays, stationery, and business cards when selling brake parts incorporating Bendix linings. The Agreement did not, however, require NJA to use the Bendix trademark or advertise, and it left NJA with complete freedom to set prices for the disc pads and drum shoes that it sold and to market these brake parts in any way that it saw fit (consistent with the limitations on NJA's right to use the Bendix trademark).

The Agreement required NJA to conform to Allied's engineering specifications when assembling brake parts incorporating Bendix linings and to carry liability insurance covering such brake parts. Prior to entering into the Agreement, and periodically thereafter, Allied inspected NJA's facilities, reviewed its quality control and reviewed its financial statements. The Agreement stated that NJA was an "independent contractor" and not an agent or legal representative of Allied and provided that either party could terminate the Agreement by giving the other thirty days prior notice in writing. The Agreement did not prevent NJA from purchasing brake linings from other manufacturers and did not mandate that NJA invest in Bendix-specific capital equipment or good will.

While the Agreement did not require Allied to reimburse NJA for advertising brake parts incorporating Bendix linings, Allied often reimbursed NJA for such advertising as a matter of marketing strategy, as long as the advertising met certain requirements. Pursuant to the Agreement, NJA chose to include the Bendix brand name on the cartons of its brake parts that incorporated Bendix linings. These cartons conformed to Allied's instructions on the use of its trademark and informed the purchaser that the brake part was manufactured using Bendix linings. With respect to brake parts that did not use Bendix linings, NJA's cartons did not advert to the brand of brake linings used. There is also record evidence from which a reasonable fact finder could conclude that NJA purchased machinery and other capital equipment in reliance upon assurances by Allied that Allied would continue to sell NJA Bendix linings.

Allied terminated NJA on October 9, 1986, as part of a comprehensive restructuring of its Bendix linings marketing strategy. Prior to the implementation of its new strategy, Allied had signed Friction Materials Agreements with over 100 assemblers. Allied determined, however, that it was losing market share to its competitors because Allied's more than 100 assemblers could not compete with Allied's principal national competitors, which sold (and continue to sell) assembled brake products to major retailers and other large accounts on a national basis though a single sales force. In response to the perceived need to centralize its sales efforts, Allied decided to stop selling its Bendix linings to assemblers and to start selling only assembled brake products. Rather than operate assembly facilities itself, Allied contracted with ten of the assemblers with which it had Friction Materials Agreements and arranged for them to meet all of Allied's assembling needs. NJA was one of the many assemblers not selected and like the other assemblers not ...


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