Franchisors landed a big win in a U.S. District Court in New Jersey last month, with a major decision reversing a nearly 40-year trend.
For the past four decades, franchisors had to renew their agreements in New Jersey, whether or not they wanted to. This was required even in cases where franchise agreements were silent on renewal or provided only a specified number of renewals.
The automatic renewals followed a decision from the New Jersey Supreme Court in 1985. In a case involving Dunkin,’ the court found that once a franchise relationship begins, and if the franchisee complies with the terms of the agreement, the deal cannot be terminated or refused a renewal.
However, a ruling by U.S. District Judge Julien Neals in September took the franchisors’ side in a new case, seeing it within a brand’s right to not renew a deal if a contract explicitly states it’s non-renewable, or if the franchisee voluntarily abandons the relationship.
The company in this case was Holiday Hospitality Franchise, a subsidiary of IHG Hotels & Resorts and the franchisor of Holiday Inn and Holiday Inn Express. Holiday was the defendant in the case, originally filed in 2021 by Scion Hotels LLC.
Representing Holiday was the firm Kaufmann Gildin & Robbins, which argued that Scion negotiated with Hilton, the parent brand of Hampton Inn, months after signing its agreement with IHG.
Attorney David Kaufmann said the decision was a landmark one, as the 1985 ruling had “haunted” franchisors for 40 years.
“If a franchise agreement was entirely silent on renewal, New Jersey courts have held that the franchisor must renew,” Kaufmann said. “If the franchise agreement says that there is only one renewal even, New Jersey Courts held that, irrespective of the language, the renewal has to keep being done over and over.”
In its complaint, Scion claimed that in 2019 it acquired a Holiday Inn next to the Newark Liberty International Airport, taking over an existing franchise agreement that had 22 months remaining.
David Kaufmann of Kaufmann Gildin & Robbins
The complaint stated that Scion acquired the hotel under the impression that it would be able to renew the agreement and keep the hotel as a Holiday Inn. However, according to the complaint, IHG told Scion it would sign a new 10-year franchise deal and convert the hotel to a Holiday Inn Express.
Scion stated because the restaurant in the hotel is unionized, transferring to a Holiday Inn Express wouldn’t be feasible. Additionally, the franchisee in the complaint stated IHG planned to acquire another nearby hotel and make it a full-service Holiday Inn, which would have driven up too much competition.
In its suit, Scion claimed it was wrongfully denied a renewal of the original franchise agreement and alleged that Holiday imposed unreasonable standards of practice, all in violation of the state’s Franchise Practices Act.
However, Judge Neals found that Holiday had good cause for not renewing Scion’s agreement because the LLC had voluntarily abandoned its franchise relationship when it looked to rebrand the hotel to a Hampton Inn.
In denying Scion’s claim with prejudice, Judge Neals wrote that the New Jersey Franchise Practices Act did not require a franchisor to offer renewal where an agreement expressly notes that it is non-renewable, which the deal in question did. Additionally, Judge Neals stated that the act is not “intended to prevent the severance of those who deliberately disregard reasonable requirements contained in their contract with the franchisor.”
Kaufmann said a number of states have similar laws to New Jersey’s, but that none had a decision in its courts that espouses a franchise agreement as infinite. Unlike New Jersey, Kaufmann said a number of states have been diligent in asserting if there was good cause and permitting termination or a nonrenewal to proceed, something important for franchisors.
“They may not want to renew for a number of reasons,” Kaufmann said. “They may have a problematic franchisee who has engaged in defaults, or there can be a lack of adherence to quality standards. No franchisor wants to cut off a revenue stream, but while a revenue stream is important, it’s less important than permitting a unit to continue in operation in a substandard fashion.”
In the recently decided case, though, Kaufmann said the firm examined every case related to the New Jersey Franchise Practices Act concerning nonrenewal and terminations. Kaufmann said while there were cases in New Jersey where termination was approved, the firm couldn’t find one where a non-renewal was upheld.
Moving forward, Kaufmann said the decision gives franchisors the ability to argue non-renewal cases more forcefully.
“This precedent shows that a determination not to renew an agreement can be made for a good cause, and the notion that a franchise is infinite is now done away with,” he said. “That language is now either weakened or obliterated all together. I don’t see the dramatic need for new legislation now given the decision, as long as a franchisor is able to elect to not renew a franchise for a good cause.”