To learn more about franchise agreements, click here.

Although the FTC-required disclosure documents are mandatory for first-time purchasers of a franchise, there are no required government disclosure documents that must be furnished to the buyer of an existing franchise business. The seller of the franchise is not required to provide the would-be buyer with the franchiser’s disclosure document.

You will want to very carefully study the terms of the existing franchise contract between the existing franchise and the franchiser. How long is its remaining term? Is the price reasonable? Will the operator compete with you afterwards? How does it compare with new franchises the franchiser sells to others? Will you be acceptable to the franchiser? Franchisers invariably have right to approve the transfer or sale of a franchise, or even to negotiate the right to buy back the franchise, and you don’t want to be a seller’s stalking horse.

An investment in a franchise is a substantial commitment of your money, your time, and your reputation. Our advice is to retain a lawyer to assist you in the process. It usually pays for itself many times over.

Business is a maze:  Let the experienced business law attorneys at Hanlon Niemann of Freehold, New Jersey guide you through the complexities of state and federal laws and regulations.

To learn more about franchise agreements, click here:

The franchise agreement is the cornerstone document of the franchisee–franchiser relationship. It is this document that is legally binding on both parties, laying out the rights and obligations of each. A sample agreement may either be attached to the disclosure statement or presented separately. Either way, you are entitled to receive it as a prospective franchisee five business days before signature. You should have it reviewed by a lawyer familiar with franchise matters–especially since most agreements are extremely one-sided in favor of the franchiser. No one should enter into a franchise and expect to have an evenly drawn contract.

The agreement will contain provisions covering, in considerable detail, the obligations of the franchiser (the company) and franchisee (you) regarding operating the business; the training and operational support the franchiser will provide (and at what cost); your territory and any exclusivity; the initial duration of the franchise and any renewal rights; how much you must invest; how you must deal with things such as trademarks, patents and signs; what royalties and service fees you will pay; tax issues; what happens if you should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; by the company, operating practices, cancellation, and attorney fees.

There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.

New Jersey courts have long sought to protect the right and ability of a person “to pursue one’s own business, calling or occupation free from undue influence or molestation.”  In the latter part of the 19th century, the courts recognized that a “wrongful and malicious combination to ruin a man in his trade may be ground for [legal action].”  Similarly, in a line of cases spanning the middle of the 20th century, New Jersey courts protected the rights of real estate brokers whose clients surreptitiously cut them out of a transaction to avoid paying a brokerage commission.  The courts have continued their oversight of business dealings through the present, and now call this an action for tortuous interference.

Tortious Interference With Contract
There are two separate causes of action for tortuous interference:  tortious interference with contract and tortious interference with prospective economic advantage.  The primary distinction between the two torts is the existence of a contract.  Each tort results from the need, or society’s desire, to protect certain types of business relationships.

To establish a claim for tortious interference with contractual relations, a plaintiff must prove: (1) actual interference with a contract; (2) that the interference was inflicted intentionally by a defendant who is not a party to the contract; (3) that the interference was without justification; and (4) that the interference caused damage.

To have acted “intentionally”, a client must have known of the contract,” but cannot have been a party to that contract.  Thus, this tort does not redress a breach of contract.  Rather, this tort addresses the separate injury caused by a third party inducing the breach.  Viewed from the perspective of plaintiff’s counsel, having a claim against party B for inducing that breach provides two potential pockets from which to recover.

The law governing this tort is relatively straightforward, inasmuch as the protected relationship between the parties is defined by contract.

Tortious Interference 
To prevail on a claim for tortious interference with prospective economic advantage, a plaintiff must prove: a reasonable expectation of advantage from a prospective contractual or economic relationship; that the defendant interfered with this advantage intentionally and with malice – that is, without justification or excuse; that the interference caused the loss of the expected advantage; and that the injury caused damage.

New Jersey’s emphasis on adequate proof of a reasonable probability of success is consistent with the national trend.  Summing up the standard for determining the existence of a reasonable expectation of economic advantage, one group of commentators has concluded:

[I]t is vital for the plaintiff – when pursuing a claim – to make certain that there is a bona fide and reasonable expectancy of a continuing and reasonable expectancy of a continuing and prosperous relationship, not just the mere desire or possibility for one.  In a prospective advantage case, the plaintiff must demonstrate that expected benefit with a reasonable degree of specificity.  More than a mere hope or optimism is needed; although the law does not require reasonable probability of economic benefit from a valid prospective relationship.

Malice
New Jersey courts describe malice in a variety of ways.  First, the courts make clear that malice does not mean ill will.  Rather, malice means that the conduct was engaged in without justification or excuse.  In the typical business case, competition between the parties may constitute justification.  The courts, however, require more than the assertion of competition:  A defendant must have a legitimate motive, such as success in the marketplace, and employ legitimate means to obtain that goal.

In Ideal Dairy, the Appellate Division specifically addressed proof of malice when competition is invoked as a justification.  The Ideal Dairy court held that there was nothing wrong with targeting a competitor, and that targeting a competitor by offering lower prices was, in fact, “the very essence of competition.”

New Jersey case law does not permit a competitor to use wrongful means.  New Jersey courts use the term “malice” to describe conduct that is “injurious and transgressive of generally accepted standards of common morality or of law.”

The New Jersey courts have reduced this inquiry to whether the conduct was sanctioned by the “rules of the game.”  The rules of the game standard first appeared in 1957 in DiCristofaro v. Laurel Grove Memorial Park, and has become the standard for determining malice in tortious interference cases.  The DiCristofaro court found that a cause of action might lie based on allegations that the defendant cemetery owners imposed excessive charges and costs upon patrons who obtained monuments and memorials from someone other than the cemetery when, as a result, the outside company was prevented from realizing its “normal business expectancies.”

The tort of tortious interference with prospective economic advantage requires that business competitors act within the moral and ethical framework required by society, as well as their own industry.  The rules of the game depend on the customs, practices or code of ethics of the industry, which have typically been vetted time and again by what is necessary to achieve efficiency in the marketplace.

New Jersey courts, harkening back to the advice dispensed by all mothers in our society that “just because someone else is doing it doesn’t make it right,” require that conduct during the course of competition must not only be consistent with the rules of the game, it also must not be “fraudulent, dishonest, or illegal.”

The New Jersey courts have enumerated several examples of what may constitute fraudulent, dishonest or illegal conduct, but the list is by no means exhaustive.  For example, liability will ensue where a competitor uses “violence, fraud, intimidation, misrepresentation, criminal or cruel threats, and/or violations of the law.”  Moreover, the conduct complained of must be independently actionable.  For example, one of the issues analyzed by the Appellate Division in Ideal Dairy was whether the defendant had violated the antitrust laws through the use of extremely low pricing.

The Ideal Dairy court held that, absent a violation of the antitrust laws, a claim of tortious interference could not be premised on “extremely low, or unprofitable prices” because that conduct was not independently actionable.”

Conclusion
The painful irony is that you may not have done anything wrong, and may have been engaging in intense, but legitimate, competition in the marketplace, but you may, nonetheless, have to endure months of expensive discovery to prove that this conduct does not subject him/her to liability so goes the capitalist way.