New Jersey has separate laws regulating the franchise industry and consumer practices. These are the “Franchise Practices Act” (N.J.S.A. §56:10-1, et seq.) and the “New Jersey Consumer Fraud Act” or “NJCFA” (N.J.S.A. §56:8-1, et seq.). Courts have held that franchising is not included under the NJCFA. Reasons include that franchising is a business relationship rather than a consumer relationship, and that the Franchise Practices Act already regulates franchising.

Identical bills pending in the New Jersey Legislature propose major changes to the Franchisor – Franchisee relationship in the hospitality industry. S3762 and A2682 have numerous provisions, but the first change in the law may have the most profound effect. The bills propose that “a hospitality franchise shall be considered merchandise for the purposes of P.L. 1960, c.39 (C.56:8-1 et seq.).” This slight change in definition would make all hospitality franchises subject to the NJCFA.

The NJCFA is one of the stronger consumer protection statutes in the country, and its purpose is “safeguarding the public” Furst v. Einstein Moomjy, Inc., 182 N.J. 1, 11-12 (2004). A successful claimant under the NJCFA is awarded to triple damages and attorney’s fees, which are mandatory. Also, the standard required to prove a violation of the NJCFA is lower than that required to prove fraud in a franchise agreement; and could make unintentional mistakes with no bearing upon the transaction subject to the harsh penalties of the NJCFA.

Prospective franchisees are not consumers entering into a consumer relationship, but businesses (even if a sole proprietorship) entering into a business relationship. Federal law requires a franchisor to make detailed written disclosures to a prospective franchisee with a minimum of 14 days to review and perform due diligence before any contract is signed. 16 C.F.R. Part 436. Such circumstance is not the case with a consumer transaction.

Why does this matter?This one change may be enough for hospitality franchisors to leave the state if the risks of doing business are too high.

Alan L. Poliner, Esq. has litigated cases in a wide variety of practice areas, including class actions, franchising, consumer fraud, unfair competition and business torts.