Colt Industries Inc. v. Fidelco Pump & Compressor Corporation and Fidelco Equipment Corporation ( 1988 )

OPINION OF THE COURT

A. LEON HIGGINBOTHAM, Jr., Circuit Judge.

This is an appeal from the district court’s order denying appellants’ motion for a preliminary injunction. Appellants sought to prevent appellee from terminating a distributorship agreement it had with them. Appellants argue that the district court erred in concluding that they had failed to demonstrate a reasonable probability of success on the merits of their claim that they were a franchise. We find that the district court did not err in applying the law or in finding the facts. Accordingly, we will affirm the judgment of the district court.

I.

Appellants Fidelco Pump & Compressor Corporation and Fidelco Equipment Corporation (together, “Fidelco”) are multi-state corporations that sell and service pumps and compressors. Appellee Colt Industries Inc. (“Colt”) manufactures the Quincy brand of pumps and compressors, which are sold through independent distributors.

In December 1985, Fidelco entered into agreements with Colt to pay a predecessor company’s outstanding debt of $87,000 to Colt, and to be appointed a Quincy distributor. The agreements provided Fidelco with non-exclusive distributorships in New Jersey and Connecticut;¹ according to Colt, those two states were to be Fidelco’s “primary area of responsibility.” The agreements were to expire after one year, but they were renewable. Each party also had the right to terminate the agreements, without cause, upon sixty days written notice. Although the agreements expired on January 15, 1987, the parties continued their business relationship until March 26, 1987. On that date, Colt, without providing any reason, sent Fidelco a termination notice. Colt subsequently filed a federal diversity action to recover $41,000 still due on the debt agreement.

Fidelco filed a petition in the district court seeking a preliminary injunction to prevent Colt from terminating the agreements. Fidelco contended that its agreements with Colt constituted franchise agreements and that Colt’s attempted termination of Fidelco violated New Jersey’s Franchise Practices Act, NJ.Stat.Ann. §§ 56:10-1 to 10-15 (West Supp.1987) (“the Act”), which provides that termination of a franchise agreement must be based upon good cause.

The district court concluded that Fidelco failed to demonstrate a reasonable probability of success on the merits of its claim that the agreements constituted franchise agreements subject to protection under the Act and, therefore, denied Fidelco’s motion for a preliminary injunction.

Following the denial of the preliminary injunction, Fidelco filed an appeal to this Court. Chief Judge Gibbons granted a temporary restraint, noting that “the appellants are likely to succeed on the merits of their contention that their agreements with Colt fall within the New Jersey and Connecticut franchise acts” and that “the appellants are likely to succeed on the merits of their contention that termination of their franchises will cause irreparable harm.” Colt Indus. Inc. v. Fidelco Pump & Compressor Corp., No. 87-5340 (3d Cir. May 29, 1987), reprinted in Joint Appendix (“JA”) at 194-95. Thereafter, a motions panel, with one judge dissenting, denied Fidelco’s request for a preliminary injunction during the pendency of this appeal. Colt Indus. Inc., No. 87-5340 (3d Cir. June 11, 1987), reprinted in JA at 196.

II.

The party seeking a preliminary injunction has the burden of demonstrating: (1) a reasonable probability of success on the merits; (2) irreparable harm if the injunction is denied; and (3) that the issuance of an injunction will not result in greater harm to the non-moving party. ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir.1987); SI Handling Systems Inc. v. Heisley, 753 F.2d 1244, 1254 (3d Cir.1985). The district court concluded that Fidelco failed to demonstrate a reasonable probability of success on the merits.

This Court will affirm the grant or denial of a motion for a preliminary injunction unless the district court abused its discretion, committed an error of law or made a clear mistake on the facts. ECRI, 809 F.2d at 226; Tustin v. Heckler, 749 F.2d 1055, 1060 (3d Cir.1984).

Fidelco’s assertion that it will prevail on the merits is based solely on its contention that the agreements with Colt constituted franchise agreements and, therefore, that they could be terminated only upon a showing of good cause. The New Jersey Franchise Practices Act defines a franchise as

a written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.

N.J.Stat.Ann. 56:10-3(a). Thus, before we can properly determine whether the Colt-Fidelco agreement constituted a franchise under the New Jersey Franchise Practices Act, we must find (1) that Colt granted a trademark license to Fidelco, and (2) that there was a “community of interest” between Colt and Fidelco.

The district court concluded that the agreements did not constitute franchise agreements. It based this decision on a legal finding that Colt had not granted a license to Fidelco to use its trademark, and on a factual finding that there was no community of interest between Colt and Fidelco as is contemplated by the Act. We will address these elements in turn.

A. Trademark License

Fidelco contends that the agreements with Colt granted it a license to use the Quincy trademark. Paragraph sixteen (16) of the distributorship agreement, however, provided that

[t]he words “Quincy Compressor” and/or any parts of said name or trademarks of Quincy Compressor, or of Colt Industries, its subsidiaries and affiliates or any simulation thereof will not be used as part of Distributor’s business name; but, nevertheless, Distributor may display “Quincy Compressor” in a manner consistent with Quincy Compressor advertising policies as part of advertising of the product and indicating that Distributor is a Distributor of Quincy Compressor products covered by this Agreement. Distributor shall discontinue and refrain from all such advertising or representation in any use whatsoever of said name or trademarks or parts or simulations thereof upon the termination of this Agreement.

JA at 37.

A decision rendered by the New Jersey Superior Court is instructive to our review. In Finlay & Assoc. v. Borg-Wamer, 146 N.J.Super. 210, 369 A.2d 541 (Law Div.1976) (“Finlay ”), aff'd per curiam on other grounds, 155 N.J.Super. 331, 382 A.2d 933 (App.Div.), certif. denied, 77 N.J. 467, 391 A.2d 483 (1978), the court, evaluating an agreement that is similar to the one at issue in the present case, rejected the contention that a license to use a trademark had been granted. The court stated that the “[m]ere furnishing of advertising materials as contemplated by the distributorship agreement, and allowing plaintiff to have its name placed on certain items, if it wished, as advertising (plaintiff using its own business name) for their own benefit does not fulfill the letter or intent of the Franchise Practices Act.” 146 NJ.Super. at 219, 369 A.2d at 545.

The district court, however, noted that “the continuing validity of [Finlay’s] rather narrow definition of ‘license’ is somewhat cast into doubt by the subsequent decision of the Appellate Division in Neptune T. V. & Appliance Serv., Inc. v. Litton Microwave Cooking Prods. Div., Litton Systems, Inc., 190 N.J.Super. 153[, 462 A.2d 595] (App.Div.1983) [(“Neptune”)].” Colt Indus., Inc. v. Fidelco Pump & Compressor Corp., No. 87-1347, Mem.Op. at 12 (D.N.J. May 29, 1987), reprinted in JA at 177. In Neptune, an appliance repair business (“Neptune”) was designated by a division of Litton Systems, Inc. (“Litton”), as an “Authorized Litton service source” under a written agreement that incorporated a detailed “Service Policy and Procedural Guide.” 190 N.J.Super. at 156-57, 462 A.2d at 597. This guide specified how warranty work was to be performed, required technicians to attend Litton training sessions and even explained how customer complaints were to be handled. Based upon this elaborate agreement and the fact that approximately 50% of Neptune’s business derived from its work with Litton products, the Appellate Division of the New Jersey Superior Court concluded that Neptune had been granted a license to use the Litton trademark as a franchise, as that term is used in the New Jersey Franchise Practices Act. Id. at 160-61, 462 A.2d at 599.

The district court noted that the agreement in this case falls somewhere between the Finlay and Neptune agreements. Colt Indus., Inc., No. 87-1347, Mem.Op. at 12-13 (D.N.J. May 29, 1987), reprinted in JA at 177-78. The Colt-Fidelco agreement provided that Fidelco could use the Quincy name only in a limited sense and that the Quincy brand name could not be used in Fidelco’s business name. The agreement further restricted the use of the Quincy brand name by specifying that it was to be used only in a manner that is consistent with Colt’s advertising policies. In our view, if this limited agreement constitutes a license to use a trademark, then any business selling a name brand product would, under New Jersey law, necessarily be considered as holding a license. Nothing in Neptune supports this extreme legal proposition. The district court, therefore, correctly concluded that the agreement did not constitute a grant of a trademark license to Fidelco.

B. Community of Interest

The district court also determined that Fidelco, even if it was granted a license by Colt, failed to meet its burden of proof on the second prong of the definition of franchise under New Jersey law, i.e., demonstrating a community of interest in the marketing of goods and services between itself and Colt.

Under the Act, a community of interest means more than the mere fact that two parties share in the profits realized when a product makes its way from manufacturer to the ultimate consumer. Neptune, 190 N.J.Super. at 163, 462 A.2d at 600. Courts analyzing whether an alleged franchisee is part of the class that is protected by the Act have looked for specific proof, focusing on certain indicia of control by the supposed franchisor over the supposed franchisee. See, e.g., id. at 163-64, 462 A.2d at 601.

The district court, based upon its findings of no indications of interdependency or control, properly concluded that the relationship between Fidelco and Colt was a cooperative one. Colt Indus., Inc., No. 87-1347, Mem.Op. at 17-18 (D.N.J. May 29, 1987), reprinted in JA at 182-83. Indeed, the factual record before the district court seemed to indicate that the relationship was one of equal bargaining power and reflected two parties engaged in the common pursuit of a shared goal. The sales meetings held at Fidelco’s locations and the advertising and promotional materials, for example, demonstrated no more than cooperation in selling compressors. These sales meetings were not mandatory training for Fidelco’s employees, nor was there a Colt-mandated method for selling the product. In addition, the advertising and promotional materials provided to Fidelco by Colt were only suggested, not required. Finally, while the shared costs aspect of yellow-page advertising at first blush suggests a closer relationship, that fact was not borne out, inasmuch as Colt did not require or specify any particular advertising. In sum, Fidelco failed to establish that it was subject to the whim, direction and control of a more powerful entity whose withdrawal from the relationship would shock a court’s sense of equity.

Fidelco suggests that Colt’s monitoring of Fidelco’s financial performance nonetheless demonstrated control over it as a franchisee. The agreement, in paragraph six (6), provided that “[distributor shall furnish satisfactory evidence of financial responsibility upon request by Quincy Compressor’s Credit Department, but not less than annually.” JA at 34. As the district court noted, however, Colt required proof of financial responsibility as one of its standard contract provisions; that practice made sense in this context, where the distributorship agreement contemplated sales to Fidelco on credit.

Colt did not set for Fidelco the sales quotas that a franchisor usually sets for its franchisees. Carlos v. Philips Business Sys., 556 F.Supp. 769, 772 (E.D.N.Y.) (applying New Jersey and Connecticut law), aff'd without published opinion, 742 F.2d 1432 (2d Cir.1983) (table). Their sales goals, far from demonstrating control by Colt, were instead an example of the cooperative nature of the Colt-Fidelco relationship. An affidavit submitted by Colt to the district court explained as follows:

1987 SALES GOALS AND % CHANGE: These fields are to be filled in by you and our District Representative during your meeting. They should be realistic, and yet challenging goals; established on the basis of your plans for promoting Quincy in 1987.

Colt Indus., Inc., No. 87-1347, Mem.Op. at 23 (D.N.J. May 29, 1987) (district court’s emphases), reprinted in JA at 188. As the district court stated “[without question, if these are quotas, they are self-imposed." Id. at 23, reprinted in JA at 188 (emphasis supplied).

Finally, we note that, although the agreements provided for warranty service by Fidelco, the fact that a distributor provides warranty service, standing alone, does not create a community of interest within the contemplation of the New Jersey statute. Neptune, 190 NJ.Super. at 167, 462 A.2d at 603.

III.

For the foregoing reasons, we will affirm the district court’s denial of the motion for a preliminary injunction.

1 . The district court concluded that Connecticut’s franchise act is less inclusive than is New Jersey's, and that, because the Colt-Fidelco agreement did not constitute a franchise agreement under the New Jersey statute, it was unnecessary to address the issue whether the agreement was a franchise agreement under the Connecticut statute. This legal conclusion is not disputed by the parties. Appellant’s Brief at 12 n. 4; Appellee’s Brief at 13 n. 1.