The Franchise Memorandum

The United States District Court for the Northern District of California recently denied a manufacturer’s motion for summary judgment on a distributor’s claim for a violation of the New Jersey Franchise Practices Act (NJFPA). Oracle America, Inc. v. Innovative Technology Distributors LLC, 2012 Bus. Franchise Guide (CCH) ¶ 14,924 (N.D. Cal. Sept. 18, 2012). As a “value added” distributor of Sun Microsystems (Sun) technology products, Innovative Technology Distributors (ITD) sold Sun’s products in conjunction with support and customization services. When Sun was acquired by Oracle, Oracle decided to move to a distribution model whereby most sales would be made directly to end users, without the involvement of distributors. For this reason, Oracle sent ITD a series of termination letters. The first letter stated as cause for termination ITD’s nonpayment of roughly $19 million in invoices, and provided ITD 60 days to cure. Two subsequent termination letters did not state any grounds for termination. ITD brought an action against Oracle claiming that Oracle had violated the NJFPA by terminating ITD without good cause.

Among other things, Oracle claimed that ITD did not qualify as a franchise under the NJFPA because ITD did not have a trademark license. Although the contract explicitly disclaimed a license, the court stated that the inquiry should focus on whether the franchisee’s use of the franchisor’s trademark created a perception that the parties were “integrally related.” To address this, ITD submitted affidavits from its customers, one of whom stated that he considered ITD to be “essentially an extension of Sun.” In addition, the court found persuasive evidence that ITD displayed Sun’s banner and logo at ITD’s corporate office, that Sun directly warrantied products sold by ITD, and that ITD’s value added services promoted the proper functioning of Sun products. In light of all of these factors, the court determined that there was a sufficient factual dispute regarding the existence of a license to preclude summary judgment in favor of Oracle.

The court went on to find that a genuine issue of material fact also existed as to whether Oracle had good cause for termination. While Oracle was able to show that its first termination letter complied with the NJFPA by stating good cause for termination (the nonpayment of $19 million) and providing a cure period, the court apparently believed that the subsequent termination letters, which did not state any grounds for termination or provide a cure period, negated the previous compliant termination letter. This holding led the court to find that a factual issue existed regarding whether Oracle violated the NJFPA when it terminated ITD.