Constructive Termination Claims Under the New Jersey Franchise Practices Act Generally Require That the Franchisee No Longer Operate the Franchise

Pai v. DRX Urgent Care, LLC, Nos. 13-4333 and 13-3558, 2014 U.S. Dist. Lexis 27071 (D.N.J. Mar. 4, 2014)

The New Jersey Franchise Practices Act ("NJFPA" or "Act"), a remedial statute regulating franchise relationships, generally prohibits franchisors from terminating a franchise "directly or indirectly" without advance written notice and "good cause" for termination. N.J. Stat. § 56:10-5. "Good cause" is defined as "failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise." Id. New Jersey courts have recognized a claim for constructive termination under the NJFPA, which typically arises when a franchisor makes a franchisee's working conditions so intolerable that the franchisee is forced to resign voluntarily. The question of whether a franchisee can assert a viable constructive termination claim under the Act without abandoning its franchise was recently decided by the U.S. District Court for the District of New Jersey in Pai v. DRX Urgent Care, LLC, Nos. 13-4333 and 13-3558, 2014 U.S. Dist. Lexis 27071 (D.N.J. Mar. 4, 2014). In Pai, the district court held that a constructive termination claim pursuant to the Act is barred when a franchisee is still operating the franchise and the franchisor is not attempting to force the franchisee to resign in any way.

The Parties and the Franchise Agreements

Plaintiffs NEXDRX1 LLC and Laura Fabbro (collectively, "Franchisees") each executed the same form of "Doctors Express" franchise agreement, pursuant to which the Franchisees were each obligated to operate an urgent care facility at a New Jersey location using the Doctors Express marks, system and operations manuals for 15-year terms. Ownership of the Doctors Express franchise system changed several times during the Franchisees' terms. American Family Care ("AFC"), whose subsidiary bought the franchise's assets from the prior franchisor, DRX Urgent Care LLC ("DRX"), is the current franchisor. After operating the franchises for several years, the Franchisees initiated separate lawsuits by filing nearly identical complaints asserting various tort and contract claims, including claims for constructive termination, against their current and prior franchisors, AFC and DRX (together, the "Franchisors"), respectively.1 The Franchisors filed motions to dismiss the complaints in both cases based on the same legal theories, which the district court addressed simultaneously.

The Constructive Termination Claim

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