NEW BRUNSWICK, N.J.-Oral arguments began Feb. 10 in a case that offers a glimpse of the ways some carrier-reseller relationships are strained due to wireless telephony’s transition from luxury to commodity.
Autosound & Cellular, an Old Bridge, N.J., retail agent, and Palm Springs Auto Resort, an Edison, N.J., wholesale agent, allege that Comcast Cellular Corp., Philadelphia, violated state franchise law when it terminated contracts with them in June 1994.
The jury trial, with Judge Richard Plechner of N.J. Superior Court, Law Division, presiding, will rule on the facts of the case. If the panel of six women and two men find Comcast guilty, a separate proceeding with a new jury will determine and assess the monetary damage award.
“We say there was a contract that was breached, but not by Comcast, and that led to their termination,” said Harold Friedman, a Newark, N.J., attorney representing Comcast.
Comcast also contends that the “special agent” status of the two resellers does not qualify as a franchisee relationship entitled to special protection under state law.
“The agreements the plaintiffs signed say Comcast may reverse or restructure [them] with 30 days advance notice,” Friedman said.
“The reason these provisions exist in the agreements the plaintiffs signed with Comcast and other carriers is that, as the industry and use changes, it is necessary to adjust to changing dynamics. That was done here in good faith, and the plaintiffs were not singled out.”
In the mid-1980s, the two companies began reselling cellular service offered by American Cellular Network, which Comcast acquired in 1989, said Ira Karasic, a Bloomfield, N.J., attorney who is representing the plaintiffs.
“Cellular was very different then. Phones were large and very expensive items. They were installed in cars and were hard to sell,” he said. “These companies were pioneers who developed markets and a customer base, and that made them vulnerable because they had something to lose … The cellular business started to grow because phones became more of a consumer item … Comcast looked to take away more business because the special expertise resellers had wasn’t as necessary.”
Incrementally over several years, Comcast altered its contracts with Autosound and Palm Springs in ways that reduced their residual commissions, the ongoing revenues earned when cellular customers used the service, Karasic contended. Those commissions help defray the handset subsidy the resellers used to lower up-front phone purchase prices, he said.
Despite Comcast’s assertions it was treating all its resellers equally in these changes, the plaintiffs identified some other Comcast agents nearby getting better resale deals, he said. Several Comcast resellers began discussing these issues among themselves in contemplation of legal action.
“In response to this, the manager of the New Jersey part of Comcast’s business told Ron Leibner, (president of Autosound), `our pockets are deeper than yours’ and threatened him if he pursued litigation,” Karasic said.
“This action violated the special protections Autosound and Palm Springs are entitled to under New Jersey franchise law, and we will prove that they are franchisees of Comcast.”
The New Jersey Franchise Practice Act provides criteria that define this business relationship, Karasic said. It is designed “for when big companies try to take things away from little companies.”
Under the law, companies in a franchise relationship must have conducted at least $35,000 worth of business with each other in the prior year. At least 20 percent of the franchisee’s business must be or intended to be with the franchiser, in this case, Comcast. There must be a written agreement. The license to use Comcast’s name and trademark and the residual commission payments also demonstrate a “community of interest” between the franchiser and franchisees.
Another linchpin of community of interest is their working relationship to market the product they are selling, Friedman said. The resellers failed to use the cooperative advertising dollars they received from Comcast to promote the Comcast Cellular One brand. That was an important omission because AT&T Wireless Services Inc. began aggressively marketing its service as Cellular One, thereby confusing consumers, he said.
Karasic said the confusion was lack of clear and consistent directives from Comcast about how it wanted its resellers to brand and advertise the service. Additionally, he alleged that Comcast tried to steal the resellers’ customers.
“Starting in 1993, when Comcast customers came into Autosound and Palm Springs to upgrade service, Comcast would later call these customers and offer them a better deal,” Karasic said.
Early the next year, as carrier competitors began offering better deals that included wider local calling areas and lower activation prices, the resellers asked Comcast to match or beat the other offers. Comcast received and ignored those requests, he said.
“Comcast’s sales, January through June 1994, rose 60 percent vs. the comparable period in 1993, but these agents’ (Comcast) sales dropped by 50 (percent) to 60 percent,” Friedman countered.
“Meanwhile, their business with AT&T and Bell Atlantic skyrocketed.”
The two agents, whose agreement with Comcast was not exclusive, had resale agreements with other carriers and offered all plans to their customers. About 1 percent of their approximately 3,000 Comcast customers chose other carriers, Karasic said.
Friedman said Comcast received complaints from retail customers, some of whom told the carrier the two resellers had switched them to other service providers without their knowledge.
He also presented copies of agreements Autosound and Palm Springs signed with carriers other than Comcast. In these, the resellers promised exclusive sales unless the potential customer was deemed a credit risk.
The fact that Autosound and Palm Springs even had any kind of agreements with other cellular phone companies is evidence they lacked a “community of interest” with Comcast for purposes of state franchise law protection, he added.
Karasic said Comcast canceled its resale agreements with Autosound and Palm Springs without notice in mid-1994, although the two resellers were continuing to meet at least the required monthly minimum of 25 new customer activations. As a result, the two resellers lost about $8,000 to $9,000 in monthly residuals to Comcast.
“Comcast also sent letters to other agents saying `don’t do business with Autosound and Palm Springs,’ so it wasn’t just `we don’t want to do business with you but we want to put you out of business,’ ” Karasic said.
