Thursday, October 25, 2007

Distributorships Not Protected “Franchise” or “Dealership”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

In decisions issued four days apart, two distributors failed to obtain statutory protection against termination by their manufacturers either as a Connecticut “franchise” or as a Wisconsin “dealership.”

Connecticut “Franchise”

The relationship between a Delaware-based manufacturer of countertop surfaces and a Lewiston, Maine distributor was not a “franchise” within the meaning of the Connecticut Franchise Act because there was no evidence that the manufacturer contemplated that the distributor would establish or maintain a place of business in Connecticut, as required by the Act.

The contractual choice of Delaware law indicated that the parties did not intend to apply Connecticut law or the Connecticut Franchise Act. When the distributor acquired a Connecticut distributor and its Connecticut distribution facility, the parties amended their agreement to include most of Connecticut and Massachusetts within the distributor’s territory. However, no other provisions of the agreement were modified or altered.

If the parties had intended for the distributor to establish a place of business in Connecticut, they could have included that understanding in their agreement, the federal district court in Portland, Maine observed. Deposition testimony failed to indicate that the agreement and the parties contemplated that the distributor would establish or maintain a place of business in Connecticut.

Absent a place of business within the state, neither the Connecticut Franchise Act nor its requirement of good cause for termination was applicable. Thus, the termination without cause, upon 60 days’ notice was justified.

The September 14 decision is New England Surfaces v. E.I. Du Pont De Nemours and Co., U. S. District Court for the District of Maine, CCH Business Franchise Guide ¶13,713.

Wisconsin “Dealership”

A boiler equipment distributor that did not share a “community of interest” with its manufacturer was not a “dealership” within the Wisconsin Fair Dealership Law, according to the federal district court in Green Bay. Thus, the Fair Dealership Law could not be applied to require the manufacturer to have “good cause” for termination of the distributorship.

The distributor had been in business for almost 35 years when it was selected to be the manufacturer’s exclusive distributor in Wisconsin and upper Michigan. Apart from a small stock of parts, the distributor did not actually warehouse boilers or keep any in stock. There was nothing like a showroom for the manufacturer’s products.

In 2005, the first year of the relationship, the distributor sold $128,000 worth of the manufacturer’s products. By 2007, the distributor was on pace to exceed $1 million in sales of the manufacturer’s products. The distributor, however, sold numerous other products and stated that sales of the manufacturer’s products constituted roughly 15% of its total sales in 2007.

Some factors used to determine whether a “dealership” existed were at least partially favorable to the distributor’s claim, the court observed. The distributor stated that it undertook a two-year effort to promote the manufacturer’s products, asserting that it invested its previously-earned goodwill and lent its well-regarded name to the promotion. There was some “inkling of unfairness” involved if the manufacturer was to reap the benefits of the distributor’s good name and then sign on with another distributor. However, it was difficult to see how the distributor’s goodwill investment would be lost as a result of the termination. There was no indication that the distributor’s good name was tarnished by its promotion of the manufacturer’s products.

The relationship was only exclusive with respect to the manufacturer. The distributor felt free to sell numerous other product lines, a practice that was the basis for the parties’ dispute. To the extent that an exclusive relationship could support a finding of a dealership, it was only significant where the dealer sacrificed its ability to sell other competing products in order to sell the manufacturer’s products.

Although the parties disputed to what extent the distributor became identified with the manufacturer’s brand, it was difficult to discern how a company that sold numerous product lines for 35 years would become identified with a single line in less than two years. The fact that the parties’ relationship was relatively brief cut against a finding of a dealership, as did the distributor’s “admittedly modest” investment in advertising the manufacturer’s products.

Ultimately, there was little about the obligations imposed on the distributor to suggest a significant level of interdependence between the parties. The court did not need to speculate about whether the manufacturer had the distributor over a barrel. It didn’t, the court ruled.

The September 18 decision is Heat & Power Products, Inc. v. Camus Hydronics Ltd., U.S. District Court for the Eastern District of Wisconsin, CCH Business Franchise Guide ¶13,714.

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