Friday, August 29, 2008

Ruling that Insurance Agency Was Connecticut "Franchise" Reversed

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A ruling that substantial evidence supported a jury's findings that an independent insurance agent's relationship with an insurance company was a "franchise" under the Connecticut Franchise Act and that the company violated the Act by terminating the agent without "good cause" was reversed by the U.S. Court of Appeals in New York City. A damage award of $2.3 million was overturned.

Ownership of Claims

The sole ground for reversal was that the claims, asserted by the individual agent and his incorporated business, actually belonged to the agent's bankruptcy estate and could not be brought by the agent or his representatives. Because the ownership of the claims was a threshold issue, the court did not need to address any of the other numerous issues raised in the appeal, the appeals court determined.

Significant Decision

The lower court decision was considered significant by the franchise bar for holding that an insurance agency relationship could constitute a “franchise.” In October 2005, the federal district court in Hartford, Connecticut ruled that the Connecticut legislature did not intend to preclude insurance agents from invoking the protections of the Connecticut Franchise Act (CCH Business Franchise Guide ¶13,200). Decisions from other jurisdictions that denied “franchise” status to insurance agencies were distinguished for involving different factual settings and legislative schemes.

Elements of “Franchise”

Unlike most state franchise laws, the Connecticut Franchise Act (Conn.Gen. Stat. §42-133e, CCH Business Franchise Guide ¶4070) does not require that a “franchise” pay a franchise fee.

According to the district court, there was substantial evidence that the complaining insurance agent was “granted the right to engage in the business of offering, selling, or distributing [goods or] services under a marketing plan or system prescribed in substantial part” by the insurance company and that the agent was empowered to “offer” the company’s policies to customers.

Considerable testimony from the agent and insurance company employees indicated that the agent operated pursuant to a marketing plan prescribed in substantial part by the company. The company did not challenge the finding that the agency’s business was substantially associated with the company’s trademark.

With the district court’s ruling reversed on other grounds, the question of whether insurance agencies may qualify as “franchises” under the Connecticut Franchise Act remains unclear, according to commentators.

The August 14 decision in Chartschlaa v. Nationwide Mutual Insurance Co. will appear in CCH Business Franchise Guide.

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