Friday, October 31, 2008

Maine-Based Distributorship Might Be Connecticut “Franchise”

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

A federal district court erred in concluding that the relationship between a manufacturer of countertop surfaces and a Maine-based authorized distributor was not a “franchise” under the meaning of the Connecticut Franchise Act, the U.S. Court of Appeals in Boston has ruled.

Place of Business in Connecticut

The lower court based its decision on the Act’s coverage of franchise agreements “the performance of which contemplates or requires the franchisee to establish or maintain a place of business” in Connecticut. The court found that the distributorship was not a "franchise" because (1) the agreement did not require the distributor—which held an exclusive franchise for much of New England—to maintain a place of business in Connecticut, and (2) it was “mere conjecture” that the manufacturer had any belief about whether the distributor would maintain a Connecticut place of business.

The appellate court ruled that a jury could have reasonably found that the manufacturer knew that the distributor purchased a firm that held its franchise for the rest of Connecticut, that the firm had an office and warehouse in the state, and that a Connecticut presence might be maintained to service Connecticut customers.

Accordingly, the appellate court vacated and remanded (1) the district court’s ruling that the Act did not apply to the relationship and (2) the district court’s grant of summary judgment to the manufacturer on the claim that it violated the Act by terminating the distributor without “good cause” (¶13,713, Business Franchise Guide 2007-2008 New Developments Transfer Binder).

Application to Out-of-State Distributor

The manufacturer argued that the statute was not meant to apply to out-of-state businesses like the complaining distributor. However, the legislative history it cited said only that an out-of-state franchisee was not protected merely because the franchisor was a Connecticut company, which was another matter entirely.

It hardly suggested that an out-of-state franchisee was unprotected when it maintained a Connecticut place of business, at least to the extent of its in-state franchise, the appellate court asserted.

The question remained as to whether the Act could apply, given that the parties’ franchise agreement provided that it was governed by Delaware law. Since that issue had not been briefed by either party, it would be left to the district court on remand.

The decision is New England Surfaces v. E.I. Du Pont De Nemours and Co., CCH Business Franchise Guide ¶13,989.

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