Monday, November 03, 2008

Appointment of Distributor Without Notice to Existing One Violated Wisconsin Dealer Law

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

A manufacturer of truck blowers that appointed another distributor of its products in a complaining dealer's nonexclusive territory violated the Wisconsin Fair Dealership Law's (WFDL's) requirement that a dealership grantor "provide a dealer at least 90 days' prior written notice of...[a] substantial change in competitive circumstances," a federal district court in Madison, Wisconsin, has decided. Because the manufacturer did not make the change based on the dealer's "deficiency," it did not need to offer the dealer a right to cure.

Change in Competitive Circumstances

It was undisputed that the manufacturer did not follow the WFDL's mandatory notice and cure procedures before appointing the new distributor. The crucial question was whether the manufacturer's appointment of the second distributor amounted to a "substantial change in competitive circumstances," according to the court.

No Wisconsin court had addressed the scope of activity that could constitute a substantial change in competitive circumstances that did not affect the dealership agreement itself but, as in the instant circumstances, affected the dealer, the court noted.

Intrabrand Competition

In light of the statute's purpose and the reasoning of the Wisconsin Supreme Court in case law, a grantor substantially changed a dealer's circumstances under the meaning of the WFDL by allowing or engaging in any "intrabrand" competition likely to have a serious effect on a dealer's ability to continue to compete in that market, the court ruled.

The manufacturer's appointment of the second distributor had a serious effect on the complaining dealer's ability to continue competing as a truck blower distributor in Wisconsin, the court determined. The second distributor had a competitive advantage over the complaining dealer because it already marketed another manufacturer's brand of truck blowers. With the addition of the manufacturer's brand of truck blowers, the second distributor offered a broader selection than the complaining dealer could, the court noted.

Before the second distributor was appointed as a distributor in Wisconsin, the complaining dealer had no intrabrand competition in Wisconsin (except, perhaps, some incidental and undiscounted sales). Thus, the impact of the appointment on the dealer was substantial, the court reasoned.


The manufacturer did not appoint a second distributor because it believed that the complaining dealer had any "deficiency" under the meaning of the WFDL, but because it believed that the second distributor would be a "natural fit" that would sell better in the territory, according to the court. Technically, a "better" second distributor could be understood to be a "deficiency" of the complaining dealer's distribution under the meaning of the WFDL.

Such a reading, however, could turn nonexclusive dealership agreements such as the one between the parties into exclusive dealership agreements. Every time a new dealer was appointed, the dealer would have an opportunity to cure and hold onto its status as sole dealer. Instead, the statue's use of the term "deficiency" was better understood as a dealer's failure to live up to the grantor's expectations of it, the court held. Therefore, there was no deficiency to be claimed and no need for the manufacturer to provide the dealer an opportunity to cure.

The decision is Wisconsin Compressed Air Corp. v. Gardner Denver, Inc., CCH Business Franchise Guide ¶13,994.

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