Thursday, January 22, 2009

Girl Scout Council Uses Wisconsin Dealer Law to Prevent Reduction of Territory

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

The national Girl Scouts organization (GSUSA) was preliminarily enjoined under the Wisconsin Fair Dealership Law (WFDL) from unilaterally removing a large portion of a local Girl Scouts council's territory, the U.S. Court of Appeals in Chicago has decided.

The Girl Scouts of Manitou Council, which was responsible for developing and managing Girl Scouting throughout eastern Wisconsin, was a “dealer” under the meaning of the WFDL, according to the court. Manitou had at least a better-than-negligible chance of succeeding on the merits of its claims that GSUSA’s attempt to reduce its jurisdiction substantially altered the competitive circumstances of the parties’ agreement and lacked “good cause” in violation of the WFDL, the court held.

What is a Dealer?

The Manitou council (Manitou) satisfied the “dealership” definition of the statute, since its agreement with GSUSA granted it the right to sell or distribute goods, the right to sell or distribute services, or the right to use a trade name, trademark, or commercial symbol, according to the court.

Although any one of the three functions would suffice to satisfy the statutory requirement, Manitou satisfied all three, the court observed. First, Manitou sold and distributed goods. Manitou's primary revenue stream derived from its annual sale of Girl Scout cookies, which netted Manitou a yearly profit in excess of $1 million. During this process, Manitou's members both solicited sales and distributed the products. Second, Manitou distributed educational and community services afforded by participation in Girl Scouting. Absent Manitou's relationship with GSUSA, it would lose the ability to provide Girl Scouting services. Third, Manitou made exhaustive use of GSUSA's names and marks.

Nonprofit Organizations

Despite these facts, GSUSA continued to argue that the WFDL was inapplicable, stating that the mission of Girl Scouts was educational and that the local councils were nonprofit entities. However, the WFDL expressed no concern for the mission or other motivation underlying the sales in question. Nor did the statute draw any distinction between for-profit and not-for-profit entities. Manitou’s activities satisfied the statute's plain language, which the Wisconsin Supreme Court had recognized was designed to encompass a diverse set of business relationships not limited to traditional franchises.

Community of Interest

As required by the WFDL, Manitou had a “community of interest” with GSUSA, the court ruled. GSUSA and Manitou shared a continuing financial interest, and their interdependence was extensive. Manitou devoted 100 percent of its time and resources to providing Girl Scouting to its jurisdiction. It also derived virtually 100 percent of its profits from offering Girl Scouting products and services. Manitou had substantial investments in real property and goodwill within its community, all of which were made in the name of Girl Scouting.

GSUSA's argument that Manitou, as a non-profit, could not be a “dealer” under the statute was without merit. For-profit and not-for-profit were shorthand classifications, not literal labels. What distinguished a for-profit from a not-for-profit was what the company did with the excess revenues. Both GSUSA and Manitou, although non-profits, operated at a substantial surplus.

“Good Cause”

The WFDL prohibits the termination, cancellation, nonrenewal, or substantial change in the competitive circumstances of a dealership without “good cause” (CCH Business Franchise Guide ¶ ¶4490.04). Nevertheless, the GSUSA presented no objective economic need to substantially alter the competitive circumstances of the parties’ agreement by unilaterally removing a large portion of Manitou’s territory, according to the court.

The organization’s financial circumstances were a far cry from the dire economic straits confronted by grantors in other cases found to have good cause to change their relationships with dealers. There was little support for GSUSA's argument that intangible concerns—such as fading brand image and waning program effectiveness—without a tangible effect on the bottom line, presented the types of concerns Wisconsin courts had contemplated by the good cause provision of the WFDL. Even if the need for change was objectively ascertainable, the proportionality of GSUSA's response was questionable, the court reasoned.

GSUSA was attempting to reduce the number of its local councils, leaving it with fewer and larger councils. However, if GSUSA succeeded in removing 60 percent of Manitou's territory, that would not help advance GSUSA’s strategy. Because Manitou would continue to exist, albeit on a smaller scale, GSUSA would be left with the same number of local councils, at least one of which would have a reduced capacity. Therefore, chances were better than negligible that a jury could conclude that GSUSA lacked an objectively ascertainable need for its proposed change, or that it failed to respond proportionately to that need, the court determined.

Irreparable Harm

There was a presumption of irreparable harm when a dealer sought to preliminarily enjoin a grantor’s alleged violations of the WFDL. Even if that presumption was rebuttable, GSUSA failed to rebut the finding that Manitou would be irreparably harmed by the change, the court ruled. Manitou, like many non-profit organizations, relied on the people comprising it to remain viable. Removing 60 percent of Manitou's territory would result in a commensurate reduction in the number of current child and adult members, prospective members, volunteers, and current and potential donors, the court noted.

Every source of Manitou's revenue was derivative of the number of members active in its council. Cookie sales, from which Manitou netted more than $1 million in profits each year, would be reduced by 60 percent. Moreover, many of Manitou's largest expenses would remain unchanged regardless of Manitou's membership level. It was clear that taking a large portion of Manitou's jurisdiction would impose severe financial stress on Manitou that could ultimately force Manitou into insolvency.

Manitou demonstrated that donors had already withheld nearly $30,000 in contributions, based on speculation regarding Manitou's forced merger with another council or loss of territory. Manitou risked the loss of property, employees, or its entire business, as well as damage to its goodwill. These harms that were both real and irreparable, the court concluded.

The opinion in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the U.S.A., will appear at CCH Business Franchise Guide ¶14,037.

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