Wednesday, May 20, 2009

Good Cause Not Required for Franchise Termination

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

A heating and air conditioning business franchisee failed to demonstrate that a manufacturer was required to have good cause before it terminated the parties’ agreement, the U.S. Court of Appeals in Denver has decided. Thus, a federal district court did not err in granting the manufacturer judgment on the claim as a matter of law.

The dispute arose when the manufacturer discovered that the franchisee had been abusing a rebate program that reduced prices charged to dealers, enabling them to meet the prices offered by competitors.

The manufacturer terminated the franchise, the dealer brought a breach of contract action, and the manufacturer counterclaimed based on the dealer’s abuse of the rebate program.

Termination at Will

As written, the agreement entitled either party to terminate at will on 30 days’ notice, the court noted. However, the franchisee argued that the agreement had been modified by the manufacturer’s statements and conduct so that the manufacturer could not terminate it without good cause.

At best, the evidence presented by the franchisee showed that the manufacturer had consistently provided cause when terminating franchises in the past, the court observed. However, a pattern of terminating with cause was not unequivocally inconsistent with the retention of the power to terminate without cause, according to the court.

Unclean Hands

The court agreed with the franchisor’s contention that the franchisee had unclean hands, based on the phony invoices the franchisee's employees had prepared in preparation for the franchisor’s audit of the rebate program.

Although a jury had found that the franchisee should have been equitably estopped from denying that the parties’ agreement required good cause for termination, the district court properly refused to apply the equitable doctrine for the franchisee’s benefit.


The district court erred by appointing a special master for an equitable accounting on the fraud claim, the court held. The district court found that having a jury “tediously slog through” the individual invoices that the franchisee had fraudulently submitted to the franchisor would prolong the trial.

Because the jury’s general verdict in favor of the franchisor on the fraud claim did not fix the scope of the franchisor’s liability, a new jury could not calculate the franchisor’s damages without resolving the specifics of that liability. Accordingly, the entire fraud claim—not simply the question of the amount of the franchisor’s damages—was required to be retried, the court held.

The decision is Haynes Trane Service Agency, Inc. v. American Standard, Inc., CCH Business Franchise Guide ¶14,125

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