Tuesday, December 22, 2009

Absent Community of Interest, Distributor Was Not Wisconsin “Dealer”

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

The relationship between a hardwood flooring distributor and a manufacturer was not a "dealership" under the meaning of the Wisconsin Fair Dealership Law (WFDL) because the relationship did not involve a "community of interest," according to a federal district court in Milwaukee.

Community of Interest

For parties to share a community of interest, the business relationship must be significant enough to threaten the financial health of the dealer, if the grantor were to decide to exercise its power to terminate, according to the court. A dealer's financial health was considered threatened if termination would cause it to sustain a significant economic impact.

To determine whether termination would cause a significant economic impact, courts examined: (1) the percentage of revenues and profits the alleged dealer derived from the grantor; and (2) the amount of time and money an alleged dealer had sunk into the relationship. The ultimate question was whether the grantor has the alleged dealer "over a barrel," the court noted.

In the instant dispute, the manufacturer was not in a position to exploit the distributor such that the parties had a community of interest for two principal reasons. (1) the distributor derived only a small percentage of its total profits from the distribution of manufacturer’s products and (2) the distributor sunk a relatively modest amount of time and money into the relationship.

Percentage of Profits

With respect to revenues and profits, the distributor generated only slightly more than five percent of its gross profits from the manufacturer’s products in 2006, less than two percent in 2007, and slightly over three percent in 2008. Single digit figures such as those indicated that the manufacturer did not have the distributor over a barrel, the court reasoned.

The distributor claimed that revenue generated from the sale of the manufacturer’s flooring represented roughly 25 percent of its total sales of hardwood flooring. That figure was misleading because the distributor derived substantial profits from other aspects of its business, the court noted.

Sunk Costs

With respect to sunk costs, the distributor’s unrecoverable investment in the manufacturer’s product line was not so significant that it allowed the manufacturer to behave opportunistically, the court determined.

The relationship between the parties was of relatively short duration, commencing in 2004 and ending in 2008. For part of that relationship, some of the distributor’s employees could have spent as much as 25 percent of their time on the distribution of the manufacturer’s products and received training specific to them. However, none of those employees worked solely on business involving the manufacturer’s products. Nor did the distributor invest a substantial sum of unrecouped funds into the relationship.

Recouped Investment

Much of the money it did expend had likely been recouped in the form of sales. It was not as though the distributor had been left with substantial unsaleable inventory or unusable buildings, as a fast food franchisee could be. Nor had the distributor been selling the manufacturer’s products at a loss in an effort to build a market, only to have the manufacturer pull the rug out from under it just as the line was beginning to look profitable, the court observed.

The community of interest standard was a relatively demanding one and the record did not support the distributor’s assertion that the manufacturer had it over a barrel.

The decision is F&C Flooring Distributors, Inc. v. Junckers Hardwood, Inc., CCH Business Franchise Guide ¶14,280.

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