Friday, February 26, 2010

Distributor, Manufacturer May Share “Community of Interest” under Wisconsin Dealer Law

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

A "community of interest" under the meaning of the Wisconsin Fair Dealership Law (WFDL) could have existed between a Wisconsin toy distributor and a French manufacturer, bringing the distributorship within the anti-termination provisions of the dealer law, the federal district court in Milwaukee has decided.

The distributor raised several genuine issues of material fact as to whether a "community of interest" existed on the manufacturer's motion for summary judgment on the distributor’s WFDL claims. Thus, the motion was denied, and the dispute was ordered to proceed to trial.

In 2001, the distributor became the manufacturer’s exclusive toy distributor for the United States. The manufacturer unilaterally terminated the distribution relationship in 2006, and the distributor brought suit, alleging that the manufacturer failed to comply with provisions of the WFDL requiring notice and "good cause" for termination and repurchase the distributor’s entire inventory of the manufacturer’s toys.

The manufacturer argued that the distributor was not a “dealer” entitled to the protections of the WFDL because, among other reasons, there was no "community of interest" between the parties.

Substantial Obligations

There was a genuine issue of material fact about whether the relationship was the type of intertwined, dependent relationship that the WFDL was designed to protect, the court ruled. The agreement imposed substantial obligations on the distributor to buy, sell, and promote the manufacturer’s products. The agreement specified minimum purchase quotas and minimum sales, the court noted. The distributor was required to maintain appropriate inventory levels and was not allowed to distribute toys that competed against the manufacturer’s toys.

Percentage of Time and Revenue

The court concluded that the distributor raised a genuine issue of fact about whether the percentage of time it devoted to the manufacturer’s products and whether the revenue it received from the manufacturer’s products constituted a community of interest. The distributor’s sales of the manufacturer’s products accounted for over 20% of its business, a percentage that weighed slightly in favor of finding a community of interest.

Exclusive Right to Sell

The fact that the distributor had the exclusive right to sell the manufacturer’s Erector brand of toys in the United States weighed heavily in favor of finding a community of interest. The distributor used the manufacturer’s brand name as part of its efforts to sell the products but it did not use the name on its exterior signage or on its vehicles. Such use appeared to be minimal and that aspect of the relationship did not satisfy the WFDL, the court held.

The distributor’s rented warehouse was not devoted exclusively to the manufacturer’s products and was adaptable to other uses upon termination of the parties’ agreement. The distributor raised a genuine issue of material fact regarding its investment in inventory but not in physical facilities or goodwill.

Personnel Devoted to Manufacturer’s Line

The distributor raised a genuine issue of material fact as to whether the personnel devoted to the manufacturer helped to establish a community of interest. The distributor had one employee who worked solely on the manufacturer’s products and contended that every one of its employees worked in furtherance of sales of the manufacturer’s products.

The distributor alleged that it spent $150,000 annually to present the products at a toy fair, $80,000 annually to lease a showroom at a toy fair, and $85,000 to $90,000 annually in marketing expenses, raising an issue of fact about whether its expenditures on advertising and promotion supported a community of interest.

Considering all of the circumstances in a light most favorable to the distributor, the court held that the relationship and the resultant revenues were significant to the distributor’s business. The distributor contended that the termination caused the entire business to collapse. However, the reason for the distributor’s ultimate demise was contested. Thus, the case was allowed to proceed to trial.

The February 10 decision in Brio Corp. v. Meccano S. N. appears at CCH Business Franchise Guide ¶14,305.

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