Monday, March 08, 2010

Sub-Distributor Failed to Adequately Allege Illinois “Franchise”

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

A sub-distributor of electrical components failed to adequately allege that its relationship with a distributor was a "franchise" under the meaning of the Illinois Franchise Disclosure Act, according to the federal district court in Chicago.

Accordingly, the sub-distributor’s counterclaim against the distributor for violations of the Act’s registration, anti-fraud, and "good cause" for termination provisions was dismissed.

After the distributor terminated the parties’ agreements and brought suit for failure to pay for delivered goods, the sub-distributor responded with several counterclaims, including the alleged violations of the Illinois Franchise Disclosure Act.

Association with Distributor’s Trademark

The sub-distributor argued that it pled sufficient facts to permit the court to infer the existence of a franchise relationship under federal notice pleading standards. However, the sub-distributor’s counterclaim was devoid of any allegation that it used the distributor’s name or mark in marketing the distributor’s electrical components, as required by the statutory definition of "franchise," the court ruled.

Although it could be inferred that the sub-distributor used the distributor’s tradename or mark because the components at issue were alleged to be unique, it was certainly not a necessary inference, the court commented. Moreover, there was no allegation that the operation of the sub-distributor’s business was substantially associated with the distributor’s mark.

Franchise Fee Requirement

The sub-distributor cited caselaw and argued that it was not required to make allegations specific to the Franchsie Disclosure Act's requirements for a "franchise." However, the sub-distributor failed to allege that it operated a business under the distributor’s mark or paid the distributor a "franchise fee," two of the elements necessary to establish a franchise.

Notice pleading required a plaintiff to plead sufficient facts to make a claim plausible on its faith and the sub-distributor’s alleged facts did not reach even that low threshold.

The decision is BJB Electric v. North Continental Enterprises, CCH Business Franchise Guide ¶14,317.

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