Wednesday, August 25, 2010

“Community of Interest” Made Distribution Arrangement a Wisconsin “Dealership”

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

Evidence supported a determination by a Wisconsin state court jury that there was a “community of interest” under the meaning of the Wisconsin Fair Dealership Law (WFDL) between a spa manufacturer and a dealer, a Wisconsin appellate court has ruled.

Thus, the parties’ relationship qualified as a "dealership" within the WFDL, and termination without notice or an opportunity to cure violated the statute, justifying a damage award of $264,800 to the dealer.

The parties began their relationship in 2000 when they entered into a “letter of intent/dealer agreement” under which the dealer was to sell and service spas made by the manufacturer. With a few exceptions early in the relationship, the dealer promoted and sold only spas made by the manufacturer until the manufacturer terminated the agreement in 2007.

It was undisputed that the manufacturer’s termination letter did not provide the dealer with the requisite notice or opportunity to cure any claimed deficiency, as required by the WFDL, and the dealer brought suit. A jury determined that a “dealership” existed under the statute and that the dealer was entitled to $264,800in compensatory damages.

The manufacturer’s primary argument on appeal was that the relationship was not within the WFDL because there was no “community of interest” between the parties. It asserted that the dealer was not dependent on the manufacturer for its economic livelihood because the he was able to find other sources of spas to sell following the termination.

In 2008, the year following termination, the dealer did deal in spas of two other manufacturers, selling a total of 28 spas compared to the 36 spas made by the manufacturer sold in 2006.

Ability to Replace Product Line

The manufacturer relied on the federal case, Home Protective Services, Inc. v. ADT Security Services, Inc. (CCH Business Franchise Guide ¶13,266), for its theory that the dealer’s ability to find other spas to sell so quickly was dispositive. However, federal court decisions applying Wisconsin law were not precedential authority for Wisconsin courts.

The Wisconsin appellate court rejected the analysis in Home Protective Services because it could not be reconciled with the Wisconsin Supreme Court’s most recent application of the community of interest standard in Central Corp. v. Research Products Corp. (CCH Business Franchise Guide ¶13,560).

Central Corp. involved a 20-year relationship between a wholesaler and manufacturer with no written contract. The manufacturer’s products comprised approximately 8-9 percent of the wholesaler’s sales and profits over the years. The court looked to an earlier Wisconsin Supreme Court decision, Ziegler Co., Inc. v. Rexnord, Inc. (CCH Business Franchise Guide ¶8882) in making its decision.

Financial Interest, Interdependence

In Ziegler, the Wisconsin Supreme Court established two guideposts for finding a community of interest—a continuing financial interest and interdependence. The Ziegler court also identified 10 facets of the business relationship to consider in determining whether there was a continuing financial interest and interdependence. Applying these facets, the Central Corp. court identified the factors that warranted a trial.

The Seventh Circuit’s focus on whether the alleged dealer was able to find another supplier of goods after termination—even on less advantageous terms—did not appear in the standard for a community of interest as formulated by the Wisconsin Supreme Court.

The Ziegler facets were analyzed to determine the degree of continuing financial interest and interdependence to determine whether the alleged dealer had a stake in the relationship large enough to make the grantor’s termination power a threat to the dealer’s economic health. That standard did not depend upon the existence or amount of damages that occurred after termination, but on the degree of continuing financial interest and interdependence that existed before the termination.

Viewing the evidence most favorably to the dealer, a reasonable fact-finder could conclude that both parties operated on the premise that the dealer had an exclusive territory in central Wisconsin.

One highly significant factor supporting a finding of a community of interest was that between 60 and 70 percent of the dealer’s business was in spa sales. Another highly significant factor was that, except for five spas from another manufacturer that were sold in early 2001 or 2002, the dealer sold only spas made by the manufacturer.

Testimony indicated that the dealer’s gross sales for the entire business was approximately $400,000 per year during the relationship with the manufacturer, with about $260,000 from spa sales. The fact that the dealer made a large percentage of its revenues from the manufacturer’s spas indicated that both parties had a continuing financial interest in the relationship and that the dealer was highly dependent on this relationship for its economic health.

It was true that the manufacturer did not require the dealer to (1) make an investment, other than the purchase of spas; (2) purchase a specific number of spas; (3) spend any specific amount on advertising, (4) do specific kinds of advertising, or (5) lay out its showroom in a specific manner. However, this evidence, in the context of all the other evidence and details concerning the relationship, did not require a ruling as a matter of law that there was no community of interest.

The decision is Water Quality Store, LLC v. Dynasty Spas, Inc. will appear at CCH Business Franchise Guide ¶14,426.

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