Monday, November 29, 2010

Dealer’s Payments Were Not “Franchise Fees” under Hawaii Law

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

A jury had sufficient evidence supporting its finding that none of the alleged payments made by a motor vehicle dealer to a manufacturer constituted "franchise fees" under the meaning of the Hawaii Franchise Investment Law, a federal district court in Honolulu has determined.

Accordingly, the jury’s finding that the manufacturer did not violate the statute when it ceased distributing motor vehicles in North America and offered the dealer the option of becoming a service-only dealer was upheld. The dealer’s motions for a new trial, to amend the judgment, and for relief from the judgment, were denied.

The dealer’s main argument was that the parties’ sales and service dealership agreement constituted a franchise agreement under the Hawaii Franchise Investment Law that required the dealer to pay "franchise fees," the court observed.

Required Payments

The dealer asserted that payments for the following items constituted statutory franchise fees:

(1) signs and financial statements;
(2) advertising;
(3) bank flooring arrangements;
(4) use of the franchisor’s communication system; and
(5) training.
With respect to signs and financial statements, the dealership agreement did require the dealer to install signs and submit monthly financial statements to the manufacturer. However, the evidence showed that the dealer failed to comply with these requirements.

The owner of the dealership testified that the "signage never changed" for the duration of the business relationship. Although deficient with signage and monthly financial statements, the dealer continued to operate as the manufacturer’s dealer, suggesting that those requirements were not franchise fees, as they were not required for the right to do business with the manufacturer.

Payments to Third Parties

Payments made by the dealer for newspaper advertising were to a third party, not to the manufacturer, and did not establish that the payments were franchise fees paid for the right to do business with the manufacturer.

Similarly, payments for flooring finance arrangements were not made to manufacturer itself. The dealer was not restricted to any particular lender and ended up selecting a bank that had no special relationship with the manufacturer.

Use of Communication System

The dealer failed to establish that the required use of the franchisor’s communication system constituted a franchise fee. Evidence suggested the dealer was required to use the manufacturer’s communications system, but the dealer did not always use that system, the court found. Since the manufacturer nevertheless continued to do business with the dealer, the jury could have concluded that the manufacturer’s communications system was not required for the dealer to continue its business.

Finally, the jury did not have to credit a vague assertion that a training charge was for actual live training as opposed to, for example, software that the dealer’s personnel could have needed to refer to on a regular basis in the course of their jobs.

The decision is JJCO, Inc. v. Isuzu Motors America, Inc., CCH Business Franchise Guide ¶14,486.

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