Wrongful Termination: "Community of Interest" Under the Wisconsin Fair Dealership Law

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

A conflict seems to have developed between the federal courts' interpretation of the Wisconsin Fair Dealership Law and that of the Wisconsin courts. The Seventh Circuit in Home Protective Services, Inc. v. ADT Security Services, Inc., CCH Business Franchise Guide ¶13,266, affirmed a district court ruling finding no "community of interest" for a plaintiff that derived 95 percent of its revenue from the defendant and devoted 95 percent of its personnel hours to its arrangement with the defendant.

This decision was recently followed by the federal district court in Milwaukee. Stucchi USA, Inc. v. Hyquip, Inc. (E.D. Wis. July 28, 2010), CCH Business Franchise Guide ¶14,437.

However, the Wisconsin Court of Appeals, in the case of Water Quality Store, LLC v. Dynasty Spas, Inc., CCH Business Franchise Guide ¶14,426, held that the federal construction of Wisconsin statutes need not be followed by Wisconsin courts, citing particularly the Home Protective Services v ADT case.

It referenced a subsequent decision by the Wisconsin Supreme Court, Central Corp. v Research Products Corp., CCH Business Franchise Guide ¶13,560, which resurrected earlier case law, Ziegler Co., Inc. v. Rexnord, Inc.(Wis. S. Ct. 1983), CCH Business Franchise Guide ¶8882.

The Wisconsin Court of Appeals found there was a "community of interest" between a spa distributor and manufacturer, even though the manufacturer did not require an investment and even though the distributor was immediately able to find a replacement brand of spas to distribute --though not at the same volume.

Franchisor Could Be Liable Under Workers' Compensation Act

In an unusual situation, a Kentucky appellate court found that a franchisor of sandwich shops could be liable for the payment of workers' compensation benefits for an injured employee of a franchisee under the Kentucky Workers' Compensation Act because the nature of the relationship between the franchisor and the franchise could have constituted "remuneration" under the Act, and the franchisee could fit the Act's definition of a "subcontractor." Uninsured Employers' Fund v. Brown (Ky. Ct. App. September 3, 2010), CCH Business Franchise Guide ¶14,453.

Thus, the court reversed decisions of an administrative law judge and the Kentucky Board of Workers' Claims. Classification as a subcontractor is usually desired by franchisors, but in this case, it may have backfired.

Discovery Limited for Experts' Reports and Communications

Federal Rules of Civil Procedure 26 (3) (A) and (B), relating to experts' draft reports and expert-attorney communications, have been changed, effective December 1, 2010. This means such documents will no longer be discoverable except for:

(1) Those that relate to the expert's compensation;
(2) Facts and data provided by counsel that the expert considered; and
(3) Assumptions provided by counsel that the expert considered.

(Report of the Judicial Conference Committee on Rules of Practice and Procedure to the Chief Justice of the United States and Members of the Judicial Conference of the United States.)

Constructive Trust Imposed on Defense Counsel's Fees

In a cautionary tale for franchise attorneys who represent clients that walk on the wild side, the Federal Trade Commission's imposition of a constructive trust on attorneys' fees paid to defense counsel who should have known their clients were crooks was upheld by the U.S. Court of Appeals in San Francisco. Federal Trade Commission v. Network Services Depot, Inc., CCH Business Franchise Guide ¶14,447.

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.