Equipment Dealer Was Not Connecticut “Franchise”

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

The relationship between a terminated dealer of outdoor power equipment and a manufacturer was not a "franchise" under the meaning of the Connecticut Franchise Act (CFA) because the dealer failed to show that more than 50% of its business resulted from the relationship, the U.S. Court of Appeals in Chicago has ruled.

A federal district court’s grant of summary judgment in favor of the manufacturer on the dealer’s CFA claim (Business Franchise Guide ¶14,551) was affirmed.

Association with Franchisor’s Trademark

To qualify as a “franchise” under the CFA, the dealer must be substantially associated with the franchisor’s trademark. To be substantially associated with the franchisor’s trademark, the dealer must show that most, if not all, of its business was derived from association with the franchisor, the court noted.

Based on the "most or all" formulation, federal courts have found that a franchise existed only where at least half of the plaintiff’s business resulted from its relationship with the defendants.

In the district court, resolution of the dealer’s CFA claim hinged on testimony submitted by the dealer’s president. Much of that testimony, in which the president detailed the gross profits and gross sales of the business, was stricken by the court as inadmissible expert testimony on the grounds that the dealer had not disclosed the president as an expert witness.

Gross Profits

Regardless of whether the president’s statements were considered to be expert or lay testimony, they were inadmissible as based on the president’s opinion rather than any objective analysis. Both lay and expert testimony was inadmissible where it consisted of unsupported inferences from raw data, according to the court.

In this instance, the president’s opinion that sales and gross profits from its Sprinkler Hose division should have been disregarded was inadmissible. If the sales and gross profits from the division were included in the overall calculations, the total gross profits of the dealer’s business derived from the parties’ relationship ranged from 34.41% to 41.37%.

Gross Sales

Although the federal district court excluded the president’s opinion on whether the sales of the manufacturer’s products by Home Depot should be included in the total sales figures for the dealer, given the president’s role as the dealer’s president and secretary, he could likely assess the appropriateness of including those sales, according to the appellate court. However, in light of the purpose of the CFA, it made sense only to include only the amount of commissions on Home Depot sales that the dealer would lose as a result of its termination, not the full sales price of those products, in determining the dealer’s gross sales.

If only the commissions the dealer would lose from the Home Depot sales were used in determining the dealer’s gross sales of the manufacturer’s products, the manufacturer’s products still accounted for less than 50% of the dealer’s total sales. In the relevant years, the total gross sales of the dealer’s business that derived from the parties’ relationship ranged from 26% to 35%.

Failure of Business

Finally, the fact that the dealer went out of business shortly after its termination failed to establish, on its own, that the dealer was substantially associated with the manufacturer’s trademark under the CFA, the court determined. No court had relied solely on the fact that a company went out of business to conclude that a franchise relationship existed between two parties, the court observed.

More importantly, the dealer’s claim that the termination caused it to go out of business was inconsistent with the position it took before the federal district court that the loss of the relationship with the manufacturer "was not the death knell” because the dealer could have survived “absent a dire economy."

The decision is Echo, Inc. v. Timberland Machines & Irrigation, Inc., CCH Business Franchise Guide ¶14,714.