Decisive Testimony Barred in Dealership Termination Case

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

The recent case of Echo, Inc. v. Timberland Machines & Irrigation, Inc. (7th Cir. October 25, 2011, CCH Business Franchise Guide ¶14,714) evolved from the termination of a dealer by a supplier and the subsequent appointment of another. But the case is almost a compendium of franchise litigation issues.

Both federal district court and the Seventh Circuit Court of Appeals:

(1) Barred the apparently quite mundane testimony by the business owner about adjustments to financial statements as constituting “expert testimony,” even though the man was testifying about his own financial statements;

(2) Upheld prior decisions regarding the definition of “substantial association” under the Connecticut Franchise Act (i.e., that the franchisee must receive more than 50% of its revenues from the franchised product to be eligible for the CFA’s protection);

(3) Ruled that a subsequent distributor cannot tortiously interfere with a contract that has already been terminated; and

(4) Required that testimony concerning certain accounting adjustments be provided by an expert rather than the company’s president (a lay witness).

Ultimately, the decision was that without providing “admissible evidence” to meet the 50% of revenues threshold, all the alleged franchisee’s claims under the CFA and other claims that depended on it were dismissed.

Is a Franchisee an Employee or an Independent Contractor?

The Ninth Circuit Court of Appeals recently reversed a federal district court decision holding it lacked jurisdiction to decide whether drivers for a franchisor of airport passenger shuttle businesses were employees or independent contractors under California law. (Kairy v. SuperShuttle Int’l, 9th Cir., November 3, 2011, CCH Business Franchise Guide ¶14,707)

The appellate court rejected the district court’s ruling ( CCH Business Franchise Guide ¶14,288) that exercising such jurisdiction would hinder or interfere with the California Public Utilities Commission’s exercise of regulatory authority over the relationship between the drivers and the franchisor. The case was remanded.

The issue also resonates with disputes over vicarious liability. (See, e.g., Barak v. Chen, Appellate Division, Second Department, September 13, 2011, 2011 NY Slip Op 06466)

Also, in Jason Robert’s, Inc. v. Administrator Unemployment Compensation, (Conn. App. Ct. April 12, 2011, CCH Business Franchise Guide ¶14,577) after losing throughout the unemployment compensation administrative process on the issue of whether a concrete artisan who had been an employee and then became a licensed dealer was still an employee for purposes of unemployment insurance, the dealer filed a court proceeding. It lost again and then brought an appeal arguing that, in fact, the relationship was a “franchise” under the Connecticut Franchise Act and that, therefore, the relationship was exempt from the “ABC test” to determine whether or not the worker was an “employee.”

The ABC test “is conjunctive; failure to satisfy any one of the prongs will render the enterprise subject to the act …. Under the ABC test, an individual will not be considered an employee if: [A] such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under his contract for the performance of service and in fact; and [B] such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and [C] such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed…” (Citation omitted; emphasis in original).

The court did not agree, saying:

“Specifically, the plaintiff argues that a finding that a franchise agreement exists between the parties exempts the relationship from the purview of the act. The plaintiff neither cites, nor does our research reveal, any legal support for this argument. On the basis of our review of the act, we find nothing that elucidates the question of whether the existence of a franchise agreement precludes application of the ABC test.”

Attorneys’ Fees: Who Is the Prevailing Party?

Frequently, the fee-shifting language used in franchise agreements and statutes says that the loser shall pay the “prevailing party’s” attorneys' fees and costs. However, often there is an issue as to who is the “prevailing party.” A party that only succeeds on an interim basis may not be considered to have prevailed. A recent example of this can be found in Kaeser Compressors, Inc. v. Compressor & Pump Repair Services, Inc. (E.D. Wis. September 2, 2011, CCH Business Franchise Guide ¶14,674), where a distributor of industrial compressors—which had prevailed on a manufacturer’s motion for a declaratory judgment brought to ensure that it would not violate the Wisconsin Fair Dealership Law (WFDL) by terminating the distributor without “good cause”—was not entitled to an award of attorneys’ fees.

The WFDL provided such payments to a dealer who sued a grantor successfully but by its plain terms, only if the grantor violated the WFDL. Since the manufacturer did not violate the WFDL, the attorneys’ fee provision did not apply.
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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.

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.