Monday, March 23, 2009

Product Discontinuation Was "Good Cause" for Dealership Termination

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

A manufacturer of construction equipment (Volvo) had "good cause" under the meaning of the Maine power equipment, machinery, and appliances dealer law to terminate a dealership after it discontinued production of Samsung branded construction equipment, the U.S. Court of Appeals in Chicago has determined.

Thus, a federal district court's award of $2.1 million in damages to the dealer on a jury's verdict for wrongful termination (CCH Business Franchise Guide ¶13,488) was reversed and the dispute remanded for entry of judgment in favor of Volvo.

Acquisition of Manufacturer

The parties' relationship began when Volvo acquired Samsung's construction equipment manufacturing business and assumed its obligations to its dealers. Volvo did not acquire the Samsung trademark, only the right to continue to manufacturer Samsung branded excavators for a three-year period, the court noted.

Volvo then began what it called the "Volvoization" of the Samsung excavator line; making changes to the excavator's design and rebranding them with the Volvo trademark. In the course of the transition, Volvo eventually terminated many of the Samsung dealerships, including the dealer at issue, whose territory included a portion of Maine.

After extensive litigation, the Seventh Circuit court eventually remanded the dispute to the district court after concluding that there was a genuine factual dispute over whether Volvo had good cause to terminate the dealer.

The Maine dealer law provided that "[t]here is good cause when the manufacturer discontinues production or distribution of the franchise goods." Whether Volvo had good cause under this subsection of the definition was the subject of the court's earlier remand to the district court.

Rebranding as Discontinuation

In the district court, Volvo argued that the "franchise goods" under this provision, meant Samsung-brand construction equipment. Thus, it contended, its rebranding of the excavators under the Volvo name constituted a discontinuation of the franchise goods. The district court erred in ruling that the Seventh Circuit had implicitly rejected this argument in the earlier appeal and that Volvo was thus prohibited from raising it under the law of the case doctrine, according to the court. Rather, the Seventh Circuit had merely concluded that there were facts in dispute on whether Volvo had violated the statute.

Because the dealer law stated that good cause to terminate a franchise existed "when the manufacturer discontinues production or distribution of the franchise goods," the key to the analysis was to pinpoint which goods were the "franchise goods." That, in turn, depended on the statutory definition of "franchise" and the language of the dealer agreement.

Franchise as Trademark License

The statute's definition of "franchise" centered on the grant of a license to use the franchisor's trademark or trade name in the marketing of goods and services. Further, the Samsung dealership agreement appointed the dealer as "a nonexclusive dealer in the Territory for the sale of the Products" upon the terms and conditions set forth in the agreement. "The Products" were defined as "All Samsung Construction Equipment for sale in North America," “including their later improved or superseding models."

The main issue then became the meaning of the second quoted phrase, "including their later improved or superseding Models," the court reasoned. The Volvo excavators were a design descendent of the Samsung line, and from that fact the district court erred by concluding that the new Volvo-brand excavators could qualify as a "later improved or superseding model" of the Samsung-brand excavators.

The district court's reading did not account for the word "including." When a contractual text specified one thing "including" another, the ejusdem generis canon generally required that the latter item must be a kind of the former item. Thus, in the instant case, "the Products" covered by the agreement were Samsung-brand construction equipment "including their later improved or superseding models"—meaning later-improved or superseding models of Samsung-brand equipment, the court held. Accordingly, "franchise goods" for purposes of the dealer law included only Samsung branded equipment.

Because the statute defined "franchise" in terms of a trademark license and the agreement authorized the dealer to use only the Samsung trademark, discontinuation of the Samsung-brand line of excavators was a discontinuation of the "franchise goods" under the statute. The dealer never had a Volvo franchise and nothing in the statute protected it from termination of a franchise it never had, the court decided.

The March 4 decision is FMS, Inc. v. Volvo Construction Equipment North America, Inc., CCH Business Franchise Guide ¶14,092.

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