Source: http://www.briggs.com/insights-publications-Franchise-Antitrust-Distribution-and-Dealer-Newsletter-Spring-2015.html
Timestamp: 2019-04-26 00:50:42+00:00

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A number of statutes across at least 31 states constrain a manufacturer’s ability to “substantially change the competitive circumstances” of the dealership by requiring good cause, and sometimes notice as well. These statutes range in scope from generalized dealer acts such as the Wisconsin Fair Dealership Act (“WFDL”) to special industry dealer statutes such as Agricultural Equipment Dealer Acts and Heavy and Utility Equipment Dealer Acts. The idea behind restricting substantial changes without good cause to a dealer’s competitive circumstances is a good one – these statutes can protect dealers from losing the benefits and value of the business they contracted to have through actions of manufacturers taken without good cause. There is a lack of clarity, and widespread deviation, in the language of these statutory prohibitions, however, which present real and substantial challenges for attorneys and business people attempting to comply with the statutes.
Understanding the statute begins with its specific statutory language. The most common wording found in these statutes is that a supplier or manufacturer may not “substantially change the competitive circumstances of the Dealer Agreement without cause.” At least thirty-three (33) statutes contain this or very similar language.2 Significantly, in most instances the statute restricts substantial change not of the dealership in isolation, but the competitive circumstances of the dealership agreement. This makes the terms of the dealership agreement itself crucial to determining what the competitive circumstances are that are substantially changed. Some statutes, however, do not mention the agreement.
“Substantial change in competitive circumstances” does not have one unambiguous, clear meaning. Only two statutes constraining this conduct, however, provide any definition of the phrase. The Washington Farm Implements, Machinery, Parts Act defines “change in competitive circumstances” to mean “to materially impact a specific dealer’s ability to compete with similarly situated dealers selling the same brand of equipment.” The definition in the Oregon Repurchase of Farm Implements Act is similar. Both statutory definitions make clear that the focus is on how the action affects intra-brand competition: competition with other dealers of the same brand.
Unfortunately, statutes in 29 other states provide no such guidance. Thus, there are two basic questions under most statutes in determining what a “substantial change in competitive circumstances” means. First, how significant must the change be to constitute “substantial change”? Second, what exactly is meant by the competitive circumstances of the dealer agreement?
The level of substantiality required can range from an undefined “substantial change” to something equaling de facto termination. Four state laws define “terminate” to include materially or substantially “change the competitive circumstances of a dealer contract.”3 Another statute, the Iowa Equipment Dealership Act, explicitly ties substantial change to termination by stating “a Supplier shall terminate a dealership agreement by…a substantial change in the competitive circumstances only upon good cause.”4 This type of statutory language suggests that “substantial change in competitive circumstances” is meant to equate to termination or cancellation. Most case law interpreting other statutes that do not explicitly tie substantial change to termination, however, reject this restrictive definition.
A series of Seventh Circuit decisions interpreting the WFDL uses a dichotomy of two standards depending upon whether or not the action is a nondiscriminatory system-wide changes. A case based upon a non-discriminatory action may proceed only if it is “the equivalent of constructive termination,”5 whereas Wisconsin federal courts apply a “substantially adverse” standard for the level of harm required for discriminatory actions.6 This dual standard of substantiality, based upon the nature of the conduct at issue, does not exist in other jurisdictions.
A second key question is what does “competitive circumstances of the dealership agreement” mean? In Washington, Oregon and Wisconsin, “a substantial change to competitive circumstances” requires an impact on intra-brand competition. There is nothing in the language of most of the other statutes that suggests that these statutes must be confined to issues of intra-brand competition. Thus, significant room for dispute exist on what “competitive circumstances’ are covered under most of these statutes.
A recurring question is whether a change in circumstances that is allowed by the terms of the dealer agreement can constitute a change in competitive circumstances governed by these statutes. The argument that the answer is no is based on the prohibition being of a substantial change of the competitive circumstances of the dealer agreement itself. If the dealership agreement allows a certain action, the argument is that the competitive circumstances of that dealership agreement cannot be changed by action consistent with it.
Given the lack of case law interpreting most of these statutes, substantial uncertainty exists whether actions allowed by the dealer agreement can violate restrictions on substantial change in competitive circumstances.
One additional complexity created by these statutes is that approximately half of them require advance notice of taking the action.11 This places the manufacturer and its counsel in an even more difficult position because of uncertainty of whether an action would qualify as a substantial change in competitive circumstances. If no notice is provided, and if it subsequently is determined that the manufacturer’s action was a substantial change, the failure to give notice itself constitutes an independent violation of the Act. On the other hand, if notice is provided, that could be construed as an admission that the contemplated action does indeed constitute a “substantial change in competitive circumstances” and, thus, the manufacturer would need good cause to take this action. The manufacturer is placed in a no win position.
Resolution of these questions create counseling nightmares for manufacturers and often requires weighing the various arguments in light of the specific language and context.
1 A fuller discussion of this topic by Jim Long can be found in the Franchise Law Journal, Volume 34, Number 3 (Winter 2015).
2 Ariz. Rev. Stat. Ann. § 44-6702(A)(3); Ark. Code Ann. § 4-72-310(b)(4); Cal. Bus & Prof. Code § 22902; Colo. Rev. Stat. § 35-38-103; Idaho Code Ann. § 28-24-103; Kan. Stat. Ann. § 16-1203; Ky. Rev. Stat. Ann § 365.831; La. Rev. Stat. Ann. § 51:482; Md. Code Ann., Com. Law § 19-103; Md. Code Ann., Com. Law § 19-301; Mich. Comp. Laws § 445.1457a; Minn. Stat. § 325E.0681; Minn. Stat. § 325E.062; Miss. Code Ann. § 75-77-2; Mo. Rev. Stat. § 407.840; Mont. Code. Ann § 30-11-802; Mont. Code. Ann § 30-11-902; Neb. Rev. Stat. § 87-704; Nev. Rev. Stat. § 597.1143; N.C. Gen. Stat. § 66-182; N.D. Cent. Code § 51-07-01.2; N.D. Cent. Code § 51-07-02.3; Ohio Rev. Code Ann. § 1353.06; Okla. Stat. 15, § 245A.3, 245(22); Or. Rev. Stat. § 646A.312; S.D. Codified Laws § 32-6B-45; Tenn. Code. Ann. § 47-25-1302; Tenn. Ann. Code. § 47-25-1903; Tex. Bus. & Com. Code Ann. § 57.002(21),.153,.202; Va. Code Ann. 59.1 § 352.3; Wash. Rev. Code § 19.98.120; Wis. Stat. § 135.03; Wyo. Stat. Ann. §§ 40-20-116, 40-20-117.
3 California Fair Practices of Equipment Manufacturers, Distributors, Wholesalers and Dealers Act, Cal. Bus. & Prof. Code § 22901(w); Oklahoma Manufacturers, Wholesalers and Distributors Act, Okla. Stat. 15, § 245A.3; Texas Fair Practices of Equipment Manufacturers, Distributors, Wholesalers, and Dealers Act, Tex. Bus. & Com. Code Ann. §57.002(21); Wyoming Fair Practices of Equipment Manufacturers, Distributors, Wholesalers and Dealers Act, Wyo. Stat. Ann. § 40-20-113(a)(xix).
4 Iowa Code § 322F.2.
5 Conrad’s Sentry, Inc. v. Supervalu, Inc., 357 F. Supp. 2d 1086, 1100 (W.D. Wis. 2005).
6 Remus, 794 F.2d at 1241.
7 632 N.W.2d 182 (Minn. 2001).
8 334 S.W.3d 351 (Tex. App. 2011).
9 Minn. Stat. § 325E.068.0684.
10 977 F. Supp. 1386 (D. Minn. 1997).
11 Ala. Code § 8-21A-4; Ariz. Rev. Stat. Ann. § 44-6703; Cal. Bus. & Prof. Code § 22903; Colo. Rev. Stat. § 35-38-104(1)(a); Idaho Code Ann. § 28-24-104; Idaho Code Ann. § 23-1328A; Iowa Code § 322F.2; Md. Code Ann., Com. Law § 19-103(b)(2) (if good cause is based on dealer’s failure to capture required market share); Mont. Code Ann. § 30-11-803; Mont. Code Ann. § 30-11-903; N.C. Gen. Stat. § 66-182(a); Or. Rev. Stat. § 646A.312(3)(a); Wash. Rev. Code § 19.98.130(1); Wis. Stat. § 135.04; Wyo. Stat. Ann. § 40-20-115(a), 116, 117.
West Virginia enacted several amendments to its Motor Vehicle Franchise Law (W.Va. Code §17A-6A-1 – 17A-6A-21; SB 453). The law was amended to cover utility terrain vehicles. The amendments also provide that the manufacturer must establish good cause for termination by a preponderance of the evidence. The amendments made a few changes to the repurchase obligations of the manufacturer, including requiring the repurchase of special tools, the repurchase of supplies and parts at the published list price and the repurchase of new motorcycles, ATVS and UTVs with no more than 50 miles. Under the new law, manufacturers are now prohibited from: (1) changing the capital structure or financial requirements without justification; (2) requiring a dealer to prospectively assent to wavier to trial by jury; (3) conditioning franchise or incentives on an agreement to renovate or improve facilities; (4) making unreasonable changes in franchise agreement without 60 day notice; (5) requiring a dealer to purchase goods/services from a specific vendor; and (6) requiring a dealer to adhere to a performance standard that is not uniformly applied to similarly situated dealers. The amendments will become effective on June 12, 2015.
Arkansas has amended its Motor Vehicle Commission Act (Arkansas Code §23-112-103; SB 917) to slightly change the definitions of Class 1 and Class 2 ATVs. Class 1 ATVs are now ATVs that are 50 inches or less in width and have a dry weight of 900 pounds or less, with 3 or more tires and a straddled seat. Class 2 ATVs are ATVs that have a width that exceeds 45 inches and a dry weight that exceeds 600 pounds, with 4 or more tires and a bench seat or one or more bucket seats. In addition, the act was amended to set forth various conditions and requirements relating to the utilization of service technicians. Provisions were also added to the act that prohibit a manufacturer from coercing a dealer to use a manufacturer vehicle purchase add-on product or service and that prohibit warranty reimbursement rates that are less than the retail rate. The bill became law without the governor’s signature on April 4, 2015.
Virginia amended its definition of motor vehicle under the chapter regulating car and truck licensing and franchise laws to include motorcycles, RVs and trailers (Virginia Code §46.2-1500; HB 2189). However, the amendment also provided that motorcycle, RV and trailer franchise laws would remain separate and the requirements under those acts would remain unchanged from the current law, but would be re-codified as new articles under the motor vehicle dealer chapter. The amendments are effective July 1, 2015.
A federal court in Wisconsin refused to dismiss a price discrimination claim under Sections 2(d) and 2(e) of the Robinson-Patman Act (the “Act”) based on the claim of a regional grocery store asserting discrimination between customers based on the package size of the products. Woodman’s Food Market, Inc. (“Woodman’s”), a regional grocery store chain with 15 stores in Wisconsin and Illinois, asserted in the Complaint that The Clorox Company (“Clorox”) violated the Act by offering “large pack” products only to “club” retailers such as Costco and Sam’s Club (direct competitors of Woodman’s), but refusing to offer those same products to smaller stores like Woodman’s. Woodman’s claim was not the typical price discrimination claim pursued under Section 2(a) of the Act, but rather was based on the sections of the Act which prohibit suppliers from discriminating in the providing of advertising allowances and other promotional payments and services to customers as set forth in Sections 2(d) and 2(e) of the Act. See 15 U.S.C. §§ 13(d) and (e). Traditionally, Woodman’s had been permitted to purchase from Clorox “large pack” products – products in larger packages that come at a reduced price from products that are sold in smaller packages. In October, Clorox announced that Woodman’s would be classified as a “general market retailer” and could no longer purchase “large pack” products. This meant that the larger retailers would be able to purchase the large pack products at a reduced price and therefore could resell those large pack items at a lower unit cost than Woodman’s. In addressing the motion to dismiss, Woodman’s argued that the large pack products constitute special packaging which qualifies as a promotional service under Section (e) of the Act and that Clorox violated the Act by refusing to allow Woodman’s to purchase those large pack products while allowing its competitors to do so. Clorox argued that the package size is not a service, but simply a product and that it cannot be held liable under the Act simply for refusing to sell a product to a particular retailer. In denying Clorox’s motion to dismiss, the court relied on two old administrative decisions by the FTC and some more recent guidelines issued by the FTC. See In the Matter of General Foods Corporation, 52 F.T.C. 798 (1956); In the matter of Luxor, Ltd., 31 F.T.C. 658 (1940); Guides for Advertising, Allowances & Other Merchandising Payments & Services, 79 Fed. Reg. 58245-01 (Sept. 29, 2014). In both of the administrative decisions, the FTC determined that offering different sized packaging of products to only some customers violated Section (e) of the Act. In the revised guidelines, the FTC stated that it considers “special packaging, or package sizes” to be promotional services as defined under Sections (d) and (e) of the Act. While the parties were unable to point to any case law that had addressed the issue, the court held that the FTC administrative decisions and guidelines provided sufficient support to allow Woodman’s to proceed with its claims under the Act. Woodman’s Food Market, Inc. v. The Clorox Company, No. 14-CV-734-slc, 2015 WL 420296 (W.D. Wisconsin, February 2, 2015).
Applying Missouri law, the U.S. District Court for the Eastern District of Missouri granted the franchisor’s motion to compel arbitration and rejected arguments by the franchisees that arbitration agreement was unenforceable as unconscionable. The Eighth Circuit, reviewing de novo, affirmed the decision. The franchisees (plaintiffs) were a group of current and former franchisees of Stratus Franchising, LLC (“Stratus”) that had sued Stratus as part of a potential class action suit alleging various RICO violations. Stratus is in the commercial cleaning business. Numerous other individuals and entities associated with the Stratus franchise system were also named as defendants. The franchisees’ primary argument was that the arbitration provision was unconscionable, and therefore unenforceable, because the prohibitively high costs of individual arbitration proceedings would prevent them from pursuing their claims. The franchisees specifically pointed to the requirement to prepay filing and other fees associated with the arbitration and the requirement to reimburse Stratus if Stratus would prevail in the arbitration. The Eighth Circuit noted that the burden was on the franchisees to present specific evidence of the costs/expenses involved and their own financial inability to pay those fees/costs. The court concluded that the franchisees had failed to provide specific evidence of the likely fees; had failed to provide any affidavits or declarations from any individual franchisee asserting an inability to pay; and noted that the arbitration provision specifically gave the arbitrator the power within his/her discretion to allocate costs and expenses between the parties. As a result, the Eighth Circuit affirmed the decision of the district court and concluded that the franchisees had “failed to carry their burden to show that the costs of individual arbitration ‘are so high so as to make access to the forum impracticable’ or to prevent them from effectively vindicating their rights in the arbitral forum.” Torres v. Simpatico, 781 F.3d 963,970 (8th Cir. 2015).
Following the trend of recent decisions in various courts, the U.S. District Court in New Jersey held that the Minnesota Franchise Act (“MFA”) does not guaranty that a franchisee located in Minnesota is entitled to have a dispute with its franchisor resolved in a Minnesota court. In this case, the plaintiff franchisor, Ramada Worldwide Inc. (“Ramada”) filed a lawsuit in federal court in New Jersey asserting that the defendant had breached a licenses agreement for the operation of a Ramada Inn located in Wisconsin. The defendant franchisee, SB Hotel Management, Inc. (“SB Hotel”) was a Minnesota corporation with a principal place of business in Minnesota. The franchise agreement contained a clause providing that SB Hotel had consented to and had waived any objection to non-exclusive jurisdiction in New Jersey as to any dispute between the parties. The franchise agreement also contained a Minnesota Addendum, incorporating the MFA. SB Hotel moved to dismiss the case for improper venue or to transfer the case to Minnesota pursuant to 28 U.S.C. §1404(a). SB Hotel argued that Minn. Stat. §80C.21 and Minnesota Rule 2860.440(j) required that the dispute be resolved in Minnesota. The court, relying on the clear and unambiguously language of those statutory sections, held that those sections simply provide that a franchisee cannot be prevented from seeking redress in a Minnesota court and do not guaranty resolution of all disputes in Minnesota. The parties consented to venue and jurisdiction in New Jersey pursuant to a contractual provision and that provision was valid and enforceable. Thus, under the court’s ruling while the franchisee could have properly initiated litigation in Minnesota and Ramada would have been required to participate in that lawsuit in Minnesota, the franchisee cannot object to venue in New Jersey in connection with a lawsuit filed by the franchisor based on the language of the MFA. The court further determined that SB Hotel failed to establish that the §1404(a) factors weighed in favor of transferring the case to Minnesota. As such, the franchisee’s motions were denied and the case was ordered to proceed in New Jersey. Ramada Worldwide Inc. v. SB Hotel Management Inc., No. 2:14-02186 (WJM), 2015 WL 758536 (D.N.J. Feb. 23, 2015).
A state court in Pennsylvania overturned the decision of the State Board of Vehicle Manufacturers, Dealers and Salespersons (“Board”) that had disallowed Arctic Cat’s appointment of a new dealer to sell a variety of ATVs. The disputed initiated between two dealers. Neiman’s Garage & Equipment (“Neiman”) has been an authorized dealer of Arctic Cat’s ATVs and other products since 1983. Kennedy RV & Powersports, Inc. (“Kennedy”) is located 9 miles from Neiman and is authorized to sell Arctic Cat snowmobiles, but was not currently authorized to sell Arctic Cat ATVs. Kennedy had previously sold Arctic Cat ATVs but had surrendered that right in 2006 when Arctic Cat appointed Bass Pro Shops as an authorized Arctic Cat ATV dealer. Bass Pro Shops is a larger dealer with a wider range of products to offer, including Arctic Cat ATVs. In January 2014, Arctic Cat announced that it intended to offer a full line of products through both dealers, Kennedy and Neiman, including all ATVs. This included two specific ATVs, the Prowler and the Wildcat, that had never been sold by either dealer. Neiman objected to this decision and filed a protest with the Board. The Board rejected several of Neiman’s claims finding that Neiman did not have an exclusive sales right, there was no evidence of coercion by Arctic Cat and there was no evidence of prejudice from the alleged defective notice. However, the Board did grant Neiman’s protest as to one claim, holding that Neiman had established good cause for not allowing the entry of a new vehicle dealer – citing to Section 27 (a), (c) of the Board of Vehicles Act. The Board held that the relevant market area could not support two dealers of Arctic Cat products and adding Kennedy as a dealer would create long term harm to competition. It held that the dealers in that area would engage in a price war and that either Neiman or Kennedy, or both, would fail and withdraw from the market. The Board concluded that in the long run, the likely “winner” of the scenario would be Bass Pro Shops, a dealer with more capital and a broader range of products to withstand a price war. The Board also noted that Arctic Cat would ultimately likely benefit from such a scenario, and implied that Arctic Cat may be setting it up to eliminate the two dealers and create Bass Pro Shops as the exclusive dealer in south central Pennsylvania. The consuming public, in the Board’s view, would not be the ultimate beneficiary of the price war. On review, the court noted that the burden of proof is on the protesting dealer to establish “good cause” for not permitting the appointment of a new dealer. The court held that the evidence did not support the Board’s “speculation” that a price war would likely occur between the two dealers and that one or both would be ruined or withdraw from the market as a result of the war. The court also held that there was no evidence to support the Board’s speculative suggestion that Arctic Cat had an ulterior motive to cause both Neiman and Kennedy to fail and leave Bass Pro Shops as the exclusive dealer in the area. The court stated that such a conspiracy theory “is not even logical” and is not “a plausible business strategy. Finding that Neiman had not satisfied its burden of establishing good cause to not allow the new dealer, the court reversed the Board’s order, thereby permitting Arctic Cat to add Kennedy as a new dealer for Arctic Cat ATVs. Arctic Cat Sales Inc. v. State Board of Vehicle Manufacturers, Dealers and Salespersons, No. 1151 C.D. 2014, 2015 WL 733245 (Pa. Commw. Ct. Feb. 23, 2015).
The Minnesota Supreme Court recently held that good faith reliance on the advice of outside counsel, if that legal advice is obtained through a reasonable inquiry, constitutes a valid defense to a tortious interference with contract claim. In the case, Plaintiff Sysdyne Corporation (“Sysdyne”) sued Defendant Xigent Solutions, LLC (“Xigent”) for hiring co-defendant Brian Rousslang (“Roussland”) when Rousslang had previously entered into a non-compete agreement with Sysdyne. Xigent based its defense upon it having obtained a legal opinion that the non-compete agreement was unenforceable and acted in reliance on that opinion. It asserted that this fact raised a justification defense to the tortious interference claim. Xigent did not argue that the advice was correct, but that it had a right to rely on it in hiring Rousslang. The Supreme Court held that “the justification defense to tortious interference with contract may encompass reasonable reliance on advice of counsel … that Xigent met its burden of proving the justification defense given the evidence supporting Xigent’s reasonable inquiry with outside counsel and honest reliance on counsel’s advice that the contract was not enforceable.” The court held that it did not matter that the advice was oral, and not in a formal opinion letter, so long as evidence supported the existence of these two elements. Thus, if a defendant takes action in good faith based upon a reasonable inquiry with outside counsel in which the relevant facts as known are fully disclosed, then the defendant can assert a justification defense to a tortious interference with contract claim. Sysdyne Corporation v. Rousslang, 860 NW.2d 347 (Minn. 2015).
Plaintiff Sleepy’s LLC (“Sleepy’s”) was a retailer/dealer for Defendant Select Comfort. Sleepy’s initiated a lawsuit in August 2007 asserting claims for breach of contract, fraudulent inducement, slander, breach of implied covenant of good faith and fair dealing, unfair competition and violation of the Lanham Act. After a lengthy trial, the district court granted Select Comfort’s motion for judgment on partial findings as to all claims. On appeal, the Second Circuit held that the district court erred in interpreting the provisions of the dealer agreement in dismissing some of the claims. Sleepy’s had asserted that Select Comfort had breached the non-disparagement provision of the dealer agreement. The district court ruled that there was no competent evidence of disparagement by Select Comfort while the agreement was in effect. The Second Circuit ruled that the district court erred in treating “expiration” and “termination” as interchangeable terms in the dealer agreement. According to the Second Circuit, based on the language of the dealer agreement, the parties clearly had intended the two terms to have different meaning. While the language of the dealer agreement expressly provided that an extension of the agreement after termination was prohibited absent a written waiver executed by both parties, the same was not true following expiration of the agreement. The court held that the dealer agreement could be extended by the conduct of the party, even without a written waiver, following the expiration of the agreement. The court noted that Minnesota law, which governed the dealer agreement, permits the extension of an agreement after expiration based on the conduct of the parties, and there were no provisions in the dealer agreement that expressly prohibited such an extension. As such, the court remanded the case to the district court to rule on Sleepy’s claims of breach of contract based on disparagement. Based on this same logic, the Second Circuit also vacated the district court’s grant of judgment as to the claims for unfair competition and breach of the implied covenant of good faith and fair dealing. Those claims were likewise remanded to the district court for further considerations based on the determination that the dealer agreement did not prohibit extension of the dealer agreement based on the conduct of the parties following expiration. Sleepy’s LLC v. Select Comfort Wholesale Corporation, 779 F.3d 191 (2nd Cir. 2015).

References: § 44
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 § 135
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 § 245
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 § 40
 § 322
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