Opinion ID: 492085
Heading Depth: 1
Heading Rank: 2

Heading: the franchise claim

Text: 7 Plaintiffs allege that the distributorship agreement established a franchise, and that defendant violated the South Dakota Franchise Act by failing to register the purported franchise. S.D. Codified Laws Ann. Sec. 37-5A-6 (1986). Consequently, plaintiffs seek treble damages and attorney's fees as provided by the Act. Secs. 37-5A-83 to -85. Plaintiffs also allege that Doughboy owed Cambee's a fiduciary duty arising from the franchise relationship, and that Doughboy breached that duty. 8 A franchise exists under South Dakota law when the following elements are present: (1) a grant to the franchisee of the right to use the trade name, commercial symbol or advertising of the franchisor; (2) a community of interest in marketing the goods or services; and (3) a franchise fee, which the franchisee is required to pay, directly or indirectly.... Sec. 37-5A-1 (1986). Each of these elements must be present before a court may find that the parties have entered into a franchise agreement. See OT Industries v. OT-Tehdas Oy Santasalo-Sohlberg AB, 346 N.W.2d 162, 166 (Minn.Ct.App.1984) (construing a substantially similar provision of the Minnesota Franchise Act, Minn.Stat. Sec. 80C.01 subd. 4(a) (1982)). The presence of the third element, the payment of a franchise fee, is at issue here. 9 The South Dakota Franchise Act broadly defines a franchise fee as any fee or charge ... for the right to enter into a business or to continue a business under a franchise agreement.... S.D. Codified Laws Sec. 37-5A-3 (1986). The Act narrows this definition somewhat by excluding [t]he purchase of goods or agreement to purchase goods at a bona fide wholesale price. Sec. 37-5A-4(1). Hinks does not deny that the price he paid for Doughboy pools was a bona fide wholesale price; rather he urges that a franchise fee may be found in the requirement that he make a minimum purchase of a certain quantity of Doughboy's pools or expend a minimum dollar amount. 3 10 The Supreme Court of South Dakota has not directly confronted the issue whether a minimum purchase requirement may constitute a franchise fee. 4 Plaintiffs do not argue that a minimum purchase provision in a franchise agreement is always a franchise fee. Instead, they urge that we apply the principles developed by the Minnesota Court of Appeals, which has stated that a minimum volume requirement, even at bona fide factory prices, may in itself be a franchise fee if the franchisee is required to purchase amounts or items that it otherwise would not. OT Industries, 346 N.W.2d at 166. The court also analyzed the purchase requirement in terms of whether it served a valid business purpose. Id. In a subsequent decision the Minnesota Court of Appeals stated that its holding in OT Industries turned on whether the required purchase correspond[s] to the reasonable requirements of the business. American Parts System, Inc. v. T & T Automotive, Inc., 358 N.W.2d 674, 676 (Minn.Ct.App.1984). 5 11 The district court did not choose to follow the Minnesota rule in interpreting the law of South Dakota. When, as here, the state's highest court has not decided a question, the trial judge's interpretation is entitled to substantial deference unless it is 'fundamentally deficient in analysis or otherwise lacking in reasoned authority.'  Dabney v. Montgomery Ward & Co., 761 F.2d 494, 499 (8th Cir.), cert. denied, 474 U.S. 904, 106 S.Ct. 233, 88 L.Ed.2d 232 (1985) (quoting Kansas City Power & Light v. Burlington Northern R.R., 707 F.2d 1002, 1003 (8th Cir.1983)). 12 Section 37-5A-1(3) of the South Dakota Franchise Act includes indirect payments in its definition of a franchise fee. Thus, we are called upon to determine whether a minimum order requirement may fall within that definition. An indirect payment might be found, for example, in a markup on the goods or services a franchisee is required to purchase, or in a price discount on goods or services the franchisee is required to provide the franchisor. See Communications Maintenance, Inc., 761 F.2d at 1206 n. 3 (discussing Illinois franchise regulations); Fern, The Overbroad Scope of Franchise Regulation: A Definitional Dilemma, 34 Bus.Law. 1387, 1392 (1979) (discussing various types of payments which might constitute a franchise fee). Nothing in this case, however, indicates that Cambee's paid a hidden or indirect fee for the right to sell Doughboy pools, or that the payments made were for anything other than merchandise contemplated by the contract. See Carlucci v. Owens-Corning Fiberglass Corp., 646 F.Supp. 1486, 1495 (E.D.N.Y.1986); Laurence J. Gordon, Inc. v. Brandt, Inc., 554 F.Supp. 1144, 1160 (W.D.Wash.1983). Nor does Cambee's allege that the required quantities were so unreasonably large that they could not be resold within a reasonable time. Marathon Petroleum Co. v. LoBosco, 623 F.Supp. 129, 134 (N.D.Ill.1985) (construing Illinois franchise regulations). 13 Moreover, the plain language of the South Dakota Franchise Act provides that the purchase of or agreement to purchase goods at a bona fide wholesale price shall not be considered the payment of a franchise fee.... S.D.Codified Laws Sec. 37-5A-4(1) (emphasis added). The statute provides for no exception based on the quantity of merchandise a distributor is required to purchase. Thus, the plain language of the Act supports the district court's interpretation, and we cannot say that its rejection of a rule established by the intermediate court of another jurisdiction 6 resulted from a fundamental deficiency in analysis or was lacking in reasoned authority. Without the payment of a franchise fee, the South Dakota statute provides no protection. See Bitronics Sales Co. v. Microsemiconductor Corp., 610 F.Supp. 550, 555 (D.Minn.1985). We therefore affirm the grant of summary judgment on Cambee's franchise claim. 14 Nor did the district court err in dismissing the claim for breach of a fiduciary duty arising from the franchise relationship. While no such relationship existed here, we affirm on an additional ground as well. Cambee's relies on Arnott v. American Oil Co., 609 F.2d 873, 882 (8th Cir.1979), cert. denied, 446 U.S. 918, 100 S.Ct. 1852, 64 L.Ed.2d 272 (1980), for the proposition that the parties to a franchise act as fiduciaries. We have construed the holding in Arnott differently, as resting on the implied covenant of good faith and fair dealing, and have held that a franchise or other ordinary business relationship does not alone create fiduciary duties. Bain v. Champlin Petroleum Co., 692 F.2d 43, 47-48 (8th Cir.1982); see W.K.T. Distributing Co. v. Sharp Electronics Corp., 746 F.2d 1333, 1336-37 (8th Cir.1984). Consequently, even had Cambee's established the existence of a franchise we would affirm on the ground that Doughboy had no fiduciary obligations to the plaintiffs.III. THE CONTRACT TERMINATION CLAIM 15 The district court, as indicated, found that the parties had formed a contract by which plaintiff became a distributor or dealer of Doughboy products in the greater Sioux Falls area. But the court found further that defendant had not breached the contract as it was, in the court's view, terminable at will by either party, and that Doughboy therefore was under no continuing duty to supply merchandise to the plaintiffs. Plaintiffs argue that Doughboy was obligated to give Cambee's a reasonable time to recoup its investment in the distributorship. 16 In general, a contract providing for no fixed term is terminable at will by either party. Martin v. Equitable Life Assurance Society of the United States, 553 F.2d 573, 574 (8th Cir.1977) (decided under South Dakota law). However, a panel of this court has held recently that, under South Dakota law, a continual, binding distributorship agreement may be inferred from the conduct of the parties, and that the duration of the contract is a question of fact for the jury. Famous Brands, Inc. v. David Sherman Corp., 814 F.2d 517, 520-21 & n. 6 (8th Cir.1987). We noted that, at the very least, 7 [the distributor] would be entitled to rely on the supply agreement, if the jury finds that one existed, for a reasonable time so as to recoup its investment in the promotion and sale of the [manufacturer's] product. Id. at 521 n. 6. 17 Although Famous Brands is of importance in deciding Cambee's claim, the two cases arguably are distinguishable inasmuch as, in Famous Brands, the defendant manufacturer apparently did not argue that the contract was terminable at will. Instead, the manufacturer argued that the agreement was too indefinite to be enforceable and that it held no mutuality of obligation. Thus, Famous Brands may not directly contradict the district court's conclusion that the contract between Doughboy and Cambee's was terminable at will. For instance, we do not read Famous Brands to hold that the jury is permitted to infer from the mere conduct of a business relationship that any particular durational term was intended by the parties. Specific conduct or other facts or circumstances providing a sound basis for overriding the normal rule that a contract providing for no duration is terminable at will must be present before the jury may be permitted to infer a contrary intent by the parties. See McGinnis Piano & Organ Co. v. Yamaha International Corp., 480 F.2d 474, 479 (8th Cir.1973) (construing Minnesota law, rejecting instructions permitting the jury to find that the agreement could continue for as long as McGinnis performed satisfactorily.). For example, in Arnott, 609 F.2d at 884, we held that the obligation of good faith and fair dealing (a topic to be discussed elsewhere in this opinion) prevented the defendant from terminating a franchise agreement without cause. 8 The defendant in Arnott was shown to have made material misrepresentations and to have acted in a manner that defeated the distributor's long term expectations based on the defendant's future profit projections and practice of long-term renewals. Id. at 880, 887. Aside from its recoupment claim, Cambee's raises no similar allegation of conduct by the parties that would permit a jury to conclude that their agreement was anything other than terminable at will. The question, then, is what expectation for a continuing relationship with Doughboy could Cambee's legitimately hold? 9 18 We have previously confronted the problem of distributorship agreements containing no fixed termination date. In cases arising under Minnesota law, we held that the manufacturers breached their contracts by terminating dealerships without just cause before the dealers had a reasonable time to recoup their expenses. W.K.T. Distributing Co., 746 F.2d at 1335-36; Ag-Chem Equipment Co., 480 F.2d at 486-88; Clausen & Sons, Inc. v. Theo. Hamm Brewing Co., 395 F.2d 388, 390 (8th Cir.1968) (cited with approval in Famous Brands, 814 F.2d at 521 n. 6). In Clausen 10 we held that the plaintiff's right of recoupment arose from an implied contract, based on the requirement that the distributor was required to make certain investments in the business by the manufacturer. Clausen, 395 F.2d at 391. However, other recoupment cases have not turned on express requirements by the manufacturer, but require only that the agent be  'induced by his appointment....'  Lockewill, 547 F.2d at 1029 (quoting Beebe v. Columbia Axle Co., 233 Mo.App. 212, 218, 117 S.W.2d 624, 629 (1938)). If the agent pays for his employment, as where he invests in the business or is put to considerable expense, it may be found that the parties had contracted for a reasonable time, if no time was specified. W. Seavey, Handbook of the Law of Agency Sec. 170, at 272 (1964) (footnotes omitted). See Restatement of the Law of Agency (Second) Sec. 442, comment c. The South Dakota statutes concerning agency relationships are consistent with this rule. S.D.Codified Laws Secs. 59-7-1 and -2 (1978) provide for revocation of an agent's authority only when the agency is not coupled with an interest. 11 19 A reasonable time has generally been construed to be that necessary for the dealer to recoup his investment of time, labor and money. See, e.g., Berryfast, Inc., 714 F.2d at 829; Lockewill, 547 F.2d at 1029 (recoupment under Missouri law allowed on quantum meruit basis); Ag-Chem Equipment Co., 480 F.2d at 486-87; Clausen, 395 F.2d at 391; Allied Equipment Co. v. Weber Engineered Products, Inc., 237 F.2d 879, 882 (4th Cir.1956). In Famous Brands, 814 F.2d at 521 n. 6, the court expressly approved of the recoupment doctrine under South Dakota law. Thus, we hold that a distributor is entitled to a reasonable period to recoup its investment, during which the agreement may not be terminated without good cause. W.K.T. Distributing Co., 746 F.2d at 1335-36; Ag-Chem Equipment Co., 480 F.2d at 487. After the reasonable recoupment period has expired, the distributorship agreement becomes terminable at will upon reasonable notice. 20 Doughboy argues that Cambee's amended complaint alleges only that Doughboy breached its contract by allowing other dealers to sell its products in the Sioux Falls area, and that Cambee's raises its recoupment theory for the first time on appeal. The record reveals, however, that the complaint states a cause of action for wrongful termination, and that the Plaintiffs' Statement of Disputed Facts filed with the district court asserts as in dispute [w]hether the business relationship between the Plaintiffs and Doughboy was ... terminated without adequate notice to Cambee's and in violation of the agreement ... before the plaintiffs were allowed a reasonable time to recover their investment. 21 Doughboy further argues that Cambee's offered no affidavits in opposing the summary judgment motion in support of its recoupment claim. This argument misapprehends the burdens of proof the parties to a summary judgment proceeding must meet. The burden of establishing the non-existence of any genuine issue of material fact is on the moving party. Fed.R.Civ.P. 56(c); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Foster v. Johns-Manville Sales Corp., 787 F.2d 390, 391 (8th Cir.1986). Nothing in the affidavits submitted by Doughboy purports to negate the existence of facts supporting Cambee's claimed investment, and it can hardly be assumed that Hinks invested no time or labor in promoting Doughboy's products. Lockewill, 547 F.2d at 1029. Therefore defendant did not meet its initial burden with respect to the recoupment issue, and summary judgment must be denied notwithstanding the absence of opposing affidavits or other evidence. Adickes, 398 U.S. at 159-60, 90 S.Ct. at 1609; Foster, 787 F.2d at 393; Economy Housing Co. v. Continental Forest Products, Inc., 757 F.2d 200, 201-02 n. 3 (8th Cir.1985). 22 In summary, the district court erred in reasoning that Doughboy was entitled to summary judgment on the contract termination claim, and we reverse on that count. 23