WHEN IS A DISTRIBUTOR PROTECTED FROM TERMINATION AS A "FRANCHISEE"?

Introduction

Most manufacturers would be surprised to learn that a typical independent distributor, who buys and resells the manufacturer's products, may be protected from termination under state law as a franchisee.

For example, a federal appeals court in Chicago affirmed an award of $1.5 million in damages to a forklift dealer, who was a franchisee under Illinois law, and was terminated without "good cause" as defined in the statute. (To-Am Equipment Co. v. Mitsubishi Caterpillar Forklift America, Inc., No. 97-1395). The manufacturer, seeking to consolidate distribution, terminated the dealer's written contract in strict compliance with the contract terms. For over 13 years To-Am had served as Mitsubishi's exclusive dealer, selling and servicing new forklifts in defined Illinois and Indiana counties. To-Am also agreed to represent Mitsubishi exclusively. At trial, Mitsubishi conceded that its termination of To-Am was without good cause.

The appeals court held that To-Am was a franchisee under the Illinois franchise act because:

• To-Am paid an indirect franchise fee when, over an 8-year period, To-Am purchased parts and service manuals from Mitsubishi for a total cost of $1,600.

• Mitsubishi's suggestions to the dealer on signage, advertising, product demonstrations and trade show exhibits constituted a franchise marketing plan under the statute, even though To-Am was not required to follow this advice.

• The operation of To-Am's business was substantially associated with Mitsubishi's trademark.

The court noted that terminations of wholesaler-distributor franchisees are not impossible. However, the termination decision should be the subject of negotiation unless the manufacturer can prove that good cause exists.

State Franchise Laws

Like Illinois, a number of other states have enacted franchise laws which protect the franchisee from termination or non-renewal by the franchisor except for "good cause." Generally, advance notice is required and the franchisee must be given a chance to remedy cited deficiencies. As the To-Am case illustrates, failure to follow the law may result in a lawsuit and a significant damage award in favor of the terminated party, plus attorneys' fees and court costs.

Generally, a franchise is defined as an agreement, express or implied, written or oral, whereby one is granted the right to engage in the business of selling or distributing goods or services under a marketing plan or system prescribed or suggested in substantial part by the franchisor; the franchisee is required to pay, directly or indirectly, a franchise fee of a stated amount; and the operation of the franchisee's business is substantially associated with the franchisor's trademark, logotype, advertising or other commercial symbol designating the franchisor.

Whether or not the parties denote the relationship as a franchise is immaterial. Additionally, a contract that expressly attempts to void or waive rights under state franchise laws generally is ineffective.

Conclusion

There are differences in the various laws and regulations defining "franchise" so that a relationship may be a franchise under the laws of one state but not under that of another. In addition, several different state laws may apply to a wholesaler-distributor with multi-state operations. Therefore, it is necessary to determine which laws are applicable and review those statutes and court cases.

Before changing or ending a business relationship the parties would be well advised to review all legal implications, including exposure under federal antitrust law and applicable state laws. Always check state statutes for the current status. The cost savings could well be substantial.

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