Regardless of labels like "dealer," "distributor" or "reseller," there are some fundamental issues that demand attention whenever a supply relationship is involuntarily terminated. Dickinson Wright works with suppliers in planning and implementing decisions to terminate. We also successfully defend these decisions through negotiation, litigation or alternative dispute resolution. We have litigated termination disputes under various state and federal laws and have appeared in state and federal courts and before arbitration panels throughout the United States to successfully defend termination decisions.
Based on our "battle experience" we offer the following ten areas of concern to bear in mind when contemplating an involuntary termination:
1. Keep termination planning communications
confidential.
Generally, all documents and communications, including
e-mails, within a company regarding the performance of a
distributor and the decision and plan to end the relationship are
subject to discovery. The only effective way to maintain
confidentiality is to work with attorneys who can give advice
within the protective shield of the attorney-client privilege.
2. Drill down to determine the actual reason for the
termination.
Even if written agreements provide for termination
"without cause," understanding the motivation and
rationale for the decision to terminate is critical. Nothing can
undermine your prospects in litigation more than a revelation
during the course of a lawsuit that the "real reason" for
the termination is other than the stated one. Evaluate whether the
termination decision is made pursuant to objective,
non-discriminatory criteria. Examine the adequacy of the
"paper trail" that confirms the termination decision.
Senior management personnel making the ultimate decision should be
interviewed, but perhaps more important are interviews of
mid-management and "area reps" who are the primary
contacts. Not only should corporate finance and contract
distributor relationship files be reviewed, but so should the files
and records of all relevant field personnel.
3. Carefully review the contract documents and
agreement.
Do you have the actual signed current agreement? Are
there any "updates" or letter amendments and have they
been signed or acknowledged? What's the standard for
termination? Is "good cause" required? Is notice required
and how much time? Is there a cure requirement? If the contract is
"at will," are there state law obligations of "good
faith and fair dealing" that apply? If the distributor
breached the agreement, what evidence exists to prove the breach?
Does the agreement contain provisions for choice of law or place of
litigation or arbitration and are they enforceable?
4. If there is no integrated express written contract,
what defines the relationship?
Is there a contract by virtue of express oral agreement
or communications showing a course of performance? Is there a basis
for implying contractual commitments arising out of company
policies, manuals or statements of procedure? Is it a purchase
order by purchase order relationship? If so, what terms and
conditions will determine the "battle of the forms"?
5. Despite the contract, what other laws may apply to
the termination?
Even express written contract provisions may be
overridden by other laws. Many states have "fair dealership
laws" that apply if there is a "community of
interest" which would invoke the policy of a state statute for
the protection of a dealer who resides in the state. Such statutes
frequently require and delineate what constitutes "good
cause" for termination and prescribe notice and a right to
cure. These statutes may also provide for easier injunctive relief
standards and the shifting of the burden of proof.
Some state statutes govern specific supply relationships, like motor vehicle, petroleum, farm implements, beer, wine, light industrial equipment, independent sales representatives, liquor, marine boats and motors, motorcycles, RVs, soft drinks, and swine and poultry marketing. Some states have "inventory buy back" laws requiring purchase of inventory. Others have case law which follows the so-called "Missouri Rule" that, as a matter of equity and restitution, the terminated distributor must be given a fair opportunity to recoup its development investment.
Lastly, check for applicable federal statutes, including the Petroleum Marketing Practices Act, 15 USC §2801, the Federal Automobile Dealer Day in Court Act, 15 USC §1221, the Sherman Antitrust Act, 15 USC §1, and FTC Franchise Rules 16, CFR §4-36 (1997).
6. What counterclaims or defenses may the distributor
assert?
Determine whether the distributor may respond with some
allegation of wrong doing or retaliation by the supplier. Ask about
complaints from other distributors or other channels of
distribution. For example, have there been complaints about the
distributor's violation of a minimum advertised price policy or
suggested retail price policy? Have there been complaints against
the distributor for selling outside its assigned area of primary
responsibility or unauthorized product or "grey goods"
sales overseas? Has the distributor made prior complaints,
including those about alleged lack of support, discrimination,
unfair discounts and pricing policies or billing mistakes? Was the
decision to terminate made in response to concerns of a
"dealer counsel" or another group of dealers which could
open the company to allegations of conspiratorial boycott? Also,
investigate the possible assertion of oral or partially integrated
promises or agreements and whether the distributor may claim a
right to cure or for a lesser sanction in lieu of termination.
7. Consider whether there will be any post-termination
issues that need to be addressed.
Does the dealer exhibit trade or service marks of the
supplier? Are there license agreements as to the limited authority
to do so and the requirement of cessation of activity and the
return of signage? Are there issues pertaining to the return of
proprietary information and trade secrets? Does the written
agreement provide for injunctive relief in the event of a refusal
to comply with post-termination obligations?
8. Will there be allegations of an "implied
franchise"?
Generally speaking, a franchise may be express or implied
in writing or orally. The elements usually include the right to
sell goods or services under a "marketing plan," that the
goods or services are "substantially associated" with a
trademark and the payment of a direct or indirect franchise fee.
Consequently, you should examine the facts to see if these elements
are arguably present under the elements of the specific state
Franchise Investment Act. Pay special attention to any fees paid by
the distributor for services or equipment and if such fees were
inflated.
9. Avoid the temptation to have a meeting with the
terminated distributor to explain where it went wrong.
Once the decision to terminate is made, there should be
nothing to talk about. "Heart to heart" discussions
frequently end up being the source of debate in litigation as to
whether or not they were educational attempts to
"dissuade" the terminated distributor from its
inappropriate activity or whether they were illegal threats and
coercion. Usually such discussions should be avoided. Further, any
potential discussion should be carefully contemplated with
knowledge that everything stated may be the subject of
post-termination repetition and embellishment.
10. Formulate a post-termination notice strategy.
Once the terminated distributor receives notice, it will
likely contact representatives of the company to determine
what's "really" going on. It may also use such
inquiries as an opportunity to engage in a "set up"
strategy of its own. It is not unheard of that recording devices
are employed in such communications. The client needs to have a set
procedure for handling any inquiries after the termination notice.
The notice should state exactly to whom any inquiries should be
directed. The company representative fielding these inquiries
should be well educated on what to expect and, like the author of
the termination letter, should be someone who can do a good job in
explaining the company's position if testimony becomes
necessary. Other persons who may receive contact from the
terminated distributor should be instructed that they should engage
in no substantive dialogue and that they should refer any inquiries
to the designated company representative. Usually, the best advice
is to respond that there is nothing to discuss beyond that which is
contained in the letter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.