Tuesday, April 18, 2006, 1:54 PM

Court Narrowly Interprets "Good Cause" Provision Of State Franchise Statute

Authored by: Jason Hicks
In Volvo Trademark Holding v. AIS Construction Equipment Corp, -- F. Supp. 2d --, 2006 WL 435973 (February 16, 2006 W.D.N.C.), the Western District of North Carolina addressed the scope and constitutionality of the "good cause" termination provisions of the Arkansas Franchise Practices Act ("AFPA"). Volvo argued that its stated cause for termination -- "Volvoization" (re-engineering and rebranding its brands for sale under the single VOLVO trademark) and "dealer rationalization" (integrating overlapping channels of distribution by utilizing dealers willing and able to offer the entire Volvo line) -- constituted good cause under the AFPA. Volvo's problem, however, was that the AFPA listed eight specific circumstances constituting good cause and "Volvoization" and "dealer rationalization" were not among them. Nevertheless, Volvo argued that "good cause" must include such business decisions and market withdrawls because, if "good cause" was limited to the eight circumstances in the statute, the statute would violate the Dormant Commerce Clause.

The court, however, held that "good cause" under the AFPA is limited to the eight occurrences specifically enumerated in the statute and did not extend to Volvo's stated reasons for termination. Next, the court found that the AFPA's "good cause" provisions, as interpreted by the court, was not per se invalid and did not create an excessive burden on interstate commerce under the Dormant Commerce Clause.

In addition to highlighting the pitfalls of state franchising laws, this case shows the unpredictability of the cannon of constitutional avoidance. Although some courts (including the Supreme Court, see here) have aggressively used this cannon to interpret statutes to avoid constitutional doubts, the Western District of North Carolina interpreted the AFPA without aid of the cannon and addressed the constitutional argument head-on.

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