Friday, July 28, 2006, 3:39 PM

Two New Cases Under Wisconsin Fair Dealership Law

The Wisconsin Fair Dealership Law (WFDL) according to its terms, "protects dealers against unfair treatment by grantors, who inherently have superior economic power and superior bargaining power in the negotiation of dealerships." The statute applies only to dealership arrangements that create a "community of interest" between the dealer and the grantor. Although there are many factors which may be considered by the courts when deciding whether a "community of interest" exists, in Home Protective Services, Inc. v. ADT Security Services, Inc., 438 F.3d 716 (7th Cir. 2006), the Seventh Circuit condensed the analysis down to asking whether "the grantor has the alleged dealer 'over a barrel' - that is whether it has such great economic power over the dealer that the dealer will be unable to negotiate with the grantor or comparison-shop with other grantors." To read more about this decision see the May 26, 2006 posting: Seventh Circuit Rules on "Community of Interests" Under Wisconsin Fair Dealership Law.

Recently, more than one dealer filing a claim under the WFDL has had some difficulty proving that the grantor had them "over a barrel." In Bearing Distributors, Inc. v. Rockwell Automation, Inc., No. 1:06CV831, 2006 WL 1174379, slip op. (N.D. Ohio 2006), a federal judge in Cleveland held that no "community of interest" existed where purchases of automotive parts by the dealer, from the grantor, accounted for only 2.4% of the dealer's overall purchases. The dealer failed to prove any sunk costs caused by the relationship in the form of "financial investment in inventory, facilities, or good will." Based on these factors the court found no threat to the dealer's economic health existed as a result of the termination of the dealership agreement by the grantor. Absent a finding of "community of interest" the court found that no dealership arrangement existed which would give rise to a claim under the WFDL.

If a dealership relationship protected by the WFDL does exist, the grantor may not terminate or materially change the agreement without "good cause." What constitutes "good cause" was at issue in Brown Dog, Inc. v. Quizno's Franchise Co. LLC, No. 04-C-18-X, 2005 WL 3555425 (W.D. Wis. 2005), where a franchisee sued Quizno's after it unilaterally terminated the franchise agreement. Under the WFDL, "good cause" exists if a franchise has not substantially complied with "the essential and reasonable requirements" imposed by the franchisor. The court found that the franchisee's failure to meet six straight development quotas for opening new franchises was sufficient to give Quizno's "good cause" to terminate the franchise agreement. The WFDL requires that the franchisee be in non-compliance for 90 days followed by 60 days notice of the grantor's intent before the grantor may end the relationship. The court essentially interpreted the WFDL as providing a five month safeharbor for non-compliance, after which, non-compliance of "an extent and nature that there has been no practical fulfillment of the terms of the agreement" constituted "good cause" to terminate the agreement. The court also determined that it was not unlawfully discriminatory for the franchisor to evaluate each franchisee's situation differently when deciding whether to terminate the relationship.

These recent decisions are favorable to grantors of dealership rights by requiring dealers to prove that the grantor has them over a barrel, and allowing grantors to terminate those relationships which are unproductive for the grantor. Where the dealer has been unable to substantially comply with the terms of the agreement for more than five months, with proper notice, the WFDL will not prevent the grantor from ending the relationship.


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