Pennsylvania Statute Dealer Termination Good Cause by klu18158

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									                                                 FRANCHISE
SM
                                                 LAW JOURNAL
                                                  A M E R I C A N                  B A R            A S S O C I A T I O N
QUARTERLY JOURNAL OF THE FORUM ON FRANCHISING                                                       VOLUME 21, NUMBER 4 • SPRING 2002




         Revisionist History? Kicking the Tires of
      J. Michael Dady’s Market Withdrawal Cases
                                                            MICHAEL J. LOCKERBY

   n George Orwell’s 1984, the                                           nonrenewal is not limited to performance deficiencies on the

I  Ministry of Truth employed
   Winston Smith to “rectify” his-
tory. In the fall 2001 Franchise
                                                                         part of the franchisee or dealer.
                                                                            Last but not least, Mr. Dady also ignores the federal trade-
                                                                         mark statute, the Lanham Act, which expressly preempts
Law Journal, J. Michael Dady                                             inconsistent state law. Under certain circumstances, dis-
presents what purports to be a his-                                      cussed below, the potential causes of action that Mr. Dady
torical review of past market                                            claims would be available to Oldsmobile dealers and other
withdrawal cases (“The Olds                                              plaintiffs complaining about market withdrawals would run
Market Withdrawal: Is What’s                                             afoul of the Lanham Act.
Past, Prologue?”). Not surprising-
ly, the conclusion at the end of the                                     Cream Puffs or Lemons?
history lesson is encouraging—             Michael J. Lockerby           Based on his review of “applicable case law,” Mr. Dady raises
for Mr. Dady’s Oldsmobile dealer                                         the specter of punitive damage claims for market withdrawal:
clients: “Oldsmobile dealers that are not able to negotiate a              The potential for a market withdrawal fraud claim is particularly sig-
fair transition package with General Motors have available to              nificant because, in addition to providing dealers with the opportuni-
them a rather compelling array of potential causes of action.”             ty to recover compensatory damages, it allows victims of the fraud
The support for this conclusion, according to Mr. Dady, can                to recover punitive damages to punish the wrongdoer and to deter it
be found in “applicable case law” and “interviews with                     and others from engaging in this type of conduct in the future.
motor vehicle market historians.” (As it turns out, the “histo-             Franchisors may face “the potential for” punitive dam-
rians” upon whom Mr. Dady relies are representatives of the              ages. However, in none of the cases that Mr. Dady cites did
National Automobile Dealers Association.1) Whatever his                  the franchisee actually recover them.
sources, Mr. Dady has, with all due respect, “rectified” the                In both reported decisions addressing the Edsel market
history of past market withdrawal cases in a way that would              withdrawal, Ford obtained summary judgment.2 In the DeSo-
make Big Brother proud. The causes of action available to                to market withdrawal cases, the U.S. Court of Appeals for the
franchisees and dealers whose products have been with-                   Third3 and Ninth Circuits4 each held that the dealers were not
drawn from the market are not nearly as “compelling” as Mr.              entitled to recover punitive damages from Chrysler. In Buono
Dady would have the readers of the Franchise Law Journal                 Sales, the terminated DeSoto dealer was awarded a grand
believe, for three important reasons.                                    total of six cents in nominal damages on its tort claim. Eleven
    First, with respect to the market withdrawal cases that Mr.          years after the DeSoto market withdrawal, the Third Circuit
Dady does cite, he has overlooked critical aspects of the facts          in Buono Sales reversed and remanded a $30,000 compen-
and/or holdings.                                                         satory damage award for a determination of what deductions
    Second, Mr. Dady has failed to include in his discussion             from the judgment should be made to reflect the dealer’s rev-
of the “applicable case law” many important market with-                 enues resulting from Chrysler’s expansion of its Plymouth
drawal decisions. Thus, he ignores the overwhelming author-              line at the same time that it terminated the DeSoto line.5
ity for the proposition that “good cause” for termination and               In the other DeSoto case, Schwimley v. Chrysler Motors
                                                                         Corp.,6 Chrysler won summary judgment. In Schwimley, the
Michael J. Lockerby (mlockerby@hunton.com) is a partner in the           Ninth Circuit affirmed the district court’s dismissal of the
Richmond, Virginia, office of Hunton & Williams. He is currently liti-   dealers’ fraudulent inducement claim notwithstanding evi-
gating a number of market withdrawal cases against J. Michael Dady       dence that Chrysler was actively considering discontinuing
in Texas, Illinois, and North Carolina (see page 220).                   the production of DeSoto automobiles before the plaintiffs

 Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 177
signed the DeSoto dealer agreements. According to Mr.            IH farm equipment market withdrawals, appellate courts
Dady, “[t]he message in the Ninth Circuit’s holding in           reversed the trial court’s award of summary judgment in
Schwimley is that, where a dealer can establish that the man-    favor of the manufacturer. These reversals, however, did not
ufacturer decided to discontinue a particular product before it  result in the dealers collecting a dime. Four years after the
entered into new written agreements with its dealers for those   termination at issue, the South Dakota Supreme Court
same products, fraudulent inducement may be a viable             reversed the jury’s award of compensatory and punitive dam-
claim.”                                                          ages in Groseth International, Inc. v. Tenneco, Inc.8 Six years
   There are at least four problems with that “message.” First   after the IH market withdrawal, the plaintiff in Karl Wendt
and foremost, the Ninth Circuit said no such thing. Second,      Farm Equipment Co. v. International Harvester Co.9 had
most market withdrawal cases are like Schwimley: the deci-       nothing to show for its efforts but (1) dismissal before trial of
sion to abandon a product line and/or consolidate distribution   all of its claims except its breach-of-contract claims; (2) a
has been under consideration for quite some time before the      jury verdict and judgment in favor of the manufacturer on the
decision is communicated to the dealer network. Rarely if        dealer’s breach-of-contract claim; and (3) a reversal and
ever, however, will a final, official decision have been made    remand for a new trial limited to breach-of-contract damages
far in advance of its announcement.                              based on a finding that the manufacturer could not raise the
   The third problem with the lesson that Mr. Dady attempts      defense of commercial impracticability. Finally, in Delta
to draw from Schwimley is that he seeks to apply it to con-      Truck & Tractor, Inc. v. J.I. Case Co.,10 decided seven years
tract renewals. In fact, the plaintiffs in Schwimley had not     after the IH market withdrawal, the Fifth Circuit reversed the
previously been DeSoto                                                                                     district court’s grant of
dealers. In other words,                                                                                   summary judgment in
Schwimley had nothing to                                                                                   favor of the manufacturer
do with the situation                                                                                      on the dealer’s breach-of-
hypothesized by Mr. Dady:
                                                      The element of                                       contract and good-faith
a manufacturer that “decid-                      [detrimental reliance]                                    claims. However, the Fifth
ed to discontinue a particu-                                                                               Circuit affirmed dismissal
lar product before it
                                            will rarely, if ever, be present                               of the dealer’s fraud claim
entered into new written                    in a market withdrawal case.                                   notwithstanding conduct
agreements with its dealers                                                                                on the part of IH that the
for those same products.”                                                                                  appeals court character-
For all of these reasons,                                                                                  ized as “duplicitous,” i.e.,
Schwimley contains no subliminal message for Oldsmobile          “representing to its dealers that it would remain in the agri-
dealers, if any, who renewed their dealer agreements after       cultural equipment business ‘forever,’ at the very time it was
General Motors Corporation (GMC) decided to discontinue          negotiating the sale of that business to Case.”11
production.                                                          Nor was “the potential for” punitive damages realized in
   Finally, an essential element of any fraud claim is detri-    the various cases addressing the GMC heavy-duty truck mar-
mental reliance. Unless the dealer sold products at a loss, this ket withdrawal. Mr. Dady claims that GMC prevailed
element will rarely, if ever, be present in a market withdrawal      only where the courts accepted the General Motors argument that
case. This is particularly so in the case of a contract renewal.     the GMC heavy-duty truck line did not constitute a separate fran-
Even if plaintiffs could show “that the manufacturer decided         chise, but rather represented only a part of the overall GMC fran-
to discontinue a particular product before it entered into new       chise, such that the GMC heavy-duty truck withdrawal and the
written agreements with its dealers for those same products,”        related termination of the GMC heavy-duty truck addendum did not
                                                                     constitute the termination of a franchise.
where is the detrimental reliance? How have the dealers been
harmed by continuing to sell, presumably at a profit, the same   It is questionable whether that statement fairly characterizes
products that they were selling before contract renewal?         the cases that Mr. Dady does cite. Moreover, his historical
   Moreover, in many states a state motor vehicle franchise      review of the GMC heavy-duty truck market withdrawal
law may have required the contract renewal. If the manufac-      overlooks several reported decisions.
turer had attempted to terminate the dealerships before              The omitted cases include one in which the defendant was
announcing the market withdrawal, the dealers would contend      an affiliate of GMC’s joint venture partner, Volvo. In General
that there was no “good cause” as required by state law. What    GMC, Inc. v. Volvo White Truck Corp.,12 the plaintiff was a
court would hold a manufacturer liable for fraud for comply-     former Volvo White truck dealer that the Volvo-GMC joint
ing with its statutory obligations?                              venture did not select as a heavy-truck dealer. The Massachu-
   The dealers also did not obtain punitive (or even compen-     setts federal court held that Volvo White had “good cause”
satory) damages in the four reported decisions addressing the    for termination under both the federal Automobile Dealer’s
International Harvester (IH) farm equipment market with-         Day in Court Act and the Massachusetts Dealer Law:
drawal. In J.I. Case Co. v. Berkshire Implement Co.,7 which          As of January 1, 1988, it will be defunct. Even if the new entity
Mr. Dady fails to mention, the Indiana federal court granted         were shown to be merely the alter ego of Volvo White, nothing in
summary judgment for the manufacturer. In the three other            the record before me suggests that its refusal to continue plaintiff as


Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 209
  a dealer was based on anything other than a business decision
  brought about by the change in product lines, an assessment of the        er, in view of GMC’s continued production of the Brigadier
  financial implications of marketing through a large number of deal-       model, the court found genuine issues of material fact
  ers, and a fair comparison of plaintiff and Bracken. An automobile        whether GMC had in fact engaged in a market withdrawal,
  manufacturer has an unqualified right to make the changes in its          and therefore denied GMC’s summary judgment motion.19
  channels of distribution for legitimate business reasons. DeCantis v.         The decision by the Fourth Circuit in Central GMC, Inc.
  Mid-Atlantic Toyota Distributors, 371 F. Supp. 1238, 1242 (E.D.
  Va. 1974). Even the efficient dealer has no right to a “marriage for      v. General Motors Corp. was by no means as narrow as
  life” with the manufacturer. Berry Brothers Buick, Inc. v. General        Mr. Dady would have readers of the Journal believe. To be
  Motors Corp., 254 F. Supp. 542, 546 (E.D. Pa. 1966), aff’d per            sure, one basis for the Fourth Circuit’s holding that GMC did
  curiam, 377 F.2d 552 (3d Cir. 1967).13                                    not violate the Maryland motor vehicle franchise statute was
                                                                            its conclusion that heavy-duty trucks were not a separate
   As for the cases in which GMC was a defendant, Mr.                       franchise: “We think GMC’s position more closely conforms
Dady does not discuss C. Earl Brown, Inc. v. Commonwealth                   to the statutory definition of franchise and more clearly
of Pennsylvania.14 This was an appeal from the Pennsylvania                 respects the distinction between discontinuing a product line
State Board of Motor Vehicle Manufacturers, Dealers and                     and terminating an entire franchise.”20
Salespersons. The board had found that GMC heavy-duty                           However, the Fourth Circuit also determined that the “ces-
trucks were a separate franchise under Pennsylvania law.                    sation of production of heavy duty trucks was a legitimate,
Nevertheless, the court upheld the board’s determination that               lawful reaction by GMC to unfavorable market conditions.”21
the termination was “for good cause and in good faith” as                   In this regard, the Fourth Circuit observed that one of the stat-
required by the Pennsylvania statute:                                       ed purposes of the Maryland motor vehicle franchise law was
  Here, the Board clearly found that GMC was faced with a business          to promote “vigorous and healthy competition.” Allowing
  decision and chose the option which would allow it to remain in the       manufacturers to respond to changing market conditions “by
  heavy truck industry in a reduced capacity in order to best utilize its   reinvesting their assets and varying their product mix pro-
  available assets. The consequence of merging two large dealer net-        motes competition and ultimately benefits consumers, indus-
  works resulted in the termination of many dealer franchises. The          try employees, and dealers in general.”22 According to the
  Board found that GMC’s initial decision was made in good faith and
  for good cause. The terminations which flowed from that initial           Fourth Circuit, “[a]llowing GMC to discontinue an unprof-
  good faith decision were part of a comprehensive and carefully stud-      itable product without the threat of large damage awards thus
  ied scheme to ensure adequate representation throughout the country       effectuates an express purpose of the Maryland statute.”23
  while also ensuring adequate dealer profits. The Board concluded              More troubling still for future market withdrawal claims,
  that GMC met its burden of proving good cause and good faith.15           the Fourth Circuit observed, albeit in dicta, that a state law
   In other words, the court concluded that “good cause” for                prohibition on market withdrawal would be of dubious con-
termination is not limited to performance deficiencies of the               stitutionality under the Commerce Clause:
franchisee or dealer. Rather, it can include the economic moti-                [T]he threat of substantial damage awards, by making the cost of
vations of the franchisor or manufacturer.                                     exiting the market prohibitive, could have the same effect on
   In another case that Mr. Dady does not address, Carolina                    GMC’s operations as if GMC were ordered to continue producing
Truck & Body Co., Inc. v. General Motors Corp.,16 the North                    unprofitable heavy duty trucks for the Maryland market.
Carolina Court of Appeals found that GMC’s heavy-duty                          A state may unquestionably act to protect the well-being of business-
trucks did constitute a separate franchise within the meaning                  es within its borders, but its ability to restrict the capacity of natural
of the North Carolina Motor Vehicle Dealers and Manufac-                       business organizations to respond to changing economic circum-
                                                                               stances is not a question that is free of constitutional difficulty.24
turers Licensing Law. The court still found “good cause” for
termination because the logical implication of the North Car-                   All told, GMC and/or its joint venture partner prevailed on
olina statute was that it permitted the manufacturer to stop                claims brought under the motor vehicle laws of Massachu-
manufacturing the product that was the subject of the fran-                 setts,25 Pennsylvania,26 North Carolina,27 Wisconsin,28 Mary-
chise agreement.                                                            land,29 and Virginia.30 In fairness to Mr. Dady, courts did find
   Mr. Dady’s historical review also overlooked Mid-State                   triable issues of fact with respect to breach-of-contract and
Truck Service, Inc. v. General Motors Corp.17 In that case, a               statutory claims governed by the laws of Maine,31 New York,32
Wisconsin federal court held that, even though GMC heavy-                   and New Jersey.33 The only lesson of these cases was, in the
duty trucks constituted a separate franchise for purposes of                words of Mr. Dady, that “a manufacturer is potentially liable.”
the Wisconsin motor vehicle dealer statute, GMC’s nondis-                       Moreover, in one of these cases, the New Jersey federal
criminatory market withdrawal was “good cause” for termi-                   court initially held that market withdrawal was not “good
nation, except with respect to the Brigadier model that GMC                 cause” for termination under the New Jersey Franchise Prac-
was still producing.                                                        tices Act and that the GMC heavy-duty truck withdrawal
   That GMC was still manufacturing the Brigadier model                     presented triable issues of fact on fraud. However, in a later
was also a decisive factor in the decision by a Maine federal               case involving GMC heavy-duty trucks, the New Jersey fed-
court in C-B Kenworth, Inc. v. General Motors Corp.18 The                   eral court rejected its prior holding and concluded that mar-
Maine Motor Vehicle Dealer’s Act defined “good cause” for                   ket withdrawal is “good cause” for termination under New
termination to include when “the manufacturer discontinues                  Jersey law.34 In Freedman Truck Center, Inc. v. General
production or distribution of the franchise product.” Howev-                Motors Corp.,35 the court so held even though the statutory

210 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
definition of “good cause” under the New Jersey Franchise       requires an automobile manufacturer “to act in good faith in
Practices Act was “limited to failure by the franchise to sub-  performing or in complying with any of the terms or provi-
stantially comply with those requirements imposed upon him      sions of the franchise, or in terminating, canceling, or not
by the franchise.”36 In rejecting Gallo, the Freedman Truck     renewing the franchise with said dealer.”44 The federal statute
court was persuaded by other decisions involving the GMC        defines “good faith” as the duty of a party to an automobile
heavy-duty truck market withdrawal, including the Carolina      franchise “to act in a fair and equitable manner toward each
Truck & Body37 decision discussed above, and also by a num-     other so as to guarantee the one party freedom from coer-
ber of opinions construing other state and federal franchise    cion, intimidation, or threats of coercion or intimidation from
statutes. These include the Wisconsin federal court’s inter-    the other party.”45
pretation of the Wisconsin Fair Dealership Law in St. Joseph        Unlike the federal Petroleum Marketing Practices Act,
Equipment v. Massey-Ferguson, Inc.,38 the Fourth Circuit’s      which expressly provides that market withdrawal is good
interpretation of the federal Petroleum Marketing Practices     cause for termination,46 the Automobile Dealer’s Day in
                                39
Act in Jimenez v. BP Oil, Inc., the First Circuit’s interpreta- Court Act is silent on the issue. However, automobile dealers
tion of the Puerto Rico Dealer’s Act in Medina & Medina v.      that attempted to use the Automobile Dealer’s Day in Court
Country Pride Foods, Ltd.,40 and the Ninth Circuit’s interpre-  Act to challenge the Edsel47 and DeSoto market withdrawals48
tation of the Nevada Alcoholic Beverage Franchise Act in        were unsuccessful. By the time of the GMC heavy-duty truck
American Mart Corp. v. Joseph E. Seagram & Sons, Inc.41         market withdrawals, few of the plaintiffs even bothered to
Notwithstanding its departure from Gallo, the Freedman          assert claims for violation of the Automobile Dealer’s Day in
Truck court did not dismiss all of the dealer’s claims. The     Court Act. Those GMC heavy-duty truck dealers that tried
court found triable issues of fact on whether GMC had           soon found that they were spinning their wheels.49
engaged in a nondiscriminatory market withdrawal by virtue          The federal Automobile Dealer’s Day in Court Act requires
of GMC’s continued production of the Brigadier model and        only that the manufacturer act in “good faith.” In contrast,
its continued “market presence” through the Volvo-GMC           many state statutes require “good cause” for termination of a
joint venture.42                                                                                        franchise or dealership.
    In short, in no prior                                                                               Again, however, that raises
market withdrawal case                                                                                  the question: What state
did a “runaway jury” and                   In short, in no prior market                                 statute says that “good
judge award punitive dam-                                                                               cause” is limited to fran-
ages (or even substantial                       withdrawal case did a                                   chisee “nonperformance or
compensatory damages).                 “runaway jury” and judge award                                   other bad act”? Of the vari-
Ironically, a “runaway                                                                                  ous state statutes at issue in
arbitrator” did decide                      punitive damages (or even                                   the five market withdrawals
Coelho & Bachetti, Inc. v.          substantial compensatory damages).                                  reviewed by Mr. Dady,
Ford New Holland, Inc.43                                                                                only the New Jersey and
but did not award punitive                                                                              Wisconsin statutes con-
damages. In fact, the Coel-                                                                             tained such a limitation.
ho & Bachetti decision, the factual and legal infirmities of        Under the New Jersey Franchise Practices Act, “good cause
which are discussed below, addressed only liability, not dam-   for terminating, or failing to renew a franchise shall be limited
ages. Notwithstanding the harsh language that the arbitrator    to failure by the franchisee to substantially comply with those
in Coelho & Bachetti used to characterize the manufacturer’s    requirements imposed upon him by the franchise.”50 As dis-
conduct, even he dismissed the Fiat tractor dealers’ tort       cussed above, however, notwithstanding this limitation, the
claims.                                                         federal court in New Jersey—in one of the GMC heavy-duty
    Thus, a clear lesson of the five prior market withdrawals   truck withdrawal cases that Mr. Dady did not discuss—held
reviewed by Mr. Dady is that dealers should not bet the farm    that a franchise termination pursuant to a market withdrawal
equipment on “the potential for” punitive damage claims.        did not violate the New Jersey Franchise Practices Act.51
                                                                    Like the New Jersey statute, the Wisconsin Fair Dealer-
Economic Justification and “Good Cause”                         ship Law expressly limits “good cause” to “bad faith” on the
According to Mr. Dady, the “compelling” causes of action        part of the dealer or:
available to Oldsmobile dealers become “progressively               Failure by a dealer to comply substantially with essential and rea-
stronger” if they can show that “available statutory protection     sonable requirements imposed upon him by the grantor, or sought
prohibits the termination of an automobile dealer absent non-       to be imposed by the grantor, which requirements are not discrimi-
performance or other bad act by the dealer.” The question that      natory as compared with requirements imposed on other similarly
Mr. Dady leaves unanswered, however, is this: What statute          situated dealers either by their terms or in the manner of their
                                                                    enforcement. . . . 52
says that a franchisee or dealer can only be terminated for
“nonperformance or other bad act”?                                  Nevertheless, the Seventh Circuit, 53 the Wisconsin
    At the federal level, the only “available statutory protec- Supreme Court,54 the U.S. District Court for the Western Dis-
tion” is the Automobile Dealer’s Day in Court Act, which        trict of Wisconsin,55 and the U.S. District Court for the East-

Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 211
ern District of Wisconsin56 have all held that market with-                 question whether market withdrawal may constitute good
drawal is “good cause” for termination under the Wisconsin                  cause for termination within the meaning of the Puerto Rico
Fair Dealership Law. In fact, the U.S. District Court for the               Dealer’s Act. The Puerto Rico Supreme Court held that mar-
Western District of Wisconsin reached that conclusion in                    ket withdrawal is good cause if the decision is made in good
another GMC heavy-duty truck market withdrawal case that                    faith and the franchisee receives adequate notice.62
went unmentioned by Mr. Dady.57
    “Good cause” restrictions are largely a matter of state law.            Second Circuit
However, the determination whether there is good cause for                  In Petereit v. S.B. Thomas, Inc.,63 the Second Circuit held that
termination or nonrenewal is often made by a federal court. In              a manufacturer’s desire to realign its distribution network
this regard, it is telling that every federal appeals court that            was “good cause” for termination within the meaning of the
has considered the issue has held that “good cause” is not lim-             Connecticut Franchise Act. According to the Second Circuit,
ited to performance deficiencies on the part of the franchisee              “good cause is not limited to proving contractual breaches of
or dealer. In the process, many of these same courts (and/or                the franchise agreement, but may be based on a franchisor’s
district courts subject to their appellate review) have held that           legitimate business reasons.”64 The statutory provision at
“good cause” can include the economic justifications of the                 issue stated: “No franchisor shall . . . terminate, cancel or fail
franchisor or manufacturer, such as a desire to consolidate dis-            to renew a franchise, except for good cause which shall
tribution or discontinue a product line. The following cases                include, . . . the franchisee’s refusal or failure to comply sub-
are illustrative (although not necessarily exhaustive).                     stantially with any material and reasonable obligation of the
                                                                            franchise agreement. . . .”65
First Circuit                                                                   Under the Connecticut Franchise Act, good cause “shall
In Schott Motorcycle Supply, Inc. v. American Honda Motor                   include, but not be limited to” franchisee malfeasance.66 The
Co., 58 the First Circuit concluded that Honda’s withdrawal                 foregoing definition, according to the Second Circuit, was
from the motorcycle market was not arbitrary, in bad faith, or              broad enough to include the franchisor’s legitimate business
unconscionable under the Maine Motor Vehicle Dealer Law.                    reasons. In this regard, the Second Circuit observed that the
Finding that the withdrawal was made for “legitimate busi-                  defendant English muffin manufacturer, Thomas, “deter-
ness considerations,” the First Circuit held that Honda was                 mined it could increase sales by increasing service frequen-
not liable for breach of contract or violation of the Maine                 cy” and that “[t]his result it thought best accomplished by
Motor Vehicle Dealer Law. In addition, the First Circuit dis-               rationalizing its distributors’ haphazard routes.”67 According
missed the plaintiff’s fraud claim, which was based on state-               to the Second Circuit, “Thomas’ goal of increasing sales
ments by Honda representatives “that Honda would remain                     constitutes ‘good cause’ within the meaning of the Franchise
just as committed to the motorcycle industry as it had been in              Act.”68 Good cause “does not require a showing of unprof-
the past and that new Honda products and programs would                     itability.”69 Rather, “[w]hen the franchisor demonstrates that
cause an increase in Honda sales, enough to make up for the                 its business decision is legitimate and made in good faith—
loss of sales from Harley Davidsons and golf carts” that the                even if shown by hindsight to be made in error—a court
plaintiff stopped selling when it renewed its Honda motorcy-                should not replace the grantor’s decision with its own.”70
cle dealership. The First Circuit held that these alleged state-
ments were not actionable as fraud because they were                        Third Circuit
statements of opinion about future events, not false state-                 In Consumers Oil Corp. of Trenton, New Jersey v. Phillips
ments of facts.59 Any reliance upon those statements, accord-               Petroleum Co.,71 the Third Circuit expressed concern that it
ing to the First Circuit, would not be reasonable:                          “would precipitate substantial constitutional questions” if the
   These general statements in the context of franchisor-franchisee         New Jersey Franchise Practices Act were interpreted as pre-
   communications constitute nothing more than “puffing” or “trade          venting market withdrawal. As noted above, the U.S. District
   talk,” upon which no reasonable person would rely. See, e.g.,            Court for the District of New Jersey ultimately determined in
   Vaughn v. General Foods Corp., 797 F.2d 1403, 1411 (7th Cir.             Freedman Truck72 that a nondiscriminatory market withdraw-
   1986), cert. denied, 479 U.S. 1087, 107 S. Ct. 1293, 94 L. Ed. 2d 149    al did not violate the New Jersey prohibition against termi-
   (1987) (“[i]n a sales or marketing context, and franchisor-franchisee
   negotiations certainly are to be placed in that context, such expres-    nating a franchise without good cause. The court so held
   sions of opinion are known as ‘puffing,’ ‘trade talk,’ or ‘sales talk’   even though the statutory definition of “good cause” under
   and do not constitute actionable fraud”); Kelly Tire Serv. Inc. v.       the New Jersey Franchise Practices Act was “limited to fail-
   Kelly-Springfield Tire Co., 338 F.2d 248, 253 (8th Cir. 1964) (“[a]t     ure by the franchisee to substantially comply with those
   best, these projections [about plaintiff’s business], however persua-    requirements imposed upon him by the franchise.”73
   sive in shaping plaintiff’s plans, were opinions subject to the uncon-
   trollable economic influences of free enterprise and not fraudulent
   misrepresentations of past or existing facts on which plaintiff justi-   Fourth Circuit
   fiably relied to its detriment”). Under these circumstances, plaintiff   The Maryland motor vehicle franchise statute at issue in
   could not have justifiably understood the alleged misrepresentations     Central GMC, Inc. v. General Motors Corp.74 prohibited ter-
   to be assurances as to specific facts, rather than mere opinion.60       mination unless “[t]he dealer has failed to comply substan-
   In Medina & Medina v. Country Pride Foods, Ltd.,61 the                   tially with the reasonable requirements of the franchise.” As
First Circuit certified to the Puerto Rico Supreme Court the                previously discussed, the Fourth Circuit held that GMC’s

212 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
withdrawal from the heavy-duty truck market was not a fran-                    The Wisconsin Supreme Court also observed that “the
chise termination within the meaning of the statute.75 The                 Wisconsin legislature could not have intended to impose an
Fourth Circuit also observed that a state law prohibition on               eternal and unqualified duty of self-sacrifice upon every
market withdrawal might violate the Commerce Clause. The                   grantor that enters into a distributor-dealership agreement.”84
court held that “the threat of substantial damage awards, by                   In support of this conclusion, the Wisconsin Supreme
making the cost of exiting the market prohibitive, could have              Court cited the portion of the statute stating that its purpose
the same effect on GMC’s operations as if GMC were                         was “[t]o promote the compelling interest of the public in
ordered to continue producing unprofitable heavy duty trucks               fair business relations between dealers and grantors, and in
for the Maryland market.”76                                                the continuation of dealerships on a fair basis. . . .” As the
   However, the Fourth Circuit did not specifically address                court pointed out, “[i]t is obvious from this section of the
whether market withdrawal was “good cause” for termina-                    WFDL that mutual fairness must be present between the
tion in view of its holding that the Maryland statute did not              grantor and dealer and that the legislature contemplated pos-
apply to a market withdrawal.                                              sible changes in existing dealership relations.”85 In support of
                                                                           its holding, the Wisconsin Supreme Court also cited two
Fifth Circuit                                                              prior federal court opinions, one from the Western District of
In Delta Truck & Tractor, Inc. v. J.I. Case Co.,77 one of the              Wisconsin and one from the Eastern District of Wisconsin.
IH market withdrawal cases reviewed by Mr. Dady, there                     Both of these cases involved market withdrawals, one in the
was no statutory “good cause” restriction at issue. The Fifth              construction equipment industry and the other in the alco-
Circuit reversed the district court’s grant of summary judg-               holic beverages industry.
ment for the manufacturer on the dealer’s breach-of-contract                   In St. Joseph Equipment v. Massey-Ferguson, Inc.,86 the
and good-faith claims. However, the Fifth Circuit agreed                   dealer brought suit against Massey-Ferguson for violation of
with the district court that “IH was not obligated to manufac-             the dealership agreement and the Wisconsin Fair Dealership
ture and distribute farm equipment forever and thus not                    Law following Massey-Ferguson’s decision to withdraw from
obligated to maintain Delta as a dealer forever.”78                        the construction equipment business in North America.
                                                                           Under the Wisconsin statute, “good cause” is required for any
Sixth Circuit                                                              termination of, or substantial change in the competitive cir-
It appears that the Sixth Circuit has not considered whether               cumstances under, a dealership agreement. Moreover, the
“good cause” for termination of a franchise can include fran-              statute expressly limits good cause to instances of dealer mis-
chisor economics.                                                          conduct. Nevertheless, the U.S. District Court for the Western
                                                                           District of Wisconsin held that an examination of the underly-
Seventh Circuit                                                            ing purposes of the Wisconsin statute showed that its “prohi-
In Morley-Murphy Co. v. Zenith Electronics Corp.,79 the Sev-               bitions [against dealer termination] are not applicable in cases
enth Circuit considered claims of wrongful termination under               where, as here, the grantor undertakes a non-discriminatory
the Wisconsin Fair Dealership Law, which requires “good                    withdrawal from a product market on a large geographic
cause” for termination. The plaintiff’s distributorship was not            scale.”87 In reaching this conclusion, the court observed that a
renewed pursuant to a nationwide strategy by Zenith to shift               literal application of the statutory “good cause” limitation
from independent distributors to direct marketing. Zenith did              would raise serious practical and constitutional concerns:
not contend that the plaintiff’s performance was in any way                   Is a company with a poorly-selling product compelled to keep mak-
deficient. Interpreting Wisconsin law,80 the Seventh Circuit                  ing and/or selling it, even at a loss, because § 135.03 won’t permit it
held that the manufacturer’s economic circumstances could                     to drop the product? Must a company desirous of withdrawing from
constitute “good cause” if it could show “(1) an objectively                  a particular geographic market—the entire North American conti-
ascertainable need for change, (2) a proportionate response                   nent, for example—continue operating in that market, even at a
                                                                              loss, because the effect of such a withdrawal on dealerships would
to that need, and (3) a nondiscriminatory action.”81                          be impermissible under the Act? Because the Act’s prohibitions
    In support of its decision, the Seventh Circuit relied upon               extend also to non-renewals, would a company in the above situa-
the Wisconsin Supreme Court’s interpretation of the Wiscon-                   tions be compelled to renew dealerships in perpetuity or until its
sin Fair Dealership Law in Ziegler Co. v. Rexnord, Inc.82 At                  ultimate financial ruin? Should dealers such as the plaintiff be per-
issue in Ziegler was the manufacturer’s attempt to restructure                mitted to extract damage awards from corporate grantors simply
                                                                              because those grantors have become victims of a business down-
its distribution system as a result of economic losses. The                   turn? To answer any of these questions in the affirmative would
Wisconsin Supreme Court reasoned as follows:                                  surely be to let the tail wag the dog. More seriously, it has the
  The real issue is whether a grantor (as defined in the WFDL) may            potential to precipitate some formidable constitutional questions.
  alter its method of doing business with its dealers (as defined in the      See: Designs in Medicine, Inc. v. Xomed, Inc., 522 F. Supp. 1054
  WFDL) to accommodate its own economic problems, or whether it               (E.D. Wis. 1981); Consumers Oil Corp. v. Phillips Petroleum Co.,
  must subordinate those problems—regardless how real, how legiti-            488 F.2d 816 (3d Cir. 1973).88
  mate, or how serious—in all respects and permanently if the dealer          While finding that the Wisconsin statute did not prevent
  wishes to continue the dealership. We find that the grantor’s eco-
  nomic circumstances may constitute good cause to alter its method        termination for market withdrawal, St. Joseph Equipment
  of doing business with its dealers, but such changes must be essen-      held that the statutory ninety-day notice provision did
  tial, reasonable and nondiscriminatory.83                                apply.89 Finally, the court held that the dealership agreement,

Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 213
by reserving to Massey-Ferguson the “right to . . . improve,         and service agreements. Following execution of the asset pur-
modify, discontinue or replace Products without incurring            chase agreement, Versatile sent termination notices to 121
any obligation or liability whatsoever to Dealer,” precluded         dealers and later filed for bankruptcy.
any claim for breach of contract based on Massey-Ferguson’s             Like the plaintiff in Groseth International, Inc. v. Tenneco,
decision to cease production of construction equipment.90            one of the IH market withdrawal cases reviewed by Mr.
   The other federal court decision interpreting the Wisconsin       Dady, the plaintiffs in Mitchell Machinery were South Dako-
Fair Dealership Law upon which the Wisconsin Supreme                 ta dealers. They alleged that both Versatile and Ford New
Court relied in Ziegler was Lee Beverage Co., Inc. v. I.S.C.         Holland were guilty of wrongful termination in violation of
Wines of California, Inc.91 The plaintiff in Lee Beverage Co.        the South Dakota farm implement dealer laws. The dealers
had, for three and a half years, been a distributor of certain       also charged that Ford New Holland was guilty of tortious
wines and brandies sold by United Vinters until United               interference with their business relations with Versatile. After
agreed to sell some of its products to I.S.C. Wines of Califor-      the district court granted summary judgment to Ford New
nia, including some of those distributed by Lee. I.S.C. Wines        Holland on the dealers’ claims, they appealed to the Eighth
declined to continue distributing those product lines through        Circuit. The Eighth Circuit affirmed, holding that Ford New
Lee. However, Lee continued as a distributor for United’s            Holland had never entered into a contractual relationship with
remaining product lines. Lee alleged later that United and           the dealers and was not a successor corporation to Versatile,
I.S.C. had terminated and changed the competitive circum-            and therefore did not terminate the dealers’ franchises.95
stances of its dealer agreement without the “good cause”             Accordingly, the Eighth Circuit did not decide whether Ver-
required by the Wisconsin Fair Dealership Law. Citing St.            satile’s market withdrawal was “good cause” for termination.
Joseph Equipment, the U.S. District Court for the Eastern
District of Wisconsin concluded that United had shown good           Ninth Circuit
cause for its actions, noting that “ ‘[g]ood cause’ for a dealer-    In American Mart Corp. v. Joseph E. Seagram & Sons,
ship termination need not be found only when the continua-           Inc.,96 the Ninth Circuit held that Seagram had “good cause”
tion of a dealership arrangement would mean financial ruin           for termination within the meaning of the Nevada Alcoholic
for the grantor.” Rather, the Lee Beverage court held that           Beverage Franchise Act. The termination at issue was part of
good cause would also exist “where the profitability of wide-        a nationwide reorganization of Seagram’s distribution net-
scale sales of a product line has sunk to such a point that a        work into a system of exclusive distributorships. Granting
sale or discontinuation of the product line is justified for the     summary judgment to Seagram’s, the district court held that
good of the corporation.”92 Like the court in St. Joseph Equip-      good cause exists where “in the exercise of prudent business
ment, the Lee Beverage court expressed concern that “[a] law         judgment the supplier terminates the franchise for grounds
which required otherwise would no doubt be subject to legiti-        that are truly legitimate and are not arbitrary, capricious, irra-
mate attack on the basis of constitutional principles.”93            tional, unreasonable or irrelevant.” 97 The Ninth Circuit
                                                                     affirmed because Seagram’s decision was “warranted by
Eighth Circuit                                                       compelling business considerations and constituted [a] valid
In Mitchell Machinery, Inc. v. Ford New Holland, Inc.,94 the         business judgment.”98
Eighth Circuit considered claims of wrongful termination
resulting from Versatile Corporation’s withdrawal from the           Tenth and Eleventh Circuits
farm equipment business. Versatile’s troubles began when the         It appears that neither the Tenth nor the Eleventh Circuit has
poor farm economy of the 1980s forced the company to cease           considered whether “good cause” for termination of a fran-
all production at its Winnipeg plant in 1986. In the months          chise can include franchisor economics.
that followed, Versatile began seeking a purchaser for its
assets. Versatile eventually sold most of its farm equipment         Attention Forum Shoppers
manufacturing facilities to Ford New Holland. However, Ford          As the foregoing review of the case law demonstrates, Mr.
New Holland declined to purchase assets related to the manu-         Dady’s Oldsmobile dealer clients are faced with adverse
facture and distribution of Versatile’s “Noble” line of farm         authority from the First, Second, Third, Fourth, Fifth, Sev-
implements, as well as certain other Versatile assets. Eight         enth, and Ninth Circuits. Although not adverse, the authority
months after Versatile ceased operations at its Winnipeg facil-      from the Sixth, Eighth, Tenth, and Eleventh Circuits is not
ity, Versatile and Ford New Holland entered into an interim          helpful to franchisees and dealers seeking redress for a mar-
operating agreement that allowed Versatile to resume produc-         ket withdrawal. So where can plaintiffs find a federal judge
tion. To secure government approval for its purchase of Ver-         who will hold that the franchisor’s economic concerns are
satile, Ford New Holland submitted documents claiming that           not “good cause” for termination? What federal judge would
“[t]he existing Versatile dealer, if he is doing a good job in his   be willing to risk almost certain reversal, on constitutional
market today, will continue selling the Versatile line.” Once it     and other grounds? One of the lessons of the prior market
had secured approval from the U.S. and Canadian govern-              withdrawals reviewed by Mr. Dady is that franchisees and
ments, Ford New Holland selected 309 existing Versatile              dealers pursuing market withdrawal claims should do what
dealers to continue selling Versatile’s farm equipment, and          Mr. Dady’s Fiat tractor dealer clients did in Coelho &
did not acquire the rights to the remaining 150 dealer sales         Bachetti:99 have the dispute arbitrated by a former federal

214 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
judge, someone whose decision is not subject to meaningful
review, much less reversal, on appeal.                                         Who Says Arbitration Is
    Former New York federal judge Marvin Frankel, the arbi-                    Good for Franchisors?
trator in Coelho & Bachetti, was obviously sympathetic to
the plight of the Fiat tractor dealers. Had his opinion been            Although Coelho & Bachetti has no precedential
subject to review by the Second Circuit, it might have identi-          value in any court, it does offer some valuable
fied just what contract the arbitrator found that Ford New              lessons for future market withdrawals. One is that
Holland, Inc. (FNH) had breached. Instead, he declared FNH              franchisors and other suppliers should think long
guilty of breach for insisting—three years before the Fiat              and hard before requiring arbitration of all con-
tractor brand was discontinued—that the dealers sign written            tractual disputes (or before agreeing to arbitration
contracts. The arbitrator was apparently offended not only              absent a contractual requirement to do so). To be
that the dealers had to sign written contracts as a condition of        sure, Coelho & Bachetti was not a complete vic-
doing business but also that these contracts contained two              tory for the dealers. The arbitrator dismissed their
particular provisions. One of them, which the arbitrator char-          tort claims, and there was no risk of a “runaway
acterized as “[a]mong the grimmest of its provisions,” termi-           jury” award of punitive damages. Instead, howev-
nated all prior agreements “between the Dealer and the                  er, the manufacturer was stuck with a finding of
Company, any affiliate or subsidiary or any predecessor.” In            liability by a “runaway arbitrator.” When trial
other words, the offending provision was a garden-variety               court judges and/or juries make mistakes, appel-
merger and integration clause. The second offending provi-              late courts can and often do correct them. In con-
sion, which the arbitrator called “[w]orse still for the deal-          trast, there was no opportunity for meaningful
ers,” was a “waiver by the Dealer of all claims it might have           appellate review in Coelho & Bachetti. Because
. . . because of past business dealings” against the entities           the arbitrator had no fear of being reversed on
from which FNH had purchased the Fiat tractor business.100              appeal, he apparently felt free to substitute his
By fiat (no pun intended), the arbitrator declared unenforce-           own personal judgments of what was “grim” and
able both the merger and integration clause and the release.            “worse still” for the written terms of the parties’
    Rather than enforce the written dealer agreements, the              contracts. Free of real appellate review, the arbi-
Coelho & Bachetti arbitrator held that FNH was guilty of                trator did not hesitate to make his own subjective
breach of contract for having the dealers sign written con-             determinations about whether merger and inte-
tracts. FNH was held contractually obligated to certain                 gration clauses should be enforceable. If Judge
“express understandings” between the dealers and FNH’s                  Frankel had decided the case while still on the
predecessor in place of the dealer agreements. One such                 bench, the Erie doctrine would not have permit-
“express understanding” was that “so long as a dealer func-             ted this “personal feeling” brand of justice. Any
tioned effectively, the dealership would continue.”101 Another          sitting federal judge would instead have been
such “express understanding,” according to the arbitrator,              required to defer to the determinations of state
was that “each dealer would be the only one in a substantial            legislators and state supreme court justices on
geographic area.”102 Not surprisingly, the arbitrator cited no          applicable state law.
authority for the proposition that an oral “express under-
standing” is perpetual in duration and can never be amended,
not even in writing. Nor did the Coelho & Bachetti opinion         identical tractors, under the Ford New Holland brand, made
explain just what it means for a dealer to “function effective-    at the same factory in Italy:
ly” or to have exclusivity within a “substantial geographical        Respondents, when they created their dubious and short-lived
area.” Nor does the opinion explain why such a promise of            scheme of dual distributorships, undertook to cordon off the former
exclusivity would be any more enforceable than a covenant            Hesston dealers in an increasingly bleak terra cotta world of Fiat
by the dealer not to compete with the manufacturer in a “sub-        tractors. They proposed to distinguish, and now ask the arbitrator to
stantial geographical area.”                                         distinguish, a wholly separate world of FNH blue tractors, identical
                                                                     to the terra cotta breed in everything but color. While the blue trac-
    However, not even the Coelho & Bachetti arbitrator               tors were being shipped from the same Fiat factories in Italy—and
would go so far as to say that FNH could not terminate               while, so far as appears, the FNH dealers were continuing in busi-
dealers for market withdrawal. To the contrary, he conceded          ness and reaping the benefits of the former Hesston dealers’ lost
that dealer terminations for “total product withdrawal”              terra cotta business—the Hesston dealers alone were to bear by
would not breach any contract (or “express understand-               their own extinction the decline in overall business of the Fiat spe-
                                                                     cialty tractors. This heaping of the total burden on the disfavored
ing”).103 The arbitrator also conceded that termination for          former Hesston dealers cannot qualify as the total withdrawal
market withdrawal would represent “cause” within the                 Respondents claim it to have been. The change in color does not
meaning of the California Equipment Dealers Act.104 The              conceal that essentially the same product remained on the market
arbitrator did not dispute that “any contrary view would             for distribution through the favored FNH dealers.106
trigger serious federal constitutional questions.”105 Never-
theless, he held that there had been no market withdrawal            To his credit, Mr. Dady obtained a result for his clients in
of Fiat tractors because FNH continued to sell virtually           Coelho & Bachetti for which there was no precedent. It is

Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 215
therefore understandable why he would obtain publication in            In the automobile industry, it has long been common for
the CCH Business Franchise Guide of the supposedly private         manufacturers to sell different brands of lines through differ-
Coelho & Bachetti arbitration decision so that it could be         ent dealer organizations. Examples include:
cited as “prologue” for future market withdrawals. In fact,        • the Chrysler and Plymouth product lines of what is now
however, the Coelho & Bachetti arbitration decision cannot             DaimlerChrysler Corporation;
be cited as authority in a court of law. In terms of precedent,    • the Ford, Lincoln, and Mercury divisions of Ford Motor
it is not legal tender. It has no more value than a Confederate        Company;
war bond after Appomattox.                                         • the Honda and Acura Divisions of American Honda
                                                                       Motor Company, Inc.;
The Franchisor’s Trump Card                                        • the Toyota and Lexus divisions of Toyota Motor Sales
Notwithstanding the aberrant decision of the Coelho &                  U.S.A., Inc.; and
Bachetti arbitrator, most market withdrawal claims are             • the Nissan and Infiniti lines of Nissan North America, Inc.
unsafe at any speed. Undaunted by the case law that actually           As in the construction equipment industry, joint produc-
has precedential value, Mr. Dady calls the Oldsmobile deal-        tion ventures are increasingly common in the automotive
ers’ claims “compelling.” He insists that the Oldsmobile           industry. Indeed, there are so many such joint ventures that
dealers’ causes of action “become progressively stronger” if       the Automotive Industries online magazine (AI-online.com)
“General Motors will be marketing at least some of the             devotes an entire portion of its website to the overlapping
Oldsmobile line under another name.” By Mr. Dady’s rea-            ownership interests and joint ventures among various motor
soning, there would be no valid market withdrawal defense          vehicle manufacturers (www.ai-online.com/stats/globalven-
available to GMC if dealers could show that engines and            ture2000.asp). For example, since 1986, Toyota and GMC
other components of the discontinued Oldsmobile product            have had a joint venture in California under the name of New
line are part of other product lines that have not been discon-    United Motor Manufacturing, Inc. (NUMMI). NUMMI man-
tinued, such as Chevrolet, Buick, and Pontiac. That may be         ufactures motor vehicles under trademarks owned by both
the view of the anonymous “historians from the National            joint venture partners. The models currently manufactured by
Automobile Dealers Association.” It was clearly the view of        NUMMI include the Toyota Corolla, the Toyota Tacoma, the
Judge Frankel, whose Coelho & Bachetti arbitration award           Pontiac Vibe, and the Toyota Voltz. Several models manufac-
attached significance to the fact that the FNH blue tractors       tured by NUMMI during its sixteen-year history have since
were “identical to the terra cotta breed in everything but         been discontinued, including the Chevrolet Nova, the
color” and “were being shipped from the same Fiat factories        Chevrolet Prizm, and the Toyota Hizux (now the Tacoma).
in Italy.” However, it is not the view of Congress, which              Was the Chevrolet Nova market withdrawal actionable, or
enacted the federal trademark statute, the Lanham Act. Nor         did dealer claims “become progressively stronger,” because
is it the view of the current members of the federal judiciary     the same NUMMI plant in California has continued to make
who enforce that statute.                                          the Toyota Corolla? Does the fact that Mitsubishi and Cater-
    In virtually every industry, it is common for products to be   pillar forklifts are both made at the same factory in Houston
sold under different brand names even though they are manu-        entitle Caterpillar dealers to Mitsubishi forklifts and vice
factured on the same assembly line to similar if not identical     versa? If American Honda were to discontinue its upscale
functional specifications. For example, many construction          Acura line, would its dealers have “compelling” causes of
equipment manufacturers have formed joint ventures to pro-         action unless the more mainstream Honda models were also
duce machinery for sale through their respective dealer orga-      discontinued? To make these and other plaintiffs’ lawyers
nizations. In the United States, these include:                    dreams come true, Congress would have to repeal the federal
• Euclid-Hitachi Heavy Equipment, Ltd., which manufac-             trademark statute, the Lanham Act. As a matter of federal
    tures rigid haulers for sale under both the Euclid and the     trademark law, no franchisee or dealer of one brand has any
    Hitachi trademarks;                                            right to obtain products identified with a different brand or
• Deere-Hitachi Construction Machinery Corporation,                trademark. As a matter of federal trademark law, it is irrele-
    which manufactures hydraulic excavators in North Ameri-        vant whether two products with different trademarks are
    ca for sale under both the John Deere and the Hitachi          made by the same manufacturer at the same factory. It is also
    trademarks; and                                                irrelevant whether the products are—except for their trade-
• Mitsubishi-Caterpillar Forklift America, Inc., which man-        mark—identical.
    ufactures forklifts for sale under both the Mitsubishi and         Federal trademark law determines which products a fran-
    the Caterpillar trademarks.                                    chisee or franchised dealer can and cannot sell because the
    Worldwide, CNH Global N.V. sells construction equip-           essence of any “franchise” relationship is a license to use the
ment under a number of different trademarks. These include         trademark of the franchisor or manufacturer. As the federal
Case, New Holland, Fiat-Hitachi, Fiatallis, Link-Belt, and         courts have long recognized, “the cornerstone of a franchise
O&K. Notwithstanding the common ownership (and in some             system must be the trademark or trade name of a prod-
cases manufacturing), these different brands of construction       uct.”107 Whenever the federal government has sought to
equipment are typically sold and serviced by different dealer      define “franchise” either generally or in industry-specific
organizations.                                                     statutes, it has always done so in terms of a trademark

216 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
license. To constitute a “franchise” within the meaning of        ered “genuine” under the Lanham Act:
the FTC Rule, a franchisee’s “goods, commodities, or ser-             One of the most valuable and important protections afforded by the
vices” must be “[i]dentified by a trademark, service mark,            Lanham Act is the right to control the quality of the goods manufac-
trade name, advertising or other commercial symbol desig-             tured and sold under the holder’s trademark. For this purpose the
                                                     108
nating another person (hereinafter ‘franchisor’).” A petro-           actual quality of the goods is irrelevant; it is the control of quality
leum “franchise” within the meaning of the Petroleum                  that a trademark holder is entitled to maintain.126
Marketing Practices Act is a contract that “authorizes or per-        If any of the Fiat tractor dealers whose market withdrawal
mits a retailer or distributor to use . . . a trademark which is  claims were the subject of the Coelho & Bachetti decision
owned or controlled by . . . a refiner.”109 State franchise laws  had tried to obtain distribution rights to Ford New Holland
similarly define “franchise” as a license to use the fran-        tractors, their efforts would have collided head-on with the
chisor’s trademark. The trademark license must be present         Lanham Act rights of their supplier. Under the Lanham Act,
to trigger application of state franchise laws regardless of      the Fiat tractor dealers would have had no right to sell the
whether “franchise” is defined in terms of a “community of        blue Ford New Holland tractors that had not been discontin-
interest,”110 a “marketing plan,”111 or some other way.112 In     ued even though they were “identical to the terra cotta breed
those states where associations of franchisees and dealers in     [Fiat tractors] in everything but color” and were being
particular industries have been successful in securing the        shipped “from the same Fiat factories in Italy.” To the con-
enactment of laws to protect them from termination and            trary, the Second Circuit’s decision in El Greco is among the
nonrenewal, these industry-specific statutes typically define     many federal court decisions standing for the proposition that
“franchise” in terms of a trademark license. This is true         a Fiat tractor dealer that did so would be guilty of unfair
regardless whether the products are beer and other malt bev-      competition, trademark infringement, and indeed counterfeit-
erages,113 farm machinery,114 heavy equipment,115 motor           ing in violation of the Lanham Act. For example, the Fourth
vehicles, 116 petroleum                                                                                      Circuit held in Shell Oil
products,117 or wine.118                                                                                     Co. v. Commercial Petro-
   A trademark license is                                                                                    leum, Inc. that the defen-
necessary to establish a                          As a matter of federal                                     dant was guilty of
“franchise” relationship                                                                                     trademark infringement
because the Lanham Act
                                             trademark law, no franchisee                                    notwithstanding that the
prohibits use of a federally         or dealer of one brand has any right                                    bulk oil that it was selling
registered trademark by                                                                                      as Shell oil had been pur-
anyone except the regis-
                                      to obtain products identified with a                                   chased from Shell’s autho-
trant and a “related com-                   different brand or trademark.                                    rized distributors. The
pany.”119 Section 45 of the                                                                                  Fourth Circuit stated that
Lanham Act defines                                                                                           “[i]t is insufficient that
“related company” as “any                                                                                    Commercial employed its
person whose use of a mark is controlled by” the trademark        own quality standards. Without Shell’s enforcement of its
owner “with respect to the nature and quality of the goods or     quality controls, the bulk oil sold by Commercial was not
services on or in connection with which the mark is used.”120     truly genuine.”127
Section 45 does more than grant the franchisor, as the trade-         The Third Circuit similarly affirmed the following district
mark owner, the right to control the quality of goods and ser-    court opinion in Edward J. Sweeney & Sons, Inc. v. Texaco, Inc.:
vices associated with its mark. Rather, the Lanham Act                Clearly, Texaco had the right to put its trademark on whatever gaso-
imposes upon the trademark owner the affirmative duty to do           line it deemed suitable. The crucial point, which apparently escapes
so, according to the Fifth,121 Seventh,122 and Ninth123 Circuits,     Sweeney, is that just because Texaco, the owner of the trademark,
along with other federal courts. 124                                  could decide what gasoline to market under that trademark does not
   That a franchisee or dealer may have been licensed to use          mean that Sweeney, who had only the right to sell gasoline so
                                                                      marked, had a like right to decide which gasoline to call Texaco.128
one particular mark does not qualify the franchisee or dealer
as a licensee or “related company” with respect to other              In the words of a New York federal court: “[T]he underly-
trademarks that belong to the same franchisor or manufactur-      ing principle is that the owner of the trademark alone has the
er. An automobile dealer licensed to use the Oldsmobile           right to decide what gasoline meets its standards and quali-
mark would therefore need a separate license to use other         fies to bear its trademark.”129
marks owned by GMC (such as Chevrolet, Buick, and Ponti-              Many wrongful termination claims are brought notwith-
ac). That other goods may be identical in every respect—          standing that the written franchise or dealership contract per-
except the trademark—does not give someone other than the         mits termination “without cause.” When confronted with the
trademark owner the right to sell them under the trademark.       plain language of the contracts that their clients signed, plain-
For example, in El Greco Leather Products Co. v. Shoe             tiffs’ lawyers often claim that state law “trumps” the contract.
World, Inc.,125 the Second Circuit held that goods manufac-       No state law, however, can operate to broaden the scope of a
tured by the holder of a trademark, but distributed without       “franchise” relationship. Nor can any state law grant the fran-
authorization of the trademark holder, could not be consid-       chisee or dealer a license to use trademarks to which the trade-

Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 217
mark owner had not previously granted rights. Any state law                   By the time that the Oldsmobile market withdrawal has
that purported to do so would not be a trump card; it would be             occurred, there may be additional case law addressing the
a joker. Section 45 of the Lanham Act—the same provision                   extent to which the Lanham Act trumps state law claims of the
that permits (and indeed requires) trademark owners to exer-               type that Mr. Dady claims are so compelling. Indeed, this very
cise                                                     quality           issue is now before a trial court in the Fourth Circuit in two
control—also contains language expressing Congress’s intent                related cases. Volvo Trademark Holding Aktiebolaget v. AIS
to preempt inconsistent state laws. Section 45 states that one             Construction Equipment Corp. (Volvo Trademark I)136 and
purpose of the Lanham Act is “to protect registered marks                  Volvo Trademark Holding Aktiebolaget v. Nueces Farm
used in interstate commerce from interference by State, or ter-            Center, Inc. (Volvo Trademark II)137 have already been the sub-
ritorial legislation.”130 The 1946 Report of the Senate Commit-            ject of two reported decisions. Volvo Trademark I and Volvo
tee on Patents presented the rationale for this provision:                 Trademark II (collectively, the Volvo trademark litigation)
                                                                           have been consolidated for trial in the U.S. District Court for
    A man’s right in his trademark in one state may differ widely from
    the rights which he enjoys in another.                                 the Western District of North Carolina in Asheville.138
                                                                              The Volvo trademark litigation involves facts similar to
    However, trade is no longer local, but is national. Marks used in      the Fiat tractor market withdrawal that was the subject of the
    interstate commerce are properly the subject of Federal regulation.
    It would seem as if national legislation along national lines securing Coelho & Bachetti arbitration. The plaintiffs in the Volvo
    to the owners of trade-marks in interstate commerce definite rights    trademark litigation are Volvo Trademark Holding Aktiebo-
    should be enacted and should be enacted now.131                        laget, a Swedish company that owns the Volvo trademark,
                                                                           Volvo Construction North America, Inc., and Champion
    The rights of a franchisor that the Lanham Act protects                Road Machinery Ltd. Champion Road is a Canadian con-
include the right to use different trademarks to distinguish               struction equipment manufacturer that became an affiliate of
otherwise identical goods. The franchisor’s Lanham Act                     Volvo Construction as the result of an acquisition in 1997.
rights also include the right to license—and not to license—               That transaction was part of a series of acquisitions by the
particular marks to particular franchisees and dealers. Any                Volvo Construction Equipment Group of other manufacturers
state law that deprived the franchisor of its Lanham Act                   of construction equipment. Following each acquisition, these
rights would be expressly                                                                                      other     manufacturers’
preempted by section 45 of                                                                                     products were eventually
the Lanham Act. The                                                                                            rebranded under the Volvo
Fourth Circuit,132 a federal                                                                                   trademark. In addition,
district court in Texas,133                        Many wrongful termination                                   numerous dealers former-
and a federal district court                claims are brought notwithstanding                                 ly responsible for the sale
in Puerto Rico134 have all                                                                                     of these other manufactur-
held that section 45 of the                   that the written contract permits                                ers’ products were eventu-
Lanham Act preempts                              termination “without cause.”                                  ally terminated pursuant
inconsistent state law. The                                                                                    to a continuing dealer
state laws at issue in these                                                                                   “rationalization” program
cases did not involve fran-                                                                                    under way at Volvo Con-
chising. However, in                                                                                           struction. Many of these
Mariniello v. Shell Oil Co., the Third Circuit—in reversing a              dealers have sued (or threatened to) challenging the termina-
lower court decision that the Lanham Act preempted a New                   tion of their distribution rights.
Jersey common law requirement of “good cause” for fran-                       The plaintiffs in the Volvo trademark litigation seek a
chise termination—observed in dicta: “If state law would                   declaratory judgment that it would violate the federal trade-
permit confusing or deceptive trademarks to operate, infring-              mark rights of Volvo Trademark Holding if Volvo Construc-
ing on the guarantee of exclusive use to federal trademark                 tion were forced to supply Volvo-branded products to dealers
owners, then the state law would, under the Supremacy                      that have not been licensed to use the federally registered
Clause, be invalid.”135                                                    Volvo trademark. The plaintiffs also seek a ruling that they
    Any state law requiring that Fiat tractor dealers be permit-           cannot be forced under the Lanham Act to license the Volvo
ted to sell Ford New Holland-branded products “would per-                  trademark to the dealers whose contracts were assigned to
mit confusing or deceptive trademarks to operate.” So would                Volvo Construction following acquisitions of other construc-
any state law that forced the licensing of the Ford New Hol-               tion equipment manufacturers. Finally, the plaintiffs seek a
land trademark to Fiat dealers, or permitted use of the Ford               declaratory judgment that section 45 of the Lanham Act pre-
New Holland trademark by someone not a “related compa-                     empts the dealers’ state law claims arising out of the termina-
ny” within the meaning of Section 45 of the Lanham Act—                    tion of the Champion product line, the termination of various
i.e., a trademark owner or licensee. Such a state law would be             Champion dealer agreements resulting from the Champion
“infringing on the guarantee of exclusive use to federal trade-            market withdrawal, and the rebranding of Champion motor
mark owners,” and according to the Third Circuit’s dicta in                graders under the Volvo trademark.
Mariniello, “would, under the Supremacy Clause, be invalid.”                  The defendant dealers moved to dismiss Volvo Trademark

218 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
I for failure to state a claim. The court denied the motion,       published beside Mr. Dady’s (“State Auto Dealer Regulation:
rejecting the dealers’ argument “that this case presents noth-     One Man’s Preliminary Views”), many state dealer regula-
ing more than a contract dispute over the termination of the       tions deprive consumers of the benefits of competition. Is it
dealership agreements.”139 Without reaching the merits of the      “fair” that automobile dealers in virtually every state have
plaintiffs’ Lanham Act claims, the court held that “for purpos-    been able to protect themselves by statute from intrabrand
es of withstanding a motion to dismiss, Plaintiffs have suffi-     competition? If consumers and others would benefit from
ciently alleged federal question jurisdiction.”140 In Volvo        having the “middleman” cut out altogether, why should pro-
Trademark II, the defendant dealer sought dismissal on two         tectionist legislation prevent this from happening? As merg-
additional grounds: that the dealer’s first-filed state court      ers, acquisitions, and rebrandings occur, there are often
action in Texas should take precedence, and that the Lanham        efficiencies that benefit not only the manufacturer but also
Act claims were moot because the dealer was no longer seek-        consumers. Is it “fair” that litigious franchisees and dealers
ing an injunction requiring the supply of rebranded motor          can deprive consumers of these benefits—or at the very least
graders. In response, the plaintiffs pointed out that it was still impose an exit toll on behavior that is perfectly legitimate and
possible for the dealer to obtain a state court order requiring    indeed pro-competitive? Whatever the answers to these ques-
the supply of the rebranded motor graders. More important,         tions, the case law is clear that franchisees and dealers chal-
the complaint in Volvo Trademark II seeks a declaratory judg-      lenging future market withdrawals face an uphill battle. Even
ment that section 45 of the Lanham Act preempts all state law      if their claims are not dismissed altogether, it may be years, if
claims arising out of the rebranding of Champion motor             ever, before they have anything to show for their efforts other
graders with the Volvo trademark—including claims for dam-         than legal bills and a lot of time spent in court proceedings.
ages as well as injunctive relief. The court also denied the
dealer’s motion to dismiss Volvo Trademark II.                     Editor’s Note
                                                                      The currently pending market withdrawal cases in which Mr.
    Until there has been a final judgment on the merits of the     Lockerby and Mr. Dady are adverse to one another are:
Volvo trademark litigation, it would obviously be premature to        Cromeens, Hollomon, Sibert, Inc.; Con-Equip., Inc.; Con-Equip.,
conclude what impact—if any—it may have on the Oldsmo-             Inc.; FMS, Inc.; Hammer Equip. Sales, Ltd.; Keil Equip. Co., Inc.;
bile and other future market withdrawals. However, the deal-       Korpan Tractor & Parts; and Performance Mach. Co. v. AB Volvo;
                                                                   Volvo Excavators AB; Volvo Constr. Equip. NV; and Volvo Constr.
ers named as defendants in the Volvo trademark litigation have     Equip. N. Am., Inc., 2001 U.S. Dist. LEXIS 15482 (N.D. Ill. Sept. 26,
so far been unable to dodge the Lanham Act bullet by the sim-      2001), currently on appeal to Seventh Circuit (7th Circuit Docket No.
ple expedient of forsaking                                                                                  01–3770), in which Mr. Dady
claims for injunctive relief                                                                                is lead counsel for the plain-
to obtain the rebranded                                                                                     tiffs and Mr. Lockerby is lead
                                                                                                            counsel for the defendants;
Volvo product that replaced                                                                                    Nueces Farm Ctr., Inc. v.
the Champion-branded                                       Of course,                                       Volvo Constr. Equip. N. Am.,
product that they previously                                                                                Inc. and Champion Road
sold. The proceedings so                           fairness is in the eye                                   Mach. Ltd., Civil Action No.
far in the Volvo trademark                                                                                  00–4732 in the 148th Judicial
                                                       of the beholder.                                     District of Texas (Nueces
litigation suggest that deal-                                                                               County), in which Mr. Dady is
ers and franchisees contest-                                                                                lead counsel for the plaintiff
ing a market withdrawal                                                                                     and Mr. Lockerby is lead
may have a difficult time                                                                                   counsel for the defendants;
getting around the impedi-                                                                                     Volvo Trademark Holding
                                                                   Aktiebolaget; Volvo Constr. Equip. N. Am., Inc.; and Champion Road
ments that the Lanham Act presents to their claims. This may       Mach. Ltd. v. AIS Constr. Equip. Corp.; CLM Equip. Co.; Future
be so even if the franchisees or dealers whose products have       Equip. Co.; and Clark Mach. Co., 162 F. Supp. 2d 465, 2001 U.S. Dist.
been discontinued seek “only money damages.” They still            LEXIS 13493 (W.D.N.C. Aug. 27, 2001), in which Mr. Lockerby is
must explain why they are entitled to relief based on the with-    lead counsel for the plaintiffs and Mr. Dady is lead counsel for the
drawal of a product that—as a matter of federal trademark          defendants; and
                                                                      Volvo Trademark Holding Aktiebolaget v. Nueces Farm Ctr., Inc.,
law—no longer exists (even if its functional equivalent is still   2001 U.S. Dist. LEXIS 17635 (W.D.N.C., Oct. 26, 2001), in which Mr.
available under different trademarks). They must also be pre-      Lockerby is lead counsel for the plaintiff and Mr. Dady is lead counsel
pared to explain why the franchisor’s federal trademark rights     for the defendant.
do not trump the state law claims by which they are challeng-
ing the market withdrawal.                                         Endnotes
                                                                             1. See, e.g., Mr. Dady’s discussion of the Edsel market withdrawal
Is It “Fair”?                                                          (“Historians from the National Automobile Dealers Association report.
In the few cases in which market withdrawal claims have got-           . . .”).
                                                                             2. Jim Barnett Motors, Inc. v. Ford Motor Co., 355 F.2d 502 (5th
ten anywhere, a fundamental premise seems to have been that            Cir. 1966); Fabert Motors, Inc. v. Ford Motor Co., 355 F.2d 888 (7th
there was something “unfair” to the franchisee or dealer about         Cir.), cert. denied, 384 U.S. 939 (1966).
the market withdrawal. Of course, fairness is in the eye of the              3. Buono Sales, Inc. v. Chrysler Motors Corp., 449 F.2d 715, 718
beholder. As FTC Commissioner Leary observed in his article            (3d Cir. 1971).


Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 219
    4. Schwimley v. Chrysler Motors Corp., 481 F.2d 1025 (9th Cir.            Volvo White had good cause to terminate the franchise agreement.
1973).                                                                        As of January 1, 1988, it will be defunct. Even if the new entity
    5. Buono Sales, 449 F.2d at 720.                                          were shown to be merely the alter ego of Volvo White, nothing in
    6. 481 F.2d 1025 (9th Cir. 1973).                                         the record before me suggests that its refusal to continue plaintiff as
    7. 1987 WL 109210, at 3 (N.D. Ind. 1987).                                 a dealer was based on anything other than a business decision
    8. 440 N.W.2d 276 (S.D. 1989).                                            brought about by the change in product lines, an assessment of the
    9. 931 F.2d 1112 (6th Cir. 1991).                                         financial implications of marketing through a large number of deal-
   10. 975 F.2d 1192 (5th Cir. 1992).                                         ers, and a fair comparison of plaintiff and Bracken. An automobile
   11. Id. at 1205.                                                           manufacturer has an unqualified right to make the changes in its
   12. Bus. Franchise Guide (CCH) ¶ 9178, at 19,153 (D. Mass. 1987).          channels of distribution for legitimate business reasons. DeCantis v.
   13. Id. at 19,156.                                                         Mid-Atlantic Toyota Distributors, 371 F. Supp. 1238, 1242 (E.D.
   14. 555 A.2d 314 (Pa. Cmwlth. Ct. 1989).                                   Va. 1974). Even the efficient dealer has no right to a “marriage for
   15. Id. at 317.                                                            life” with the manufacturer. Berry Brothers Buick, Inc. v. General
   16. 402 S.E.2d 135, 138 (N.C. App. Ct. 1991).                              Motors Corp., 254 F. Supp. 542, 546 (E.D. Pa. 1966), aff’d per
   17. 1988 WL 148432, at *9 (W.D. Wis. 1988).                                curiam, 377 F.2d 552 (3d Cir. 1967).
   18. 706 F. Supp. 952 (D. Me. 1988).                                     In C-B Kenworth, Inc. v. General Motors Corp., 706 F. Supp. 952 (D.
   19. Id. at 956.                                                         Me. 1988), the court found a material issue of fact as to whether GMC
   20. Central GMC, Inc. v. General Motors Corp., 946 F.2d 327, 330        had engaged in “coercion” by requiring the execution of a legal release
(4th Cir. 1991), cert. denied, 503 U.S. 907 (1992).                        before providing termination assistance. However, the market with-
   21. Id. at 333.                                                         drawal itself was not actionable under the Automobile Dealer’s Day in
   22. Id. at 334.                                                         Court Act.
   23. Id.
                                                                              50. N.J. STAT. ANN. § 56:10–5.
   24. Id.
                                                                              51. Freedman Truck Ctr., Inc. v. General Motors Corp., 784 F. Supp.
   25. General GMC, Inc. v. Volvo White Truck Corp., Bus. Franchise
                                                                           167, 173 (D.N.J. 1992).
Guide (CCH) ¶ 9178 (D. Mass. 1987).
                                                                              52. WIS. STAT. § 135.02(4)(a).
   26. C. Earl Brown, Inc. v. Commonwealth, 555 A.2d 314 (Pa.
                                                                              53. Morley-Murphy Co. v. Zenith Elec. Corp., 142 F.3d 373 (7th
Cmwlth. Ct. 1989).
                                                                           Cir. 1998).
   27. Carolina Truck Body Co., Inc. v. General Motors Corp., 402
                                                                              54. Ziegler Co. v. Rexnord, Inc., 433 N.W.2d 8 (Wis. 1988).
S.E.2d 135, 138 (N.C. App. Ct. 1991).
                                                                              55. St. Joseph Equip. v. Massey-Ferguson, Inc., 546 F. Supp. 1245
   28. Mid-State Truck Serv., Inc. v. General Motors Corp., 1988 WL
                                                                           (W.D. Wis. 1982).
148432, at *9 (W.D. Wis. 1988).
                                                                              56. Lee Beverage Co., Inc. v. I.S.C. Wines of California, Inc., 623 F.
   29. Central GMC, Inc. v. General Motors Corp., 946 F.2d 327 (4th
                                                                           Supp. 867 (E.D. Wis. 1985).
Cir. 1991), cert. denied, 503 U.S. 907 (1992).
                                                                              57. Mid-State Truck Serv., Inc. v. General Motors Corp., 1988 WL
   30. Hechler Chevrolet, Inc. v. General Motors Corp., 337 S.E.2d 744
                                                                           148432, at *9 (W.D. Wis. 1988).
(Va. 1985). Hunton & Williams represented the appellees in Hechler            58. 976 F.2d 58 (1st Cir. 1992).
Chevrolet.                                                                    59. Id. at 60.
   31. C-B Kenworth, Inc. v. General Motors Corp., 706 F. Supp. 952           60. Id. at 65.
(D. Me. 1988).                                                                61. 858 F.2d 817 (1st Cir. 1988).
   32. Arthur Glick Truck Sales, Inc. v. General Motors Corp., 865            62. Id.
F.2d 494 (2d Cir. 1989).                                                      63. 63 F.3d 1169, 1184–85 (2d Cir. 1996).
   33. General Motors Corp. v. Gallo GMC Truck Sales, Inc., 711 F.            64. Id. at 1184.
Supp. 810 (D.N.J. 1989).                                                      65. CONN. GEN. STAT. § 42–133f(a) (2001).
   34. Freedman Truck Ctr., Inc. v. General Motors Corp., 784 F. Supp.        66. Id. § 42–133(a).
167 (D.N.J. 1992).                                                            67. Petereit, 63 F.3d at 1185.
   35. Id..                                                                   68. Id.
   36. N.J. STAT. ANN. § 56:10–5.                                             69. Id.
   37. Carolina Truck Body Co., Inc. v. General Motors Corp., 402             70. Id.
S.E.2d 135 (N.C. App. Ct. 1991), cert. denied, 407 S.E.2d 831 (N.C.           71. 488 F.2d 816, 819 (3d Cir. 1973).
1991).                                                                        72. Freedman Truck Ctr., Inc. v. General Motors Corp., 784 F. Supp.
   38. 546 F. Supp. 1245, 1248 (W.D. Wis. 1982).                           167 (D.N.J. 1992).
   39. 853 F.2d 268 (4th Cir. 1988), cert. denied, 490 U.S. 1011 (1989).      73. N.J. STAT. ANN. § 56:10–5.
   40. 858 F.2d 817, 824 (1st Cir. 1988).                                     74. 946 F.2d 327, 330 (4th Cir. 1991), cert. denied, 503 U.S. 907
   41. 824 F.2d 733, 734 (9th Cir. 1987) (per curiam).                     (1992).
   42. Freedman Truck Ctr., Inc. v. General Motors Corp., 784 F. Supp.        75. Id. at 333.
167, 173 (D.N.J. 1992).                                                       76. Id.
   43. Bus. Franchise Guide (CCH) ¶ 10,923 (A.A.A. 1996).                     77. 975 F.2d 1192 (5th Cir. 1992).
   44. 15 U.S.C. § 1222.                                                      78. Id. at 1198.
   45. Id. § 1221.                                                            79. 142 F.3d 373 (7th Cir. 1998).
   46. 15 U.S.C. § 2802(b)(2)(E).                                             80. Notwithstanding its interpretation of Wisconsin law in Morley-
   47. Jim Barnett Motors, Inc. v. Ford Motor Co., 355 F.2d 502 (5th       Murphy Co. v. Zenith Elec. Corp., the Seventh Circuit has held that
Cir. 1966); Fabert Motors, Inc. v. Ford Motor Co., 355 F.2d 888 (7th       “the internal economic reasons of the franchisor are not, by themselves,
Cir.), cert. denied, 384 U.S. 939 (1966).                                  good cause for termination or nonrenewal of a franchise” under the
   48. See Buono Sales, Inc. v. Chrysler Motors Corp., 449 F.2d 715,       Indiana Deceptive Franchise Practices Act. Wright-Moore Corp. v.
724 (3d Cir. 1971).                                                        Ricoh Corp., 908 F.2d 128, 137 (7th Cir. 1990).
   49. In General GMC, Inc. v. Volvo White Truck Corp., Bus. Fran-            81. Morley-Murphy Co., 142 F.3d at 378.
chise Guide (CCH) ¶ 9178, at 19,156 (D. Mass. 1987), the court reject-        82. 433 N.W.2d 8 (Wis. 1988).
ed the dealer’s contention that the manufacturer had violated the             83. Id. at 11.
Automobile Dealer’s Day in Court Act by terminating the motor vehi-           84. Id.
cle franchise without “good cause”:                                           85. Id.


220 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association
   86. 546 F. Supp. 1245 (W.D. Wis. 1982).                                        name, trademark, service mark, or related characteristic within an
   87. Id. at 1247.                                                               exclusive or nonexclusive territory, or to sell or distribute goods or
   88. Id. at 1247–48.                                                            services within an exclusive or nonexclusive territory, at wholesale,
   89. Id. at 1250.                                                               retail, by lease agreement, or otherwise.
   90. Id. at 1250–51.                                                         ARK. STAT. ANN. § 4–72–202 (emphasis supplied).
   91. 623 F. Supp. 867 (E.D. Wis. 1985).                                      The Delaware Franchise Security Act defines “franchised distributor”
   92. Id. at 869.                                                             as someone engaged in the business of, inter alia:
   93. Id.
   94. 918 F.2d 1366, 1367–69 (8th Cir. 1990).                                    (a) Purchasing or taking on consignment products which bear the
   95. Id.                                                                        trademark or trade name of the manufacturer, producer or publish-
   96. 824 F.2d 733 (9th Cir. 1987).                                              er for the primary purpose of selling such products to retail outlets;
   97. American Mart Corp. v. Joseph E. Seagram & Sons, Inc., 643 F.              or
Supp. 44, 48 (D. Nev. 1985).
   98. American Mart Corp., 824 F.2d at 733.                                      (b) Selling in or through retail outlets products which bear the
   99. Bus. Franchise Guide (CCH) ¶ 10,923, at 28,162 (A.A.A. 1996).              trademark or trade name of no more than 3 manufacturers, produc-
 100. Id. at 28,163.                                                              ers, publishers, trademark licensors, or trade name licensors;. . . .
 101. Id.                                                                      6 DEL. CODE § 2551 (emphasis supplied). “Franchisor” is similarly
 102. Id.                                                                      defined to include someone in the business of, inter alia:
 103. Id. at 28,164–65.
 104. Id.                                                                         (a) Distributing or selling to one or more franchised distributors, on
 105. Id. at 28,165.                                                              its own behalf or on behalf of another, products which bear the
 106. Id.                                                                         trademark or trade name of the manufacturer, producer or publish-
 107. Susser v. Carvel Corp., 206 F. Supp. 636, 640 (S.D.N.Y. 1962),              er; or
aff’d, 332 F.2d 505 (2d Cir.), cert. granted, 379 U.S. 885 (1964), cert.          (b) Licensing the use of one or more trademarks or trade names to
dismissed, 381 U.S. 125 (1965).                                                   one or more franchised distributors;. . . .
 108. 16 C.F.R. § 436.2(a).
 109. 15 U.S.C. § 2801.                                                        Id. (emphasis supplied).
 110. For example, the New Jersey Franchise Practices Act defines              The Minnesota Franchise Law similarly defines franchise as including:
“franchise” as:
                                                                                  (a) a contract or agreement, either express or implied, whether oral
   a written arrangement for a definite or indefinite period, in which a          or written, for a definite or indefinite period, between two or more
   person grants to another person a license to use a trade name, trade           persons:
   mark, service mark, or related characteristics, and in which there is
   a community of interest in the marketing of goods or services at               (1) by which a franchisee is granted the right to engage in the busi-
   wholesale, retail, by lease, agreement, or otherwise.                          ness of offering or distributing goods or services using the fran-
                                                                                  chisor’s trade name, trademark, service mark, logotype,
N.J. REV. STAT. § 56:10–3(a) (emphasis supplied). Other jurisdictions
                                                                                  advertising, or other commercial symbol or related characteristics;
whose restrictions on franchise termination similarly define “franchise”
in terms of a “community of interest” include Missouri (see MO. REV.              (2) in which the franchisor and franchisee have a community of
STAT. § 407.400), Nebraska (see NEB. REV. STAT. § 87–402), Wiscon-                interest in the marketing of goods or services at wholesale, retail, by
sin (see WIS. STAT. § 135.02(3)), and the District of Columbia (see               lease, agreement, or otherwise; and
D.C. CODE ANN. § 29–1201(2)).                                                     (3) for which the franchisee pays, directly or indirectly, a franchise
 111. The Virginia Retail Franchising Act is typical of states that               fee; . . . .
define “franchise” in terms of a “marketing plan”:
                                                                               MINN. STAT. § 80C.01 (emphasis supplied).
   “‘Franchise’ means a written contract or agreement between two or            113. See, e.g., Virginia Beer Franchise Act:
   more persons, by which:
                                                                                  “Agreement” means a commercial relationship, not required to be evi-
   (1) A franchisee is granted the right to engage in the business of offer-      denced in writing, of definite or indefinite duration, between a brew-
   ing, selling or distributing goods or services at retail under a market-       ery and beer wholesaler pursuant to which the wholesaler has been
   ing plan or system prescribed in substantial part by a franchisor;             authorized to distribute one or more of the brewery’s brands of beer.
   (2) The operation of the franchisee’s business pursuant to such plan           “Brand” means any word, name, group of letters, symbol or combi-
   or system is substantially associated with the franchisor’s trade-             nation thereof adopted and used by a brewery to identify a specific
   mark, service mark, trade name, logotype, advertising or other                 malt beverage product and to distinguish that product from other
   commercial symbol designating the franchisor or its affiliate; and             beers produced or marketed by that brewery or other breweries.
   (3) The franchisee is required to pay, directly or indirectly, a fran-      VA. CODE § 4.1–500 (emphasis supplied).
   chise fee of $500 or more.                                                   114. See, e.g., Virginia Farm Machinery Dealership Act:
VA. CODE § 13.1–559 (emphasis supplied). Other states whose restric-
                                                                                  “Dealer agreement” means a written or oral contract or agreement
tions on franchise termination and nonrenewal similarly define “fran-
                                                                                  between a dealer and a wholesaler, manufacturer, or distributor by
chise” in terms of a “marketing plan” include California (see CAL. BUS.
                                                                                  which the dealer is granted the right to sell or distribute goods or
& P ROF . C ODE § 20001), Connecticut (see C ONN . G EN . S TAT .
                                                                                  services, or to use a trade name, trademark, service mark, logo
§ 42–133e), Illinois (see 1987 Ill. Laws 85–551, § 3), Indiana (see IND.
                                                                                  type, or advertising or other commercial symbol.
CODE §§ 23–2-2.5–1, 23–2-2.7–5), Iowa (see IOWA CODE § 523H.1),
and Washington (see WASH. REV. CODE § 19.100.010).                             VA. CODE § 59.1–344 (emphasis supplied).
  112. Other state laws that restrict rights of franchise termination and       115. See, e.g., Virginia Heavy Equipment Dealer Act:
nonrenewal similarly define “franchise” in terms of a trademark license.
                                                                                  “Agreement” means a commercial relationship, not required to be
The Arkansas Franchise Practices Act defines “franchise” as:
                                                                                  evidenced in writing, of definite or indefinite duration, between a
   a written or oral agreement for a definite or indefinite period, in            supplier and a dealer pursuant to which the dealer has been autho-
   which a person grants to another person a license to use a trade               rized to distribute one or more of the supplier’s heavy equipment


 Reprinted by permission of the American Bar Association ■ Volume 21, Number 4, Spring 2002 ■ Franchise Law Journal 221
   products, and attachments and repair parts therefor, and in connec-         122. Oberlin v. Marlin American Corp., 596 F.2d 1322, 1327 (7th
   tion therewith to use a trade name, trademark, service mark, logo         Cir. 1979) (“The Lanham Act requires supervision of trademark
   type, or advertising or other commercial symbol.                          licensees at the expense of abandonment of the trademark. The licensor
VA. CODE § 59.1–353 (emphasis supplied).                                     must control the operations of its licensees to ensure that the trademark
 116. See, e.g., Virginia Motor Vehicle Dealers Franchise Act:               is not used to deceive the public as to the quality of the goods or ser-
                                                                             vices bearing the name.”).
   “Franchise” means a written contract or agreement between two or            123. Edwin K. Williams & Co. v. Edwin K. Williams & Co.-East,
   more persons whereby one person, the franchisee, is granted the           542 F.2d 1053, 1059–60 (9th Cir. 1976), cert. denied, 433 U.S. 908
   right to engage in the business of offering and selling, servicing, or    (1977) (“A tradename licensor must maintain control over the quality
   offering, selling, and servicing new motor vehicles of a particular       of the finished product or service to guarantee to the public that the
   line-make or late model or factory repurchase motor vehicles of a         goods or services are of the same, prelicense quality.”).
   particular line-make manufactured or distributed by the grantor of          124. See, e.g., McAlpine v. AAMCO Automatic Transmissions, Inc.,
   the right, the franchisor, and where the operation of the franchisee’s
                                                                             461 F. Supp. 1232, 1239–40 (E.D. Mich. 1978) (“For a licensor,
   business is substantially associated with the franchisor’s trademark,
                                                                             through relaxation of quality control, to permit inferior products to be
   trade name, advertising, or other commercial symbol designating
                                                                             presented to the public under its licensed mark might well constitute a
   the franchisor, the motor vehicle or its manufacturer or distributor.
                                                                             misuse of the mark.”).
VA. CODE § 46.2–1500 (emphasis supplied).                                      125. 806 F.2d 392 (2d Cir. 1986), cert. denied, 484 U.S. 817 (1987).
 117. See, e.g., Virginia Petroleum Products Franchise Act:                    126. Id. at 395 (citations omitted) (emphasis supplied).
   “Franchise” or “franchise agreement” means any agreement,                   127. Shell Oil Co. v. Commercial Petroleum, Inc., 928 F.2d 104, 107
   express or implied, between a refiner and a dealer under which a          (4th Cir. 1991).
   refiner authorizes or permits a dealer to use, in connection with the       128. Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 478 F. Supp.
   sale, consignment, or distribution of motor fuel, a trademark which       243, 279–80 (E.D. Pa. 1979), aff’d, 637 F.2d 105 (3d Cir. 1980), cert.
   is owned or controlled by such refiner. “Franchise” or “franchise         denied, 451 U.S. 911 (1981).
   agreement” shall also mean any agreement, express or implied,               129. Amoco Oil Co. v. D.Z. Enters., Inc., 607 F. Supp. 595, 599
   under which a dealer is granted the right to occupy leased market-        (E.D.N.Y. 1985).
   ing premises, which premises are to be employed in connection               130. 15 U.S.C. § 1127.
   with the sale, consignment, or distribution of motor fuel under a           131. S. REP. NO. 79–1333, 79th Cong., 2d Sess., reprinted in 1946
   trademark which is owned or controlled by such refiner.                   U.S.C.C.A.N. 1274, 1277.
                                                                               132. Spartan Food Sys., Inc. v. HFS Corp., 813 F.2d 1279, 1284 (4th
VA. CODE § 59.1–21.10 (emphasis supplied).
                                                                             Cir. 1987) (“The express terms of § 45 of the [Lanham] Act which pro-
 118. See, e.g., Virginia Wine Franchise Act:
                                                                             vide for its preemption of state law require that the conflict between
   “Agreement” means a commercial relationship, not required to be evi-      Spartan’s federal protection and H.F.S.’s state law claims must be
   denced in writing, of definite or indefinite duration, between a winery   resolved in favor of Spartan.”).
   and wine wholesaler pursuant to which the wholesaler has been               133. American Automobile Ass’n v. AAA Ins. Agency, Inc., 618 F.
   authorized to distribute one or more of the winery’s brands of wine.      Supp. 787, 798 (W.D. Tex. 1985) (“state law cannot defeat or limit in
                                                                             any way the protection given to federally registered marks under the
   “Brand” means any word, name, group of letters, symbol or combi-          Lanham Act”).
   nation thereof adopted and used by a winery to identify a specific          134. Davidoff Extension S.A. v. Davidoff Comercio E Industria
   wine product and to distinguish that product from other wine pro-         Ltda., 747 F. Supp. 122, 127 (D.P.R. 1990) (“Through 15 U.S.C.
   duced or marketed by that winery or other wineries.                       § 1127, Congress has established the policy of prohibiting state inter-
VA. CODE § 4.1–401 (emphasis supplied).                                      ference with those rights afforded to federally registered trademarks.”).
  119. 15 U.S.C. §§ 1051, 1055.                                                135. Mariniello v. Shell Oil Co., 511 F.2d 853, 858 (3d Cir. 1975)
  120. Id. § 1127 (emphasis supplied).                                       (citation omitted).
  121. Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.,            136. 162 F. Supp. 2d 465 (W.D.N.C. 2001).
549 F.2d 368, 387 (5th Cir. 1977) (“Courts have long imposed upon              137. No. 1:01cv122-T, 2001 U.S. Dist. LEXIS 17635 (W.D.N.C. Oct.
trademark licensors a duty to oversee the quality of licensees’ products.    26, 2001).
[citation omitted] The rationale for this requirement is that marks are        138. Mr. Lockerby represents the plaintiffs and Mr. Dady represents
treated by purchasers as an indication that the trademark owner is asso-     the defendants in the Volvo trademark litigation.
ciated with the product. Customers rely upon the owner’s reputation            139. AIS Constr. Equip. Corp., 162 F. Supp. 2d at 470.
when they select the trademarked goods.”).                                     140. Id. at 471.




222 Franchise Law Journal ■ Spring 2002, Volume 21, Number 4 ■ Reprinted by permission of the American Bar Association

								
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