A Warning to the Unwary: Beware of Fair Dealership Laws When Making a “Covid-Shakeup.”

KMK is pleased to announce that an article by KMK Shareholder Ryan M. Billings was recently published in the Spring 2021 edition of Primerus Paradigm. The article discusses the dangers of making Covid-related changes to distributor relationships without a full understanding of local fair dealership laws.
 
A courtesy copy of the article is enclosed below. If you have any questions about fair dealership laws or an issue involving a distributor relationship, please contact Ryan M. Billings at rbillings@kmksc.com or call (414) 962-5110.
 
About KMK
Founded in 1937, Kohner, Mann & Kailas, S.C. (KMK) is a leading law firm with a global reputation for success and a rich tradition of results, providing legal expertise in business and financial services, business litigation, and commercial collections. Recognized by U.S. News & World Report as one of the nation’s Best Law Firms, KMK is headquartered in Milwaukee, WI. For more information, visit www.kmksc.com.
 
By Ryan M. Billings
 
A Warning to the Unwary: Examine Local Law Closely Before Making COVID-Related Distributor Changes
 
COVID-19 has turned the business world upside down in a myriad of ways. Some markets have dried up, while others are booming. Supply chains have shifted as companies go out of business or change priorities. Given this turmoil, many businesses are considering making changes to their distributor relationships, whether by terminating distributors, changing territories or revising compensation structures. But beware. In the U.S. and elsewhere, local laws may constrain the changes a company can legally make to its distributor network, the timeframe under which those changes can be made, and the permissible grounds for making a change. As the penalties for non-compliance can be severe, any business looking to make a change should consult with competent counsel who is licensed in the distributor’s jurisdiction.
 
For instance, consider Wisconsin’s Fair Dealership Law, Wis. Stat. § 135.01, et seq. (WFDL). For distributor relationships that fall under the WFDL (dealerships), the party who engages a distributor (grantor) can terminate, cancel, fail to renew or substantially change the nature of the dealership only upon proper notice and with good cause. To be proper under the statute, the notice must:
 
(a) be in writing;
(b) detail all of the reasons for the change;
(c) be received at least 90 days before the change; and
(d) in cases involving performance deficiencies, provide the distributor at least 60 days to cure any deficiency.
 
Good cause means either that the distributor (dealer) has acted in bad faith or has failed to comply substantially with the essential, reasonable and non-discriminatory requirements of the grantor.
 
Any failure to provide the statutorily-required notice, or any substantial change in the relationship without good cause, is a violation of the WFDL, requiring the grantor to pay damages and the dealer’s attorneys’ fees. With respect to damages, WFDL cases are generally brought after a dealer has been terminated, and the dealer argues that if the grantor had obeyed the statute, the dealer would have cured any purported deficiency and performed satisfactorily for an indefinite period. Damages therefore are the profits the dealer could have expected to earn over the foreseeable course of the dealership relationship.
 
For instance, if a dealer was making $10 million in annual profits and the dealership could be expected to last another 25 years, the dealer could seek the present value of $250 million in damages, plus its attorneys’ fees in pursuing violation of the statute. Further, because the 90-day notice requirement is inflexible (except in the cases of bankruptcy or non-payment by the dealership for orders or other purchased goods), a simple failure to provide the required 90 days’ notice and 60 days to cure could expose a grantor to liability for decades of expected profits. In other words, failure to give the proper notice in this hypothetical could be a $250 million mistake!
 
Of course, grantors in circumstances like this have argued that, at most, the dealer is entitled to just 90 days of expected profits (the notice period), but that argument doesn’t always win, and the law is construed in favor of the dealer.
 
I cannot tell you the number of times an out-of-state company, unaware of the WFDL, has terminated a Wisconsin distributor relationship in full compliance with the termination provision of the distributor contract, and was shocked to get hit with a WFDL suit. Under Wisconsin law, you cannot alter the requirements of the statute by contract, so a termination that is perfectly within the grounds agreed to by the parties may still be in violation of the statute and expose the grantor to substantial liability. In addition, choice of law or venue clauses providing that another state’s law governs the relationship or that lawsuits must be brought in a non-Wisconsin venue are often deemed unenforceable due to Wisconsin’s public policy interest in enforcing the WFDL. So, there is no sure-fire way to contract around the WFDL’s requirements.
 
The most common defense to a WFDL suit is to argue that the relationship does not fall under the statute. By its terms, the WFDL only applies to “dealerships,” which are relationships that involve:
 
(1) a contract or agreement between two or more persons to sell or distribute good or services, or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol; and
(2) a “community of interest.”
 
The term “community of interest” is a fuzzy concept that addresses whether the parties have a sufficient continuing financial interest and level of interdependence such that a grantor’s decision to cancel or alter the relationship would be a threat to the economic health of the dealer. The quintessential example is the owner of a gas station, who has invested their livelihood in the partnership with a given petroleum company and would be devastated if the gas company suddenly decided to terminate the relationship.
 
The Wisconsin Supreme Court has laid out an 11-factor test to determine if a community of interest exists, and has explained that it is a totality of the circumstances test in which no one factor predominates. Given the lack of clarity in what the concept of a “community of interest” means; the debatable nature of each of the eleven factors; and the fact that no one factor clearly outweighs the others, the end result is that lawyers argue about whether the statute applies in virtually every WFDL case, and the ultimate answer is uncertain in most situations.
 
While I’ve used Wisconsin as an example for discussion purposes, 18 other U.S. states have distributor laws that override the parties’ contract, and many more states have statutes that provide default rules in the absence of contractual language otherwise. Outside the U.S., many countries have laws that impose mandatory requirements on distributor or franchise agreements, and nearly all countries with developed legal systems regulate these kinds of relationships in some way. Not every jurisdiction has laws as stringent as the WFDL, but discovering what those laws require after a termination letter has already been sent can be a very painful and expensive lesson.
 
With competent advice from a lawyer licensed in the jurisdiction where the distributor is based or primarily works, exposure to laws like the WFDL can be minimized or eliminated altogether. In Wisconsin, good cause is something that can usually be established with a proper paper trail and a history of trying to work things out with the dealer, and notice is simply a matter of planning ahead and knowing the rules. Any business that is considering a “COVID shakeup” would be wise to consider the requirements and potential legal exposure involved in changing relationships with distributors before any ultimate decision is made.
 
About Ryan M. Billings
 
Ryan M. Billings is a Shareholder and Chair of Litigation with Kohner, Mann & Kailas, S.C. He practices complex litigation, representing business entities across a broad spectrum of matters, from simple contract disputes to class action antitrust claims. Ryan regularly advises clients concerning Wisconsin’s Fair Dealership Law and unfair competition laws.
 
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Milwaukee, Wisconsin 53212
414.962.5110 Phone
rbillings@kmksc.com
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