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Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2009

On Behalf of | May 3, 2019 | Franchise Fees

And the saga continues . . .

In Coyne’s & Co. v. Enesco, LLC, 553 F.3d 1128 (8th Cir. 2009), a distributor (“plaintiff”) entered into an agreement with a company formed under the laws of England (“company”). The agreement provided for plaintiff’s exclusive right to sell, distribute, market and advertise all of the company’s products in the United States and Mexico from 2005 through December 2007. In exchange, plaintiff agreed to pay the company a 35–50% mark-up on the products.

In August 2007, the company was placed into receivership and its receivers entered into an asset sale agreement with an Illinois corporation (“defendant”). A few days later, the company’s receivers sent plaintiff a termination letter pursuant to Section 5.4 of the agreement, allowing for any party to terminate if the other becomes insolvent. Plaintiff responded that the termination was without legal effect because Section 5.4 did not allow an insolvent party to use its own insolvency to justify termination.

One month later, defendant announced that it would be distributing the products—which plaintiff had an exclusive right to distribute in the United States and Mexico—in the United States. Plaintiff subsequently filed suit and sought a TRO and preliminary injunction to prevent defendant from moving forward with its plan to distribute the products in the United States.

The district court denied plaintiff’s motion and rejected plaintiff’s claim for unlawful termination in violation of the Minnesota Franchise Act. The court reasoned that plaintiff was unable to demonstrate a likelihood of success on its claims if the agreement was not still in effect. Plaintiff appealed on the basis that it paid a franchise fee. As such, the failure to comply with the termination requirements under the Minnesota Franchise Act rendered both the termination invalid and the agreement still in effect. In support, plaintiff argued that the minimum purchase requirement and 35–50% mark-up on the products constituted an indirect franchise fee.

Minimum Purchase

A minimum purchase requirement can satisfy the franchise fee element of the Minnesota Franchise Act “if the distributors were required to purchase amounts or items that they would not purchase otherwise.” To determine this, the court asks “whether the [minimum purchase] requirements were unreasonable.” Because plaintiff did not put forth the argument at the district court or before the court on appeal that the minimum purchase requirement was unreasonable, the district court’s finding that the minimum purchase requirement was not an indirect franchise fee was not clearly erroneous.

Price Mark-up

Whether a price mark-up on goods above a bona fide wholesale price constitutes an indirect franchise fee is a fact-specific inquiry. The district court found that the mark-up was not an indirect franchise fee, as the mark-up represented the profits on the products. On appeal, plaintiff argued that this was incorrect “because it is illogical to assume that all of the rights granted to [plaintiff] under the Agreement . . . are merely in consideration for [plaintiff’s] payment of a bona fide wholesale price for [the] products.” The court on appeal, without much (or any) elaboration, responded that plaintiff’s argument was insufficient to demonstrate that the district court’s finding was clearly erroneous. As a result, the court affirmed the district court’s holding.

Takeaway: Under the Minnesota Franchise Act, a minimum purchase requirement can be a franchise fee and a price mark-up on goods above a bona fide wholesale price can be an indirect franchise fee. However, be aware that different trial court judges may demand different standards of proof to establish a “franchise fee” and a decision of a trial court judge may not receive a great deal of scrutiny on appeal.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.