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Franchising From the Franchisee Lawyer Perspective

Imagine a client walks into your office wanting to get out of a contractual arrangement that they entered into three years ago. They explain that they are losing money, and that the contract makes no sense for them any longer.

In probing them, and reading the contract, you learn your client’s business is essentially controlled by the other party. The contract dictates the most basic aspects of the business—the hours of operation and the training requirements of the employees. It gives the other party approval rights over who the manager will be; the layout and appearance of the location; and controls what products and services your client can sell. Digging further you find that your client had to buy all of the original FF&E from the other party, and once open, is required to continue buying all inventory from the other party and its wholly owned affiliates, all at prices that are above what your client could get on the street for the exact same products. And, beyond controlling the price of goods (by being the only seller of those goods your client is allowed to purchase from), the contract also allows the other party to control the retail price of the goods and services your client may offer as well. In sum, your client has little to no control of their own profit margin.

The financial terms surprise you. Your client paid $75,000 to be in this one-sided relationship, and continues to pay 8 percent of their gross revenue to stay in the relationship, irrespective of whether they are making any money.

The boilerplate terms are no better. Your client is required to indemnify the other party for anything that happens at the location, even if it is the fault of the other party (and the indemnification is not reciprocal). The contract expressly disclaims any obligation the other party has to act in good faith. The dispute resolution provisions give the other party the right to bring injunctions, but your client does not have that right. Your client’s right to bring a claim is subject to a one-year statute of limitations, but there are no such limits on the other side. Venue and choice of law both favor the other party. And the attorney fee provision is also unilateral; the other party can get theirs if they win, but your client has no such stated right.

Finally, getting to the reason your client came in, you turn to the termination provisions. The agreement, which is for a 20-year term, while allowing the other side to terminate, inexplicably gives your client no right to terminate for any reason. And, if your client “breaches” by terminating because…read more


*NOTICE: This article 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 article.

Manufacturer or Distributor Cancellation of a Dealer Franchise: “Just Provocation” Under South Dakota Statute


If you are a franchised dealer, then odds are your contract contains terms regarding the circumstances under which your dealership may (or may not) be terminated.  But did you know that you may also have some statutory termination protection as well?  Many states have dealer protection laws which also contain the certain circumstances under which your dealership may (or may not) be terminated.  For purposes of this blog, we will be focusing on South Dakota law.

South Dakota Franchise Dealer Statute

Under South Dakota Codified Laws section 37-5-3, a manufacturer or distributor is prohibited from cancelling a dealer’s franchise “unfairly . . . and without just provocation.”  Any manufacturer or distributor who does so is subject to a Class 1 misdemeanor.

How Have the Courts Interpreted “Just Provocation?”

Although the statute does not define “just provocation,” there are some cases that shed light on what is meant by the phrase.

In Groseth International, Inc. v. Tenneco, Inc., 410 N.W.2d 159, 168 (S.D. 1987), the court held that “just provocation [under § 37-5-3] requires some sort of misconduct or shortcomings on the part of the dealer.”  There, Groseth International, Inc. (a family-owned corporation) entered into a franchise agreement with International Harvester Company (“IHC”) in which Groseth was a franchised dealer of IHC farm equipment.  Groseth abided by all the terms and conditions of the franchise agreement.  In December 1984, Groseth was notified that Case/Tenneco would be acquiring IHC and that in cities where Case and IHC dealers both existed, one dealership would be terminated.  Despite Case/Tenneco requesting information concerning Groseth’s business on December 14, 1984, which Groseth had responded to, the decision to close Groseth’s business had already been made by Case/Tenneco on December 6, 1984—eight days before!

What is even more concerning is that none of Case/Tenneco’s representatives viewed Groseth’s business operation, inspected the business premises, evaluated the financial aspects of the business, or performed any investigation concerning the nature of Groseth’s business as an IHC franchisee before making the termination decision.

On January 3, 1985, Case/Tenneco representatives informed Groseth that his current dealer agreement with IHC was terminated.  Contrary to the language of the IHC agreement, Groseth was not given six months’ notice of his termination and was denied information concerning why his franchise was terminated.

Based on the foregoing, the court determined that the record was devoid of any dealer misconduct or shortcoming, and remanded for a determination of the presence (or lack thereof) of any “just provocation,” as required by the statute.

In Diesel Machinery, Inc. v. B.R. Lee Industries, Inc., 418 F.3d 820, 826 (8th Cir. 2005), Diesel Machinery, Inc. (“DMI”) sued B.R. Lee Industries, Inc. (“LeeBoy”) alleging that LeeBoy unlawfully terminated DMI’s exclusive dealership agreement in violation of the South Dakota Dealer Protection Act.  In November 2000, LeeBoy entered into a dealership agreement with DMI that was effective through December 31, 2001 and would thereafter “automatically renew for successive one (1) year terms.”  The agreement also provided that either party could terminate the agreement upon sixty (60) days advance notice.  On July 12, 2001, LeeBoy called DMI’s president to cancel the franchise agreement and later confirmed DMI’s termination in writing.  LeeBoy’s recent acquisition of another product line was listed as the sole justification for the termination.

Prior to the termination, (1) LeeBoy never complained about DMI’s performance, (2) there were no problems regarding warranties, credit, sales performance, training, advertising, stocking requirements or quality of service, (3) LeeBoy admitted DMI had not breached or violated the dealership agreement or violated any program, practice, policy, rule, or guideline of LeeBoy, and (4) DMI performed significantly better than LeeBoy’s previous South Dakota dealer.  Because of these, the court found that there “was no evidence that the termination decision resulted from any misconduct or shortcomings on [the dealer’s] part.”  Therefore, the court found the termination was not “justly provoked.”


Courts interpreting the South Dakota Dealer Statute have rendered the statute’s requirement that a dealer be terminated for “just provocation” to mean that the dealer have some sort of misconduct or shortcoming to justify the termination.

If you are a terminated South Dakota dealer, or have recently been informed that your manufacturer or distributor intends to terminate your dealership, be sure that your manufacturer or distributor abides by its contractual and statutory obligations for termination.  If not, your rights may have been violated.

*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.