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Dealer Terminations

Do you know your rights?

Terminating a manufacturer-dealer relationship in the material handling industry is a serious business decision with many commercial and legal ramifications. For example, a manufacturer refused to renew a chemical products distributor’s contract when it expired. The distributor recovered $10.5 million in antitrust damages.

Although the manufacturer’s products accounted for only 16 percent of the distributor’s sales, the distributor went out of business four years later as a result of the termination. The distributor recovered damages for the loss of its entire business. In general, the same rules apply to non-renewals and terminations.

A commercial solution to a problem between a manufacturer and dealer is the best approach. Under a commercial solution, the two parties may either agree to termination conditions or salvage the relationship without legal action or arbitration. In a successful manufacturer-dealer relationship, the parties should be able to resolve these matters reasonably.

If a commercial solution is possible, each party should consult legal counsel and learn its rights and responsibilities if termination cannot be avoided. Each party should assert its right in any discussions so that alternatives to a lengthy dispute or a lawsuit can be explored.

Each party should consider whether or not:

  • The termination would breach a contractual obligation;
  • The termination would violate any federal or state statutory restrictions, including state franchise laws;
  • The termination could result in a violation of antitrust laws.
  • Does Termination Violate Contract Rights?
    The first question is whether or not there is a contractual arrangement between the parties that would be breached by termination. A contract is usually written but may be based on an oral understanding. The contract may require that termination be based on good cause (for example, past due on payments, failure to achieve reasonable sales quota, inadequate product promotion or poorly trained salespeople), that the dealer be given notice of any deficiency and a chance to correct it, and that reasonable advance notice of termination (or non-renewal) be given.The agreement must be carefully examined. If a breach has occurred, an action could be filed to recover damages; or termination may be postponed, giving the parties time to work out a commercial solution or give the dealer time to make arrangements with other suppliers to replace the lost line.

    In some circumstances, the law implies a contract even when there is none. For example, with the manufacturer’s knowledge or at its request, a dealer may invest in new salespeople, more warehouse space or marketing expenditures in order to better promote a manufacturer’s line. An implied contract could be enforced to allow the dealer to continue the dealership for a reasonable period of time, thus enabling the dealer to recoup its investment. This is done to avoid imposing financial hardships on a dealer as a result of a short-notice termination.

    How to Analyze Termination Options

    Check all the facts. Review files, notes, conversations, letters and contracts. Interview salespeople and ascertain the reasons for the termination. Answer the following questions to help determine whether or not the termination is valid:

    • What is the real motive behind the termination?
    • Is the motive anticompetitive? Were there complaints to the manufacturer from the terminated dealer’s competitors? Were these related to price decisions?
    • Is keeping the manufacturer’s line vital for the dealer? Can termination be postponed for a reasonable period to permit the dealer to find other sources of supply?
    • Has the manufacturer given the dealer reasonable advance notice of the termination?
    • Will the manufacturer repurchase inventory? Will the manufacturer provide an opportunity to remedy the problem?
    • Have all dealers been treated similarly? Although failure to obtain a sales quota may be a legitimate reason for termination, this reason is suspect if others who missed their quota weren’t terminated.
    • What is the financial exposure if a suit is filed in response to the termination decision?

    What are the Statutory Restrictions on Termination?
    Various state and federal laws may also restrict the ability to terminate a dealer. Generally, these statutes require good cause for termination, and they may require that the dealer be given an opportunity to correct the problem. The burden of proving good cause is usually placed on the manufacturer. Written notice of intent to terminate given 30 to 90 days in advance is sometimes required. In some states, a manufacturer is obligated to repurchase a dealer’s inventory if requested.

    If another person influenced the manufacturer’s decision to terminate the dealer, that person may have unlawfully interfered with the business relation. Under state court decisions, a person who induces another not to enter into or continue a business relationship may be liable for the harm caused. Involvement of a third person (such as a competitor of the terminated dealer) may also create antitrust problems.

    Is the Dealer a Franchisee?
    Most manufacturers would be surprised to learn that a typical independent dealer, who buys and resells the manufacturer’s products, may be protected from termination under state law as a franchisee. For example, a federal appeals court in Chicago recently affirmed an award of $1.5 million in damages to a forklift dealer who was a franchisee under Illinois law and was terminated without “good cause” as defined in the statute (To-Am Equipment Co. v. Mitsubishi Caterpillar Forklift America, Inc.). The manufacturer, seeking to consolidate distribution, terminated the dealer’s written contract in strict compliance with the contract terms. For over 13 years, To-Am had served as Mitsubishi’s exclusive dealer, selling and servicing new forklifts in defined Illinois and Indiana counties. To-Am also agreed to represent Mitsubishi exclusively. At trial, Mitsubishi conceded that its termination of To-Am was without good cause.

    The appeals court held that To-Am was a franchisee under the Illinois franchise act. Like Illinois, a number of other states have enacted franchise laws which protect the franchisee from termination or non-renewal by the franchisor except for “good cause.” 

    Does Termination Violate the Antitrust Laws?
    Even if the manufacturer has a contractual right to terminate and there are no statutory impediments to a termination, that does not end the inquiry. One must next determine whether or not the termination violates antitrust laws.

    Liability for wrongful termination under the antitrust laws can be substantial. A terminated dealer can recover three times the actual money damages, plus attorneys’ fees and costs of litigation.

    A manufacturer may suggest a resale price for its products. If the manufacturer goes beyond that, it could constitute an unlawful resale-price-maintenance scheme. A manufacturer cannot use coercion, including threats to terminate dealers who don’t follow the suggested price.

    There is no clear rule on what constitutes coercion. According to one source, a suggestion made 10 times could be viewed as coercion.

    The best solution to a dealer termination or non-renewal problem is a commercial one. Thorough preparation for discussions and negotiations by each party is essential. Make sure to include an objective evaluation by legal counsel of the rights and obligations of the parties based on the facts in your case. An honest desire to resolve any difference and get back to business is less costly than litigation and keeps relationships intact.Material Handling Equipment Distributors Association

    George Keeley Meet the Author
    George W. Keeley, Esq. is legal counsel for MHEDA and a partner with Keeley, Kuenn & Reid in Chicago, Illinois.

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