A manufacturer relies on a distributor to bring a product to its customers. The distributor relies on the manufacturer`s revenues to support its activities. Both parties must reach an agreement on how the distributor transports the products and how much the manufacturer pays for this service. When these agreements are no longer manageable, the parties may choose to terminate the distribution agreement and create a new agreement or terminate the relationship. Careful legal analysis may be required to ensure that a distribution relationship exists as opposed to a franchise relationship to avoid liability for non-compliance with franchise laws. A franchise relationship exists when a trade name or trademark is licensed by the supplier/franchisor, there is an oral or written agreement for a specified or indefinite period, and there is also a "community of interest" in the marketing of goods or services. See e.B. Missouri Beverage Co., Inc.c. Shelton Bros., Inc., 796 F.Supp. 2d 988, 995 (W.D.
Mon. 2011), aff`d 669 F.3d 873 (8. Cir. 2012). Too often, the quality of a contract is defined by the problems that later arise from poor design. Even the best-designed plans can contractually become a quagmire of litigation when unforeseen problems arise or relationships fail. Entering into distribution agreements requires not only foresight and experience with possible problems, but also a healthy relationship between the parent or supplier and the dealer. Legal notices can help parties avoid these pitfalls.
The development of a framework to address common contractual issues specific to distribution agreements is both possible and necessary. Distribution and concessionaire relationships are often also protected by state laws. There are often specific laws on dealers of intoxicating agricultural equipment, motor vehicles or spirits that provide additional legal protection to dealers/dealers operating in states where a "community of interest" exists and require a "good reason" before an agreement can be terminated with required notice and the possibility of redress. Often, a significant cause is defined by law as an insolvency action filed by the Distributor or a moral reprehensibility or other immoral conduct of the Distributor. Sometimes, the mere non-compliance with the terms of the agreement may also be sufficient for a valid reason under certain laws. Of course, federal law may also impose additional protections for a distributor/distributor, depending on the industry and the characteristics of the relationship. See 15 U.S.C§ 2801 (Petroleum Marketing Practices Act); 15 U.S.C§ 1221 (Federal Automobile Dealer Day in Court Act). A supplier must ensure that these notification requirements comply with any written agreement as well as applicable laws or general laws.
For example, in Missouri, a relationship law requires a franchisee to receive 90 days` notice of termination of a contract. See §407.405, R.S.Mo. This law only applies to franchisors/franchisees, which implies the possibility that a distribution relationship may meet the legal definitions of a franchise. Careful legal analysis is required to ensure that a distribution relationship exists as opposed to a franchise relationship to avoid liability for non-compliance with the law. Under Missouri law, a franchise relationship exists when a trade name or trademark is licensed by the supplier/franchisor, there is an oral or written agreement for a specific or indefinite period of time, and there is a "community of interest" in the marketing of goods or services. See §407.400, R.S.Mo.; Missouri Beverage Co., Inc.c. Shelton Bros., Inc., 796 F.Supp. 2d 988, 995 (W.D. Mon. 2011), aff`d 669 F.3d 873 (8.
Cir. 2012). A legal analysis is needed to determine whether there is a community of interest that is not easily recognizable. A community of interest is often expressed by the courts as a substantial investment specific to the franchise business and/or investments required by the parties` agreement or the nature of the business. See Cooper Distr. Co., Inc.c. Amana Refrigeration, Inc., 63 F.3d 262 (3rd Cir. 1995). However, a community of interest has also generally been defined as the franchisor who benefits from the marketing of the product by the franchisee or the franchisee who benefits from the marketing of the product by the franchisor. See C&J Delivery, Inc.c. Emery Air Freight Corp., 647 F.Supp. 867, 872 (E.D.
Mo. 1986). 1. Does the decision to terminate the relationship comply with the terms of the written distribution agreement? A distribution agreement allows a distributor to transport or resell products purchased from a manufacturer. The manufacturer supplies the products and the distributor acts as a seller, either as a wholesaler or as a retailer. The distribution agreement may be exclusive, with a single reseller serving a manufacturer for a specific product or region. The agreement may also allow multiple distributors to work with multiple manufacturers. The manufacturer generally sets out the terms of the agreement, including any marketing tactics or product licensing procedure, and the distributor agrees to abide by these terms. In the absence of a termination clause in the distribution agreement, the manufacturer and distributor may negotiate an amendment to the current agreement.
If the parties still consider the relationship to be profitable and useful, the renegotiation shows that they can still work together, even if their situation has changed since the signing of the original agreement. These efforts also show that even if the parties fail to reach a new settlement, they can work together to avoid a costly lawsuit. The grounds for termination should be applied consistently within a distribution system. If another distributor has acted or has acted in the same manner as a distributor who receives a notice of termination, but that distributor has not been dismissed for the same or similar conduct, this fact is likely to be revealed at the time of discovery when the dispute is ongoing. Conflicting reasons for termination are the best friends of a licensed distributor and the supplier`s worst nightmare, especially in front of a jury. If a specific reason for termination is provided, but the "true reason" is revealed when it is discovered, it can be extremely difficult to defend a supplier`s decision. If the reason for termination is based on particular conduct or non-performance, that conduct or non-performance should not be tolerated within the distribution system by other distributors or distributors. The consistency of a supplier ensures credibility. In the event of termination or expiration of the distribution contract, the provisions constituted at the time of incorporation are at the forefront. Is the termination process competitive, does it avoid legal entanglements in antitrust litigation? These issues can be dealt with well in advance – provided, of course, that they are discussed at the beginning of the business relationship. Termination within a distribution relationship often has to correspond to a certain period of time, and many state laws also require a way to heal. Termination obligations usually give the terminated dealer sufficient time to get its business affairs in order, notify customers, sell existing inventory purchased from the supplier, and possibly have time to find other suppliers.
If a possibility of rectification is required and the merchant heals the alleged failure within the required time, the watch will be reset and new notices of termination will likely be required if the infringing behavior recurs. See e.B. R.S.Mo., §407.842 (60 days" for healing and, if the delay is repaired, the defect notification is void). A supplier must ensure that these notification requirements comply with any written agreement, as well as applicable laws or jurisdiction to interpret those laws. A recent decision of the Federal Supreme Court provides precautionary advice to manufacturers or suppliers who are considering terminating their resellers as part of a distribution partnership. In Keen Edge Co, Inc., v Wright Mfg, Inc., No. 19-1673, 2020 WL 4926664 (ED Wis, August. 21, 2020), the court ruled that the manufacturer was not allowed to terminate its business relationship with an exclusive dealer – and temporarily lured the manufacturer into the trap. Wright Manufacturing Inc.
(Wright), a lawn mower manufacturer, has been engaged with Keen Edge Company (Keen Edge) to exclusively distribute its lawn mowers throughout the Midwest for nearly 40 years. In exchange for exclusivity, Keen Edge was to meet its sales targets and help repay the funds and invest in some of Wright`s stakes. It`s always a difficult decision to end a sales relationship, especially if it`s a long-standing and previously profitable relationship. A manufacturer/supplier must take a strategic approach to terminating a distributor to ensure compliance with the distribution agreement, as well as applicable regulations and customary law that may govern the relationship. .