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Jeremy I. Silberman: Protections under state franchise laws



Tuesday, 17 Mar 2009 ( #402 ) - Bridgewater, NJ, United States
Your Focus
Jeremy I Silberman
Jeremy I. Silberman  is a member of Norris McLaughlin & Marcus, P.A., and specialises in franchise and distribution law with emphasis on the materials handling industry. Norris, McLaughlin, & Marcus is a full-service law firm located in Bridgewater, New Jersey and New York City. For more information visit www.nmmlaw.com.

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In these uncertain times, with manufacturers consolidating brands, reducing product offerings, and reorganising their distribution systems, state franchise laws can protect a dealer from unfair and unlawful treatment by a manufacturer.

Franchise laws help level the playing field between large manufacturers and local dealers by prohibiting manufacturers from taking certain actions that could negatively affect a dealer. For example, franchise relationship laws regulate when a manufacturer can terminate or refuse to renew a local dealer.

Although independent equipment dealers may not traditionally think of themselves as franchisees, dealers should take a close look at the franchise laws in their state to determine whether they are covered by the law, and consider steps they can take to ensure continued protection. The specific requirements a dealer must meet to be covered by franchise laws vary from state to state. However, under all the franchise relationship statutes, it does not matter whether the word "franchise" actually appears in the agreement between the dealer and manufacturer. Instead, the law considers the actual nature and history of the business relationship.

The protections offered to dealers also vary under different states’ franchise laws. Generally, these laws make it illegal for a manufacturer to terminate or refuse to renew a dealer without "good cause". However, what may qualify as "good cause" differs from state to state. Some states’ statutes prohibit a manufacturer from terminating the dealer where the manufacturer is seeking to end or change the relationship for reasons unrelated to the dealer’s performance, such as where the manufacturer is changing its distribution system. Others may permit such a termination provided adequate notice is given to the dealer.

Franchise statutes do not, however, prevent a manufacturer from terminating a dealer where the dealer has substantially violated their dealership agreement, so long as the contract provision is legal and reasonable, the manufacturer provided proper notice and, in some states, provided an opportunity to cure. Where a dealer believes a termination violates the franchise laws, the dealer can seek an injunction from the courts to prevent the termination from becoming effective until the court can review the legality of the manufacturer’s actions.

Materials handling equipment dealers have successfully used state franchise laws to protect their businesses from termination and have collected damages for unlawful terminations. For example, in a case previously reported in Forkliftaction.com News #311, we represented a forklift dealer where the manufacturer decided to eliminate the dealer as part of a larger plan to restructure its dealer network. Although the existing dealer had been successful, the manufacturer decided as part of this reorganisation to give this dealer’s territory to a larger, multi-state dealer, and served a termination notice. When the dealer refused to give up the territory, the manufacturer disputed that the dealer had been granted an exclusive sales territory, appointed a new dealer for the territory, and gave that new dealer better pricing, discounts, credit terms, and advertising. The terminated dealer sued the manufacturer. Because the dealer reacted quickly, the dealer remained in business while the suit was pending.

The judge found that the manufacturer had violated the New Jersey’s Franchise Practices Act, which prohibits both direct and indirect terminations, and awarded the original dealer damages for sales lost to the new dealer, as well as its attorney’s fees and court costs. Even more importantly, the dealer’s family business was saved. The court prevented the manufacturer from carrying out its termination of the original dealer, who the judge found had not breached its dealership agreement, and protected the dealer’s exclusive sales territory.

Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Puerto Rico, Rhode Island, U.S. Virgin Islands, Virginia, Washington, and Wisconsin have all enacted general franchise relationship laws. Other states, such as Alaska, Idaho, Louisiana, Maryland, North Dakota and South Dakota, have laws that provide some limited protection to dealers and distributors, although the protections may be more limited than general franchise relationship laws. Materials handling equipment dealers may also qualify for additional protections under their state’s industrial, farm, and heavy equipment dealership laws, motor vehicle dealer laws, and general business opportunity laws.

The franchise relationship laws and these other types of statutes can protect equipment dealers in other ways, besides the "good cause" for termination provisions. For example, several statutes make it illegal for a manufacturer to impose "unreasonable standards of performance" upon a dealer. Unreasonable standards can include imposing different requirements upon the dealer than imposed upon other dealers, or they can include standards that are unreasonable because of the specific circumstances of the dealer’s marketplace.

Other statute provisions make it illegal for a manufacturer to block a dealer from selling competing brands of equipment, a common reason manufacturers threaten to terminate dealers.

It is important to note that not all materials handling equipment dealers are necessarily protected by their state’s franchise laws. Whether a dealer qualifies for protection requires an analysis of the dealer’s business, its written contracts and historical relationship with the manufacturer, and the state laws applicable to that relationship. Dealers can take many steps to increase the likelihood that their business will be considered a protected franchise, should they ever need to invoke the franchise laws to save their business.

In the current business climate, every dealer should be investigating and taking those steps necessary to maximise the protection provided by these statutes.
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