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Distributor a Franchisee Under Connecticut Franchise Act
The decision by a key supplier to terminate a Connecticut-based electrical distributor violated the state's franchise protection law, according to a recent ruling by the Connecticut Supreme Court. (Hartford Elec. Supply Co. v. Allen-Bradley Company, No. 16011). The state franchise protection law defines a "franchise" as an oral or written agreement in which (1) the franchisee is granted the right to distribute goods under a marketing plan substantially prescribed by the franchiser, and (2) the franchisee's business operations are substantially associated with the franchiser's trademark, trade name or logo. The statute bars termination, cancellation or nonrenewal of the franchise except for "good cause".
The distributor was terminated in 1997 by its supplier upon 90 days written notice, in accordance with the parties' agreement. The notice listed six reasons in support of the decision to terminate. Significant to this case, one-half of the distributor's business was derived from the sale of the supplier's products and other products were sold as complements to the supplier's products. The distributor filed suit and prevailed at trial.
On appeal, Allen-Bradley argued that it did not prescribe a marketing plan for the distributor, as required in the franchise act. The court disagreed and found that there was sufficient control over the distributor to satisfy this requirement. Specifically, the distributor was required to prepare an annual business plan for supplier approval; the supplier exerted influence over the distributor's resale pricing and the hiring and firing of its sales personnel; the supplier required extensive training of the distributor's personnel concerning Allen-Bradley products; the supplier exerted significant control over the distributor's inventory level and mix; and the supplier had the right to examine and copy the distributor's sales records and audited financial reports. Also of significance was the supplier's Distributor Concern Program, a program designed to remedy a distributor's substandard sales performance. Distributor participation in the program was mandatory.
The court also agreed that the distributor's business was substantially associated with Allen-Bradley's trademark, even though the distributor handled other product lines. Specifically, the distributor circulated the supplier's catalogs and promotional materials which contain the supplier's logo; flyers used by the distributor displayed the supplier's logo; and the distributor's premises sign included the Allen-Bradley name.
Finally, the court upheld the trial court's finding that the supplier failed to prove that it had good cause to terminate its agreement with the distributor. The plaintiff's sales performance was not compared to the performance of its similarly situated peers: Plaintiff also received a congratulatory letter in early 1997 (four months prior to the termination), praising its level of purchases of defendant's products during the prior year.
Connecticut's franchise law was enacted in 1972 as a means to protect independent gasoline dealers from abusive termination by the major oil companies. As this case illustrates, the statute's reach has expanded far beyond its original target.
Keeley, Kuenn & Reid, a Chicago based law firm with government relations affiliates in Washington, D.C., is engaged in the practice of business law, commercial litigation, employment law, taxation, antitrust, product liability, estate planning and legislative matters. Through its affiliates, the firm also meets its clients' needs in protecting intellectual property rights and international commercial law matters.
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