A distributor can be terminated by its supplier if the supplier does not approve of an asset sale

A Minneapolis, Minnesota business lawyer knows that a distributor who transfers its assets to a new company may be terminated as a dealer if the transfer is not approved by a supplier.

TEXAS UJOINTS LLC,
Plaintiff-Appellant,
v.
DANA HOLDING CORP., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 1:13-cv-01008-WCG — William C. Griesbach, Judge.
____________________
ARGUED NOVEMBER 29, 2016 — DECIDED DECEMBER 16, 2016
____________________
Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.
POSNER, Circuit Judge.

In this diversity suit, governed by
Texas law, the plaintiff, Texas UJoints (to simplify, we’ll call
it just UJoints), argues that it was a dealer in products of Dana
Holding Corporation (a supplier of drive shafts, which
typically are devices for transmitting power from an engine
to the wheels of a vehicle, and other industrial equipment),
in particular Dana’s GWB and Spicer products, and that Dana
terminated the dealership of GWB products in violation
2 No. 16-2239
of a Texas statute. (Dana is the principal defendant; we can
ignore the others.) The statute provides that “a supplier may
not terminate a dealer agreement without good cause,”
Vernon’s Texas Statutes and Codes Annotated, Business and
Commerce Code § 57.153, “dealer agreement” being defined
as “an oral or written agreement or arrangement, of definite
or indefinite duration, between a dealer and a supplier that
provides for the rights and obligations of the parties with
respect to the purchase or sale of equipment or repair parts.”
§ 57.002(4). But “good cause for termination of a dealer
agreement exists … if there has been a sale or other closeout
of a substantial part of the dealer’s assets related to the business.”
§ 57.154(a)(4).
Dana had a dealer agreement in Texas with a company
named Automotive Industrial Supply Co. (“AISCO”). Unbeknownst
to Dana, AISCO sold off most of its assets to a newly
formed company named DanMar Holdings (unrelated to
Dana), which in turn transferred the assets to a firm named
Texas UJoints. The name “UJoints” had been a trade name
used by AISCO, but now became the name of an independent
firm, the plaintiff in this case. That transfer of assets, like
AISCO’s sale of its assets to DanMar, gave Dana, pursuant to
§ 57.154(a)(4), quoted above, good cause to terminate its
dealer agreement with AISCO. The termination precluded
Texas UJoints from claiming to have been authorized to step
into AISCO’s shoes and thereby become a Dana dealer in
Texas. And so the district judge held, granting summary
judgment in favor of Dana.
The transfer of assets from DanMar to UJoints had taken
place in September 2012. In November the two owners of
DanMar (who were also the owners of UJoints), Dan Zahn
No. 16-2239 3
and Martin Brown (hence “DanMar”), met for the first time
with representatives of Dana. Zahn and Brown did not reveal
the existence of DanMar or UJoints but said they’d
bought AISCO; they hadn’t, though they had bought its assets.
Dana’s representatives told Zahn and Brown that they
would have to submit a business plan for their reconstituted
AISCO (i.e., UJoints). Discussions with Dana continued for
months, and finally in May 2013 Zahn sent Dana a PowerPoint
presentation containing the business plan. But the following
month Dana informed Zahn that it wouldn’t make
UJoints a Dana dealer of its GWB products, although it
would allow UJoints to continue selling the Spicer products.
UJoints responded by filing this suit, which Dana removed
to the federal district court in the Eastern District of Wisconsin.
The court ruled for Dana, precipitating this appeal.
UJoints argues that either Dana entered into a new dealer
agreement with it or UJoints had become a party to Dana’s
agreement with AISCO just by virtue of the transfer of
AISCO’s assets to it. There was no new dealer agreement,
however; and as for the sale of AISCO’s assets to UJoints,
since that was “a sale or other closeout of a substantial part
of the dealer’s assets related to the business” it gave Dana
good cause to terminate its dealer agreement with AISCO
pursuant to § 57.154(a)(4). The termination left Dana with no
business relations with AISCO and no shoes for UJoints to
step into and to claim to be an authorized Dana dealer,
bound to Dana by an agreement.
UJoints argues that Dana terminated the agreement only
because of complaints from other dealers. That’s irrelevant.
Dana had good cause to terminate the agreement once
4 No. 16-2239
AISCO sold its assets. UJoints points out that at the November
meeting a Dana representative told Brown and Zahn: “I
don’t care what you are going to do or how you are going to
do it as long as it includes [Bob Stoddard, a long-time
AISCO employee].” UJoints argues that this statement constituted
Dana’s blessing UJoints’ stepping into AISCO’s
shoes as a Dana dealer by purchasing AISCO’s assets. No
way; at the November meeting Dana’s representatives didn’t
know that UJoints had purchased AISCO’s assets. And Zahn
testified that Dana’s representatives didn’t make any promises
at the November meeting, or at any other meeting.
UJoints is left to argue that Dana “intentionally and expressly
entered into a dealership agreement with” UJoints
after learning that UJoints had acquired AISCO’s assets. This
is not inconceivable, since Dana had been content to use
those assets in its business. As evidence of a dealership
agreement with Dana, UJoints points out that until Dana
terminated its relationship with it in June 2013, Dana gave it
its standard distributor terms and conditions and protocols
for ordering product, introduced Zahn and Brown to Dana
officials in Germany (where apparently some of Dana’s
products originate), sent UJoints a credit application to fill
out “as part of the partnership going forward,” provided
UJoints with certain product specifications, and continued
filling orders by UJoints for products for UJoints to distribute.
But UJoints has again missed the point. When AISCO’s
assets were shifted to UJoints, Dana naturally wanted to
learn more about the new company, and so it cooperated
with UJoints to the extent of providing some inducements to
it to continue distributing Dana products. That does not
No. 16-2239 5
mean that Dana entered into a “dealer agreement,” specifying
the ongoing rights and obligations of it and UJoints—a
new, unknown entity the identity of which the owners had
concealed from Dana for a significant time, which must have
undermined their credibility with Dana. Glancing back at
our quotations from the Texas statute, we see that a distributor
agreement can be of indefinite duration, implying that it
can be terminated at any time if no duration is specified, and
none was here, and also that it can be terminated because the
distributor sold its assets, which AISCO did.
All else aside, precipitate classification of a pattern of
dealing as a dealership agreement terminable only for good
cause would have a disruptive effect on distribution. When a
distributor suddenly vanishes, the supplier may still need its
distribution; it may be unable to afford the protracted interruption
that might ensue if it lost its existing distribution
and had to create a new system of distribution from scratch.
It is also natural for a supplier to want to learn more about a
successor to its former dealer before granting the successor a
dealership. And so it was natural for Dana to continue selling,
for a time, to its dealer’s, AISCO’s, successor—UJoints.
Obviously not all sales are pursuant to dealer agreements,
as opposed to merely being agreed upon. If you buy
a car from someone and resell it, that doesn’t make you a
dealer, and so the fact that UJoints bought products from
Dana and resold them did not make UJoints a party to a
dealer agreement. Because UJoints was distributing Dana’s
products, Dana had to furnish it with information necessary
to facilitate that distribution and avoid errors. That provision
of information, necessary for efficient distribution even if
6 No. 16-2239
there is no dealer agreement, did not constitute or create
such an agreement.
The judgment of the district court is therefore affirmed