No franchise business relationship existed to prevent termination of would-be franchisee

When a business relationship is terminated, the terminated business owner will sometimes try to claim a franchise relationship so as to prevent the termination.  Many franchise acts require a putative franchisor to jump through various procedural hoops to terminate a franchisee, such as allowing the putative franchisee an opportunity to cure its alleged defaults.  In this case, the court of appeals, relying on the New Jersey Franchise Act and the Wisconsin Franchise Act, found that under the Missouri Franchise Act no franchise relationship existed.  In particular, the court found that no license had been granted for the putative franchisee to use its trademarks or service marks.  Also, no community of interest existed.  A community of interest  may exist under one of two circumstances: (1) “when a large proportion of an alleged dealer’s revenues are derived from the dealership,” or (2) “when the alleged dealer has made sizable investments (in, for example, fixed assets, inventory, advertising, training) specialized in some way to the grantor’s goods or services, and hence not fully recoverable upon termination.”  An experienced, business lawyer can help you with termination.

 

 

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 11-2456
___________
Missouri Beverage Company, Inc., *
*
Appellant, *
*
v. *
*
Shelton Brothers, Inc., *
* Appeal from the United States
Appellee. * District Court for the
* Western District of Missouri.
___________________ *
*
Missouri Beer Wholesalers Association; *
Missouri Wine and Spirits Association, *
*
Amici on behalf of *
Appellant. *
___________
Submitted: January 12, 2012
Filed: February 28, 2012
___________
Before WOLLMAN, LOKEN, and MELLOY, Circuit Judges.
___________
WOLLMAN, Circuit Judge.
Missouri Beverage Company (MoBev) appeals the district court’s1 order
denying its motion for partial summary judgment and granting Shelton Brothers,
Inc.’s (Shelton’s) motion for summary judgment on MoBev’s claims for violation of
Missouri franchise law.2 Because the plain language of the Missouri franchise statute
at issue unambiguously requires that the general definition of “franchise” applies to
liquor supplier-wholesaler relationships and the relationship between MoBev and
Shelton does not satisfy this definition, we affirm.
I.
MoBev, a Missouri corporation with its principal place of business in Missouri,
is a wholesale distributor of spirits, wines, beers, juices, and sodas throughout
Missouri. Shelton, a Massachusetts corporation with its principal place of business
in Massachusetts, supplies wholesalers with artisanal beers from around the world.
In 2004, MoBev and Shelton entered into an oral agreement, the precise terms of
which are in dispute. The parties agree, however, that MoBev could purchase beer
from Shelton, that MoBev was not obligated to order any particular amount of beer
from Shelton, and that Shelton was not required to supply any particular amount of
beer.
Shelton filled beer orders placed by MoBev from 2006 through 2009. As
required by Missouri law, Shelton sent the State of Missouri letters from 2004
through 2008 notifying the State of MoBev’s appointment as distributor for different
Shelton products in various Missouri counties. See Mo. Code Regs. Ann. tit.
1The Honorable Nanette K. Laughrey, United States District Judge for the
Western District of Missouri.
2The Missouri Beer Wholesalers Association and Missouri Wine and Spirits
Association filed an amicus brief in support of reversal and participated in oral
arguments.
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11, § 70-2.270. MoBev also conducted two sampling events focusing on Shelton’s
beers in 2008 or 2009. On August 8, 2008, Shelton sent an email to MoBev and other
distributors thanking them for their work to build Shelton’s brands and outlining a
uniform policy under which Shelton would refund a credit against future invoices for
products used for sampling. Although the parties never discussed MoBev’s use of
Shelton’s name or logo in promotional literature, Shelton testified that MoBev “can
always use our name if they want to” and could have used the logo had a request been
made. Shelton Dep. at 74-75. MoBev did 3 not believe that it was obligated to
develop Shelton’s name or goodwill, and MoBev did not focus on developing
Shelton. MoBev has had fifty to one hundred suppliers over the years, and MoBev’s
sales of Shelton’s beers never exceeded 1.16% of MoBev’s gross annual sales of all
alcoholic products.
In January of 2010, Shelton stopped providing products to MoBev and sent a
letter removing MoBev as Shelton’s Missouri distributor. MoBev brought a Missouri
state court action against Shelton, claiming that Shelton violated Missouri franchise
law by failing to give proper notice of franchise termination, under Mo. Rev.
Stat. § 407.405, and by unlawfully terminating a franchise, under Mo. Rev.
Stat. § 407.413. Shelton removed the action to federal court under diversity
jurisdiction. The district court denied MoBev’s motion for summary judgment and
granted Shelton’s motion for summary judgment, concluding that the business
relationship between MoBev and Shelton was not that of franchisor-franchisee under
Missouri law.
3MoBev did use sales materials containing logos of various imported beers
supplied by Shelton. There is no indication in the record, however, that MoBev ever
used Shelton’s name or logo in marketing its brands or products, and MoBev does not
argue that it used Shelton’s name or logo in such manner.
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II.
“We review the district court’s grant of summary judgment de novo, applying
the same standards as the district court and viewing the evidence in the light most
favorable to the nonmoving party.” Zike v. Advance Am., Cash Advance Ctrs. of
Mo., Inc., 646 F.3d 504, 509 (8th Cir. 2011) (quoting Travelers Prop. Cas. Co. of Am.
v. Gen. Cas. Ins. Co., 465 F.3d 900, 903 (8th Cir. 2006)). “The court shall grant
summary judgment if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(a).
III.
The threshold issue is whether the business relationship between Shelton and
MoBev constituted a franchisor-franchisee relationship under Missouri law. Mo.
Rev. Stat. § 407.400(1) contains the definition of “franchise.” A 1975 amendment
added an express inclusion of liquor wholesalers and suppliers into the definition.
The relevant excerpt of the definition is as follows, with the amended language in
boldface:
“Franchise” means a written or oral arrangement for a definite or
indefinite period, in which a person grants to another person a license
to use a trade name, trademark, service mark, or related characteristic,
and in which there is a community of interest in the marketing of goods
or services at wholesale, retail, by lease, agreement, or otherwise,
including but not limited to a commercial relationship of definite
duration or continuing indefinite duration, between a “wholesaler,”
such wholesaler being a person as defined in this section, licensed
pursuant to the provisions of chapter 311, to sell at wholesale,
intoxicating liquor, as defined in section 311.020, to retailers, duly
licensed in this state, and a “supplier,” being a person engaged in
the business as a manufacturer, distiller, rectifier or out-of-state
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solicitor whose brands of intoxicating liquor are distributed through
duly licensed wholesalers in this state, and wherein a wholesaler is
granted the right to offer, sell, and distribute within this state or any
designated area thereof such of the supplier’s brands of intoxicating
liquor, or all of them, as may be specified; except that, the term
“franchise” shall not apply to persons engaged in sales from warehouses
or like places of storage, other than wholesalers as
above described . . . .4
Mo. Rev. Stat. § 407.400(1); see also Mo. H.B. 810 (1975) (enacted); Brown-Forman
Distillers Corp. v. McHenry, 566 S.W.2d 194, 198-99 (Mo. banc 1978).
A. Whether the general definition of “franchise” under § 407.400(1) applies to
liquor supplier-wholesaler business relationships
The parties dispute whether only the criteria outlined in the statutory text
specifically referring to liquor wholesalers (the specific definition) need be satisfied
to demonstrate the existence of a franchise in the liquor distribution industry, or
whether the criteria from the language in the original franchise legislation (the
general definition)—which was unchanged by the 1975 amendment—also apply.
Under the general definition, which Shelton argues applies, the existence of a
franchise requires proof of the following elements: (1) a written or oral arrangement,
(2) in which a person grants to another person a license to use a trademark or related
characteristic, and (3) in which there is a community of interest in the marketing of
goods or services. Mo. Rev. Stat. § 407.400(1). Under the specific definition, one
would need to prove only (1) the existence of a commercial relationship of definite
duration or continuing indefinite duration between a wholesaler and supplier to sell
One difference exists between the 4 language of the 1975 amendment and the
current text quoted above – in 1998 the Missouri Legislature changed “spiritous
liquor and wine(s)” to “intoxicating liquor” throughout the statute. Mo. H.B. 957
(1998) (enacted).
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intoxicating liquor (2) wherein a wholesaler is granted the right to offer, sell, and
distribute any of the supplier’s brands. Id.
Under Missouri law, “[t]he seminal rule of statutory construction is to ascertain
the intent of the legislature from the language used and to consider the words used in
their plain and ordinary meaning.” St. Louis Cnty. v. Prestige Travel, Inc., 344
S.W.3d 708, 713-14 (Mo. banc 2011) (citing Turner v. Sch. Dist. of Clayton, 318
S.W.3d 660, 665 (Mo. banc 2010)). When a statute’s language is clear, Missouri
courts give effect to its plain meaning and “refrain from applying the rules of
construction unless there is some ambiguity.” Id. (quotation omitted). “Where
statutory interpretation is necessary, statutory language is considered in context and
in comparison with other sections to determine its meaning.” Id. (citation omitted).
The district court correctly concluded that a plain reading of § 407.400(1)
makes clear that the general definition indeed applies to franchise relationships within
the liquor industry the same as it applies to all other businesses. This is apparent
from the statute’s use of the word “including” after the general definition of
“franchise,” as opposed to “or,” “except,” or some other language denoting that liquor
sales relationships were to be analyzed differently from relationships in other
industries. This interpretation is supported by the Missouri Supreme Court’s
explanation that § 407.400(1) “contains both an original, general definition of
‘franchise,’ applying to all types of businesses and not limited to liquor franchises,
as well as a specific definition added by the legislature in [1975] to specifically
include liquor franchises,” and “[t]he statute first contains a general definition of
‘franchise’ applicable generally to all types of businesses; it then contains a specific
definition of liquor distribution agreements that are included.” High Life Sales Co.
v. Brown-Forman Corp., 823 S.W.2d 493, 500-01 (Mo. banc 1992) (emphasis added).
Thus, the specific definition simply illustrates a type of relationship that could be
covered under the statute, provided that such relationship also satisfied the general
definition of “franchise.”
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MoBev counters that High Life Sales actually supports its position, because the
case included an analysis only of the specific definition in determining whether the
relationship at issue constituted a franchise. When read in its entirety, however, the
case suggests that the Missouri Supreme Court confined its analysis to the language
of the 1975 amendment because the disputed issue concerned whether a liquor
wholesaler’s business satisfied the specific definition. See High Life Sales, 823
S.W.2d at 500-02.5
Even had § 407.400(1) been ambiguous concerning whether the general
definition applies to liquor supplier-wholesaler relationships, examination of the
statute’s context further demonstrates that the general definition applies to such
relationships. Before the 1975 amendment, one could have read § 407.400(1) as
ambiguous with respect to whether a liquor supplier-wholesaler relationship could be
a franchise, because of the text stating that “the term ‘franchise’ shall not apply to
persons engaged in sales from warehouses or like places of storage.” The 1975
amendment’s explicit inclusion of language pertinent to the liquor industry served to
clarify that certain business relationships in the liquor industry are not precluded from
being deemed a franchise even though liquor wholesalers generally are “engaged in
sales from warehouses.” See McHenry, 566 S.W.2d at 197 (noting that “the passage
of [the 1975 amendment] made it clear [that the liquor industry] had the same
protection in this area of merchandising practices as other businesses.”); see also
Maude v. Gen. Motors Corp., 626 F. Supp. 1081, 1085 (W.D. Mo. 1986) (noting that
One unpublished district court opinion, without 5 including any analysis or
citing any authority, ruled that § 407.400(1) applies “to a wholesaler/supplier
relationship for the distribution of spirituous liquor and wines, without the need to
independently establish the existence of” a license or a community of interest. Mo.
Conrad Liquor Co. v. Brown-Forman Corp., No. 89-0141-CV-W-6, 1990 U.S. Dist.
LEXIS 3373, at *1 (W.D. Mo. 1990). We conclude that the Missouri Supreme
Court’s subsequent decision in High Life Sales vitiates whatever persuasive effect
Missouri Conrad Liquor may otherwise have had.
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“the warehouse sales exclusion proved troublesome in the liquor industry” and
resulted in the 1975 amendment).
MoBev and amici devote large shares of their briefs to discussion of the 21st
Amendment to the United States Constitution and the history of the three-tiered liquor
distribution system between suppliers, wholesalers, and retailers in the United States,
apparently to argue that the Missouri legislature, cognizant of this history, intended
to create special franchise privileges for those in the liquor industry. However
interesting that historical account may be, we do not find it relevant to the
interpretation of the statutory provision at issue. We conclude that the plain language
of § 407.400(1) requires liquor supplier-wholesaler relationships to satisfy the general
definition to be deemed a franchise.
B. Whether the business relationship between MoBev and Shelton satisfies the
general definition of “franchise” under Missouri law
Because the general definition of “franchise” applies to liquor supplierwholesaler
business relationships, it remains to be determined whether MoBev and
Shelton’s relationship satisfies that definition. It is undisputed that an oral agreement
existed between the parties (though the terms of that agreement are in dispute), thus
satisfying the first element of the general definition. The parties dispute the
remaining two elements: whether Shelton granted MoBev a license to use a
trademark or related characteristic, and whether a community of interest exists.
1. Whether Shelton granted MoBev a license to use a trademark or related
characteristic
“Courts have referred to interpretations of New Jersey’s very similar statutory
definition of ‘franchise’ in interpreting the Missouri statute.” Am. Bus. Interiors, Inc.
v. Haworth, Inc., 798 F.2d 1135, 1139 (8th Cir. 1986) (citing McHenry, 566 S.W.2d
at 196) (relying on interpretation of New Jersey Franchise Practices Act); ABA
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Distribs., Inc. v. Adolph Coors Co., 542 F. Supp. 1272, 1287-88 (W.D. Mo. 1982)).
Like § 407.400(1), the New Jersey statute also requires “the grant of a license in the
franchisor’s trade name,” and “a community of interest in a business enterprise.”
Haworth, 798 F.2d at 1139-40; see N.J. Stat. Ann. § 56-10-3. “[A] hallmark of the
franchise relationship is the use of another’s trade name in such a manner as to create
a reasonable belief on the part of the consuming public that there is a connection
between the trade name licensor and licensee by which the licensor vouches, as it
were, for the activity of the licensee in respect of the subject of the trade name.”
Neptune T.V. & Appliance Serv., Inc. v. Litton Microwave Cooking Prods. Div., 462
A.2d 595, 599 (N.J. Super. Ct. App. Div. 1983) (citations omitted). “[N]ot every
grant of permission to use a trademark in the sale of goods or services is a ‘license’
within the meaning of the Franchise Act . . . The license contemplated by the Act is
one in which the franchisee wraps himself with the trade name of the franchisor and
relies on the franchisor’s goodwill to induce the public to buy.” Liberty Sales
Assocs., Inc. v. Dow Corning Corp., 816 F. Supp. 1004, 1009-10 (D.N.J. 1993)
(quoting and citing Instructional Sys., Inc. v. Computer Curriculum Corp., 614 A.2d
124, 138-40 (N.J. 1992)).
Shelton never granted MoBev a license to use its trademark or any related
characteristic. MoBev never used Shelton’s name in any marketing efforts, never
requested to use Shelton’s name, and never received Shelton’s express permission to
call itself an authorized Shelton dealer or otherwise use Shelton’s name. Shelton’s
testimony that it would have given MoBev permission to use Shelton’s name had a
request been made plays no part in the analysis. Moreover, MoBev stated in its
district court motion papers that rather than relying on or cloaking itself with the
goodwill inherent in Shelton’s name, MoBev relied on its own reputation to sell
Shelton’s products. Pl.’s Suggestions in Opp. of Def.’s Mot. for Summ. J. ¶ 26
(“[C]ustomers do business with MoBev because they associate MoBev with good
products. MoBev salespeople mention the supplier if the supplier has a reputation of
carrying good quality products, with the goal of promoting the product.”) (citation
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omitted). Thus, it is clear that Shelton did not grant to MoBev a “license to use a
trade name, trademark, service mark, or related characteristic” as a matter of Missouri
law.
2. Whether Shelton and MoBev engaged in the same “community of interest”
In the absence of any discussion by the Missouri courts regarding the
community of interest requirement, for guidance we consider interpretations of
similar statutes. Looking again to interpretation of the very similar New Jersey
franchise law:
The community of interest signalling a franchise relationship does not
imply a sharing of profits. Rather it is based on the complex of mutual
and continuing advantages which induced the franchisor to reach his
ultimate consumer through entities other than his own which, although
legally separate, are nevertheless economically dependent upon him.
Neptune, 462 A.2d at 600-01 (internal citation omitted). From Neptune and its
progeny, the Third Circuit distilled the following two-part test for determining
whether a community of interest exists: “(1) the distributor’s investments must have
been substantially franchise-specific, and (2) the distributor must have been required
to make these investments by the parties’ agreement or the nature of the business.”
Cooper Distrib. Co. v. Amana Refrigeration, Inc., 63 F.3d 262, 269 (3d Cir. 1995)
(internal quotation and citation omitted). Courts interpreting the New Jersey statute
have in turn sought guidance from the very similar Wisconsin Fair Dealership Law
(WFDL), see Neptune, 462 A.2d at 599-600, under which a community of interest
may exist under one of two circumstances: (1) “when a large proportion of an alleged
dealer’s revenues are derived from the dealership,” or (2) “when the alleged dealer
has made sizable investments (in, for example, fixed assets, inventory, advertising,
training) specialized in some way to the grantor’s goods or services, and hence not
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fully recoverable upon termination.” 6 Frieburg Farm Equip., Inc. v. Van Dale, Inc.,
978 F.2d 395, 399 (7th Cir. 1992) (citations omitted); see Wis. Stat. § 135.02
(defining “[c]ommunity of interest” as “a continuing financial interest between the
grantor and grantee in either the operation of the dealership business or the marketing
of such goods or services”). Given the strong similarities between the “franchise”
definitions in Missouri, New Jersey, and Wisconsin, we believe that the Missouri
Supreme Court would determine the existence of a “community of interest” under a
standard commensurate with those articulated by the Third Circuit in Cooper
Distributing and the Seventh Circuit in Frieburg.
Applying either the Cooper Distributing or Frieburg standard, no community
of interest existed between the parties in the marketing of Shelton’s products.
MoBev’s sales of Shelton’s products never exceeded 1.16% of MoBev’s annual sales
throughout the parties’ relationship,7 MoBev did not use Shelton’s name in marketing
during the parties’ relationship, and MoBev was not required to make—and did not
make—any sizeable investments particular to Shelton. In light of these
circumstances, MoBev’s investments cannot reasonably be deemed substantially
franchise-specific, and MoBev cannot reasonably be deemed economically dependent
on Shelton or to have unequal bargaining power in the relationship. In sum, then, we
conclude that Shelton and MoBev’s relationship was not that of franchisor-franchisee
under Missouri law.
6The Frieburg court also “suppose[d] that some combination of revenues and
investments could manifest a community of interest, even if neither could standing
alone.” Id.
7In contrast, the alleged franchisee in High Life Sales derived “approximately
98%” of its sales from the alleged franchisor. High Life Sales, 823 S.W.2d at 494;
see also Kenosha Liquor Co. v. Heublein, Inc., 895 F.2d 418, 419-20 (7th Cir. 1990)
(concluding that 5.8% of sales was insufficient to establish a franchise relationship
under WFDL when no other factors weighed in favor of such a relationship).
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IV.
The judgment is affirmed.
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