A Wisconsin federal judge granted summary judgment in favor of a food service and cleaning equipment maker (“Stoelting”), ruling that minimum purchase requirements under two dealer agreements were not a franchise fee under California or Washington law.
The dealer agreements set purchase requirements of equipment, parts and accessories from Stoelting, required sales goals to be met, and permitted termination without cause on 30 days' notice. Each agreement had a choice of law—California law for one dealership (AFTT) and Washington for the other (Prism).
Stoelting terminated both dealer agreements, without cause, by giving 30 days' written notice. The dealers claimed both states’ franchise laws applied, meaning the termination provision was not effective since each law requires good cause to terminate a franchise. Coverage of the franchise laws turned on whether Stoelting’s minimum purchase requirements were a franchise fee.
Under California law, goods purchased at bona fide wholesale prices are not a franchise fee, if there is no obligation to buy more than a reasonable inventory. California Department of Business Oversight guidance defines bona fide wholesale price as “the price at which goods are purchased and sold by a manufacturer or wholesaler to a wholesaler or dealer where there is ultimately an open and public market in which sales of the goods are effected to consumers of the goods.”
The court noted that AFTT bought equipment at 45 percent of list price and parts and accessories at 50 percent, but Stoelting showed that the prices AFTT paid were in line with prices paid by all Stoelting’s domestic distributors and were consistent with wholesale pricing in the frozen treat equipment industry. The dealer provided no contrary evidence. Thus, the court held that the prices were wholesale prices under California law.
Regarding the required inventory level, AFTT was expected to maintain an inventory worth only 3.8 percent of AFTT’s expected annual sales goal, which AFTT exceeded. The court concluded that this required inventory level at wholesale prices did not exceed a reasonable inventory, and found the mandatory purchases were not a franchise fee under California law.
In Washington, to qualify as a franchise fee, a payment must be an “unrecoverable investment” by the franchisee in the franchisor. Under this standard, the court held that the minimum purchase requirement at wholesale prices under Prism’s agreement was not a franchise fee. Prism could sell the equipment after termination and the contract had an option for Stoelting to buy back the items. Therefore, the required purchases of inventory were recoverable.
While a minimum inventory level of only 3.8 percent of expected annual sales was not a franchise fee, minimum inventory requirements can exceed a reasonable startup or ongoing inventory. Prudent manufacturers should be certain that all inventory requirements in a distributorship or similar agreement that has hallmarks of a franchise (i.e., a trademark license, supplier control and a fee) are commercially reasonable.
PW Stoelting LLC v. Levine, W.D. Wis., ¶16,321
