FRANCHISEE 101: Hawaiian Distributor May Be a Franchisee

by Lewitt Hackman
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A long-standing distributor and licensee of Harley-Davidson motorcycles in Hawaii was entitled to proceed on its claim that the business relationship with Harley-Davidson Motor Company, Inc. was a "franchise" under Hawaii's Franchise Investment Law (HFIL), according to the decision of a federal court in Hawaii.

Cycle City was a distributor and dealer of Harley-Davidson products in Hawaii under various agreements since 1966. Cycle City was also a party to a license agreement with Harley-Davidson that let Cycle City manufacture and sell certain Harley-Davidson trademarked products. When Harley-Davidson declined to renew the agreements, Cycle City sued for breach of the agreements and violations of the HFIL.

Cycle City claimed the license agreement was a "franchise", which is described in the HFIL as a business relationship under which (i) a license is granted to use a trade name, service mark, trademark, or logotype; (ii) the franchisee pays a "franchise fee" to the franchisor; and (iii) there exists a "community interest" between the franchisor and franchisee in the operation of the franchise business.

The HFIL defines a "franchise fee" as any fee or charge that a franchisee must pay or agrees to pay for the right to enter into or continue to operate a business under a franchise agreement and a "community interest" as a continuing financial interest between the franchisor and franchisee in the operation of the franchise business. Cycle City claimed the grant of the license to use the Harley-Davidson trademarks, a required annual minimum payment of $30,000 to Harley Davidson on the sale of licensed products, Cycle City's substantial investment in the licensing venture and Harley-Davidson extensive controls over Cycle City's sale of licensed products all combined to satisfy the three elements of a "franchise".

The court agreed with Cycle City and noted there is "no precise line between when a company is simply a distributor or a manufacturer's trademarked goods and when the company is a franchise. The mere licensing of a trademarked good, without more, does not give rise to a franchise relationship. How much more is required is a matter of degree and, in many cases such as this one, a question for the finder of fact."

Read the entire decision: Cycle City, Ltd. v. Harley-Davidson Motor Co., Inc.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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