Seventh Circuit Takes on Dairy Parlors, Damages, and Dealerships

Foley & Lardner LLP

A recent Seventh Circuit opinion written by Judge Posner addresses both the covenant of good faith and fair dealing and some issues of damages proof in a particularly appropriate Wisconsin context: dairy-equipment dealerships.

The dispute in Tilstra v. BouMatic LLC, No. 14-3333 (7th Cir. June 30, 2015), arose after BouMatic, a Wisconsin dairy-equipment manufacturer, decided that Tilstra, its long-time dealer in “arguably the richest dairy county in Canada,” was doing “a poor job with his territory” and began to pressure the dealer to sell—allegedly by threatening to stop supplying him or to modify or eliminate his sales territory. The next month, Tilstra sold out to an adjacent dealership for just over half of what he believed his dealership was worth.

Tilstra’s suit against BouMatic alleged tortious interference and breach of the covenant of good faith and fair dealing with respect to the dealership contract’s requirement of 90 days’ written notice and good cause for termination. Tilstra’s good-faith claim was the only one to survive a motion to dismiss, but a jury found for Tilstra and awarded him $471,124 in damages.

On appeal, BouMatic began by arguing that it had not formally terminated the dealership agreement, that the agreement allowed it to change sales territory in its discretion, and in any event, that it had good cause to terminate Tilstra.

The Seventh Circuit was unimpressed, believing that these arguments elevated form over substance. Though BouMatic may not have formally terminated the dealership agreement, by threatening to eliminate Tilstra’s territory if he didn’t sell it had “eva[ded] the spirit of the bargain” and “abuse[d] [its] power to specify terms”—both forms of bad faith recognized under Wisconsin law. And if BouMatic had “good cause,” it neglected to inform Tilstra of that fact (as required by the contract), if indeed its “good cause” was anything more than the fact that it had found a substitute dealer from whom it thought it could make more money.

The court characterized the remainder of BouMatic’s appeal as a “blunderbuss of objections” to the damages calculations made by Tilstra’s expert witness, Rinaldo Sciannella. BouMatic objected that Sciannella had not attempted to verify Tilstra’s financial statements by engaging the help of outside accountants; the court responded that reliance on hearsay in financial statements is an accepted practice for management accountants under Federal Rule of Evidence 703. BouMatic objected as speculative to Sciannella’s assumption in his calculations that Tilstra’s dealership would have remained as valuable as its recent past; the court approved Sciannella’s calculation as a standard method of business valuation known as the “capitalized earnings” approach, where damages are the sum of the dealership’s discounted future earnings. The court also rejected BouMatic’s arguments that it could have shrunk Tilstra’s territory or that Tilstra could have obtained a comparable dealership from another manufacturer.

The key lesson here for Wisconsin manufacturers is a practical one: when seeking to terminate a dealer, make the decision carefully, proceed with caution, and make every attempt to follow both the letter and the spirit of the applicable dealership agreement.

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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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