Diageo is currently fighting a lawsuit regarding a Missouri distributor named Major Brands; the lawsuit involves, in part, various states’ franchise law. Franchise law is, indeed, a complex area of law that can sneak up on companies in a bad way if not considered at the right time.
Like many areas of law, franchising is regulated with a federal and a state law component. At the federal level, the Federal Trade Commission defines a franchise as having three elements: (1) Trademarks – a franchisor gives a franchisee the right to distribute for sale goods and/or services under the trademarks of the franchisor; (2) Control or Assistance – the franchisor either has control of, or gives assistance to, the franchisee (federal law has defined that this control or assistance must be “significant”); and (3) Payment – the franchisee must pay the franchisor a minimum amount of money before opening for business.
If the federal law defines a business as a franchise, then other federal laws apply, such as laws governing disclosure of certain information and required registrations.
However, when franchise law starts to govern the relationship between a franchisor and a franchisee, things get more tricky and sometimes litigation becomes an issue. The main reason for this is that two parties’ relationship is usually governed by a private contract, where each party decides which rights and duties it will have (ideally). When franchise law steps in, sometimes these rights and duties change, and even both parties might not realize it.
In Washington State, for example, state franchise law governs some aspects of the relationship. For example, parties cannot terminate a franchise relationship unless there is “good cause.” “Good cause” means things like a party goes insolvent, commits a crime, or ceases business operations. Notice that this does not include something like a personal dispute or one party simply stops liking another party.
So, notice that if two parties are in a standard garden-variety contract with each other to do business, they can pretty much terminate the relationship at any time. However, if they are determined to be a franchise under Washington law, they cannot terminate unless there is “good cause.” Please note also that the elements to be determined a franchise are different under Washington law than the 3 elements listed above under federal law.
In the alcohol business, the three-tier system of distribution still dominates the industry. Wineries, distilleries, and breweries, both large and small, rely on strong networks of state-level distributors, and – you guessed it – they often distribute goods with the trademarks and logos of the companies they are doing business with.
The tricky issue to take into consideration as a producer of alcohol is if an arm’s length agreement with a distributor in another state qualifies as a franchise relationship under that state’s law (or another, depending on the forum clause in the contract, such is one of the issues in the Diageo lawsuit). If a franchise exists, it is sometimes much harder to terminate a business relationship, and the franchisee often has additional remedies when litigation ensures.
(This posting is not to be construed as legal advice. If any of the information in this posting relates to legal issues that you are facing, you should contact an attorney.)
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