Publicaties

---

With no fanfare, Rhode Island has become the first state to enact franchise relationship legislation since Iowa did so in 1992.

The Rhode Island Fair Dealership Act (the Act) was enacted effective June 14, 2007 with almost no publicity, and the Act became law. Until now, since 1992 every state that had considered enacting franchise relationship legislation chose not to. Franchise relationship bills are currently pending in Massachusetts and Tennessee.

Virtually Identical Law in Wisconsin Has Led to Hundreds of Lawsuits

The Act is virtually identical to the Wisconsin Fair Dealership Law. It purports to impose a “good cause” standard on franchisors for certain events including franchise terminations, non-renewals, and any undefined “substantial change in competitive circumstances” (a Termination Event). In Wisconsin, the virtually identical law has resulted in literally hundreds of litigated cases.

While Rhode Island has regulated franchise offers and sales since 1973, the state did not attempt to regulate the terms of franchise agreements or the relationship between franchisors and franchisees. But, through the Act, Rhode Island now does regulate the franchise relationship. Moreover, as in the Wisconsin law, Rhode Island’s broad “community of interest” definition applies not only to franchises but to non-franchise distributorships and dealerships.

Wide-Ranging Definition

The new Act defines a “dealership” as any “contract or agreement (whether express, implied, oral or written)” in which one “person is granted the right to sell or distribute goods or services, or use a … trademark …, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling or distributing goods or services … .” A “community of interest” means any continuing financial interest between the two parties to the contract in either the operation of the dealership business or the marketing of the goods or services. This wide-ranging definition encompasses nearly all franchise systems and most distributorships and dealerships. At least the jurisdictional scope of the Act is limited only to dealers “situated in” Rhode Island.

The Act contains few exclusions, exempting only “intoxicating liquor dealerships, motor vehicle dealerships, insurance agency relationships and door-to-door sales dealerships.”

The stated purpose of the Act is remedial: to protect dealers against unfair treatment by their franchisors and to provide them with rights and remedies in addition to those existing by contract or common law. The Act forbids, and renders void, any contract purporting to waive application of the Act. Furthermore, the Act purports to apply to existing franchise contracts, not just prospective ones.

Act May Be Unconstitutional

That is, the Act impairs existing contracts. Prior case law from other states (including Iowa) indicates that this impairment may render the Act unconstitutional. Nevertheless, even if that aspect of the Act is determined to be unconstitutional, it may still apply to contracts that are entered into, renewed, or amended after June 14, 2007.

Termination Events under the Act

Under the Act, a franchisor, supplier, or manufacturer – the grantor of the dealership – must give the dealer at least 90 days’ prior written notice of any Termination Event. The notice must state all of the reasons for the Termination Event and provide the dealer with at least 60 days to cure any claimed deficiency. The only exceptions to the notice requirement are if the reason for the Termination Event is either: (1) non-payment of sums due, in which case 10 days notice to cure the default must be given; or (2) the dealer’s insolvency, bankruptcy, or an assignment for the benefit of creditors, in which case no notice is required.

The Act defines “good cause” as either: (1) bad faith by the dealer in carrying out the terms of the dealership; or (2) failure by a dealer to comply substantially with essential and reasonable requirements that “are not discriminatory as compared with requirements imposed on other similarly-situated dealers either by their terms or in the manner of their enforcement.”

Although the Act does not explicitly state that Termination Events can only be accomplished for “good cause”, the Act implies a “good cause” requirement. This is an instance in which the Rhode Island law departs from that of Wisconsin. Indeed, it’s strange that, after essentially copying the Wisconsin law, the Act omits the explicit prohibition from the Wisconsin law that forbids franchisors from engaging in any Termination Event unless it has “good cause.” But, even with this conspicuous omission, in context, the Act intends to impose a “good cause” standard on Termination Events.

While the application of the Act to terminations and non-renewals raises the specter of perpetual franchises, the effect on other activities is uncertain. The phrase “substantial change in competitive circumstances” is undefined. Franchise and dealer suits in Wisconsin under a similar provision have challenged numerous types of conduct (such as appointing additional dealers), and have spawned countless lawsuits.

Violations of the Act Entitle Franchisees to Remedies

Violations of the Act entitle the franchisee to various remedies, including actions for damages, reimbursement of attorneys’ fees and costs, and both permanent and temporary injunctive relief. To support temporary injunctive relief, the Act states that violations are deemed to cause irreparable harm.

The Act purports not to apply to binding arbitration agreements, but only if the criteria for determining whether good cause exists for a Termination Event and the relief provided a dealer are consistent with and no less than that provided for in the Act. Again, this indicates that a “good cause” standard exists under the Act; even if it is not explicitly stated.

If a franchisor terminates a franchise agreement, whether or not for good cause, the dealer may force the franchisor to repurchase all inventory of merchandise sold by the franchisor to the dealer that bear the franchisor’s marks, at their fair wholesale market value.

Flurry of Litigation is Coming

Since Iowa passed franchise relationship legislation in 1992, that much-maligned law has been eroded several times. Now franchisors with franchisees in Rhode Island, faced with their own, possibly unconstitutional legislation, must nevertheless take special care not to violate the Act in their dealings with their franchisees. Since the Act is a virtual clone of the Wisconsin law, Rhode Island courts can expect a flurry of litigation over Termination Events involving franchisees and dealers.