Over the last 15 years, franchisors have become accustomed to handily defeating efforts to enact new state statutes that impose termination, non-renewal and other restrictions on the franchise/dealer relationship. That complacency abruptly ended with little fanfare when the Rhode Island Fair Dealership Act became effective on June 14, 2007. As with most relationship legislation, the Act was introduced at the request of a constituent who owned a dealership and who believed he was being mistreated by his manufacturer when the manufacturer unilaterally increased the minimum purchase requirements.
The Act is similar in many respects to the Wisconsin Fair Dealership Law. Like the Wisconsin law, the Rhode Island Act impacts more than traditional franchises—it applies to a broad range of relationships, including dealerships and distributorships, through its expansive "community of interest" definition. In addition, the Act covers more than termination; it also applies to nonrenewal and any "substantial change in competitive circumstances" (which it fails to define). The Act requires that a franchisor, or "grantor" as used in the Act, must: (1) provide at least 90 days' prior written notice of termination, cancellation, nonrenewal or substantial change in the competitive circumstances of the dealership; and (2) provide the dealer at least 60 days to remedy any claimed deficiency before taking any action against the dealer.
Advance notice is not required under the Act if termination is based on the dealer's insolvency, bankruptcy or an assignment for the benefit of creditors. In addition, only a 10-day notice and cure period need be given for monetary defaults. Following termination, at the dealer's option, the grantor must repurchase inventory sold by the grantor that bears the grantor's trademark. If the grantor fails to comply with the Act, the dealer has a private right of action for damages and injunctive relief, and the Act also provides for an award of attorneys' fees.
Like most of the 19 other states and two territories (Puerto Rico and the Virgin Islands) that regulate some aspect of the franchise/dealer relationship, in addition to a specified notice and cure period, the Rhode Island Act imposes a "good cause" requirement before the grantor can take adverse action against the franchisee/dealer. While it is not surprising that these 22 statutes generally require good cause, what is surprising, and a source of concern, is the states' different perspectives as to what constitutes good cause. Delaware and Virginia are at one end of the spectrum since those statutes do not define the concept, apparently leaving it to the courts to decide.
Rhode Island and Wisconsin arguably are at the other, most restrictive end of the spectrum. In those two states, good cause is limited to the dealer's failure to substantially comply with essential and reasonable requirements imposed by the grantor, provided those requirements are not discriminatory as compared with requirements imposed on similarly situated dealers. In other words, good cause exists only if the dealer materially breaches his contract and the grantor has taken the same action against similar dealers. As is common with most of the state statutes, these two statutes do exclude from the good cause (and the advance notice) requirement the situation where the franchisee is insolvent, has made an assignment for the benefit of creditors or has filed bankruptcy.
Several other jurisdictions take approaches almost as restrictive as Rhode Island and Wisconsin. These statutes provide that good cause may only be based on the franchisee/dealer's failure to substantially comply with the requirements imposed by the agreement. These jurisdictions include Minnesota, Nebraska, New Jersey, Puerto Rico and the Virgin Islands. Puerto Rico goes on to allow termination if any action or omission by the dealer adversely and substantially affects the interests of the grantor in the marketing and distribution of the merchandise or services.
Fortunately, most states that regulate the franchise/dealer relationship do not so severely limit what constitutes good cause. The majority provide that good cause includes "but is not limited to" the franchisee/dealer's failure to comply with lawful, material provisions of the franchise agreement. While most statutes do not define what noncontract actions are sufficient to constitute good cause, some identify specific circumstances that satisfy this standard. These include situations such as abandonment of the franchise, a felony conviction, material misrepresentations by the dealer and any act that substantially impairs the grantor's trademark. There remains, under the approach taken by the majority of states, uncertainty as to exactly what constitutes good cause since there is only limited case law addressing the issue.
Because the statutes vary so greatly, a franchisor/grantor must take several critical steps before it seeks to terminate or take some other adverse action against a franchisee/dealer. The first step is to determine whether a relationship law is applicable to the franchisee/dealer in question. If so, care must be taken to ensure that good cause (as defined by the particular statute) exists for the planned action. Regardless of how a particular statute defines good cause, the relevant case law should be reviewed to verify how the courts interpret the statute. Once that determination has been made, it is necessary to ensure that the notice complies with the state notice and cure period requirements. These hurdles are not simply legal niceties. Since the vast majority of these statutes grant private rights of action to impacted franchisees/dealers, the failure by a grantor to determine that good cause exists and to give the proper notice and cure period could result in expensive litigation, the termination/nonrenewal being voided by the courts and an award of damages and attorneys' fees for the franchisee/dealer.