Constructive Termination Under the Wisconsin Fair Dealership Law

By David R. Cross & Daniel M. Janssen

The Wisconsin Fair Dealership Law (WFDL) has been a subject of controversy in the courts and in the business world for more than 20 years.¹ The purpose of the WFDL is to provide "thousands of small businessmen in Wisconsin" ² with a type of tenure. ³ The WFDL prohibits a "grantor" of a dealership from terminating, canceling, failing to renew or substantially changing the competitive circumstances of an agreement with a dealer absent statutorily defined good cause, after providing the dealer with written notice and an opportunity to cure.⁴

A few decisions over the last 10 years have hinted that dealers may possess a cause of action implied in the WFDL but not found in its text - a claim for "constructive termination." However, no claim for constructive termination has ever succeeded. In fact, it appears that no court has ever addressed an actual claim of constructive termination until the recent case of JPM Inc. v. John Deere Industrial Equipment Co.⁵ The Seventh Circuit's decision in JPM confirms what earlier decisions had suggested in passing - that there truly is an implied WFDL cause of action for constructive termination. But in a stroke of irony, the Seventh Circuit held in JPM that the express protections of the WFDL dramatically limit the remedies for a constructive termination claim.

Constructive Termination before JPM

The notion that a claim for constructive termination (or "de facto termination") might exist under the WFDL is nothing new. Three decisions before JPM suggested in dicta that the WFDL impliedly prohibits a grantor from taking actions that destroy the value of the dealer's business, yet fall short of an actual termination. The treatment given constructive termination by the courts in these early decisions is oblique, probably because the courts were not faced with dealers who actually pled such a claim.

The concept of constructive termination under the WFDL was raised for the first time by Judge Posner, writing for the Seventh Circuit in Remus v. Amoco Oil Co. Amoco, the grantor, adopted a uniform program that reduced the wholesale price of gasoline to its dealers and at the same time reduced its reimbursement to dealers for credit card sales. The program was attractive to dealers who sold gasoline primarily to customers who paid cash. The program hurt Remus, though, because most of Remus's customers paid by credit card. According to Remus, Amoco's program "substantially change[d] the competitive circumstances" of its dealership agreement in violation of section 135.03 of the Wisconsin Statutes.⁶

Judge Posner rejected Remus's claim because the WFDL "substantial change" provision was not intended to prevent grantors from enacting uniform and systemwide changes in their methods of distribution.⁷

In the process of dismissing Remus's complaint, however, Judge Posner discussed in dicta whether the WFDL "substantial change" provision was itself a remedy for dealers who were the victims of constructive termination. But in answering the question, he seemed to suggest just the opposite - that a claim for constructive termination could exist independently of a claim for "substantial change." Judge Posner noted that Remus might have had a claim for constructive termination had there been proof that Amoco "wanted to drive Remus out of business."⁸ There was no such evidence, and Remus had not argued constructive termination, so Judge Posner's analysis ended without a full explanation of the claim.

The concept of constructive termination appeared again briefly in East Bay Running Store Inc. v. Nike Inc., a Seventh Circuit decision two years after Remus.⁹ East Bay, one of Nike's dealers, sued Nike after it implemented a policy prohibiting all its dealers from selling the "Nike Air" line of shoes through catalogs. Nike claimed that the policy was needed to ensure that the line was marketed effectively through personalized attention to the sale of each pair of shoes. East Bay sued Nike for violating the WFDL's prohibition of "substantial change," because more than 90 percent of its business was based upon mail order catalog sales.¹⁰

Judge Kanne, writing for the court, rejected East Bay's claim for the same reason that Judge Posner dismissed the "substantial change" claim in Remus. Judge Kanne wrote that the WFDL "substantial change" language was not meant to punish grantors' nondiscriminatory systemwide changes. In so holding, he cited Remus (in a footnote) for the proposition that the WFDL "substantial change" provision might be meant to protect dealers from constructive termination.¹¹ Judge Kanne did not elaborate on the constructive termination concept, however, because East Bay did not "attempt to show that Nike's actions amounted to a 'constructive termination.'"¹²

Constructive termination also was mentioned in a Wisconsin Court of Appeals case, Super Valu Stores Inc. v. D-Mart Food Stores Inc., but under the name of "de facto" termination.¹³ Like Remus and East Bay, Super Valu involved an unsuccessful claim for "substantial change," so the majority decision did not discuss in any detail the elements of a claim for de facto termination.

The JPM Decision

The case of JPM v. John Deere Industrial Equipment Co. presented a court for the first time with a dealer's concrete allegation that its WFDL-protected dealership had been constructively terminated. The grantor argued that the WFDL did not recognize claims for constructive termination, and in the alternative, that there were limits to the claim that made it unavailable under JPM's facts. The Seventh Circuit rejected the grantor's first argument, holding that there was a claim for constructive termination under the WFDL, but agreed that the dealer could not prove constructive termination under the facts.

In 1990 JPM signed a dealership agreement with John Deere. The agreement appointed JPM as a dealer of John Deere construction and forestry equipment in northwest Wisconsin. JPM had purchased the business from John Deere's former dealer for $1 million. Four years later, JPM sold the business to another dealer for more than double that amount - $2,062,705.

After the sale, JPM sued John Deere alleging that John Deere had constructively terminated its dealership in violation of the WFDL by forcing JPM to sell and that JPM did so under economic duress. JPM claimed that John Deere told JPM that it had to sell the business in three months to a buyer handpicked by John Deere, and that JPM could not merge with the chosen buyer or solicit bids for the dealership. John Deere vigorously challenged JPM's story.

John Deere's first line of defense was that there was no such thing as a cause of action for constructive termination under the WFDL, outside of a claim for "substantial change," and that no claim for "substantial change" could arise until John Deere actually altered the terms of its dealership agreement with JPM. John Deere argued that threatened future actions did not ripen into a WFDL claim until the grantor actually took some action harming the dealer.

The Seventh Circuit rejected John Deere's argument, stating simply, "We assume that constructive termination is a recognized cause of action under the Wisconsin Fair Dealership Law."¹⁴ The court held that economic duress could properly be the basis of a claim for constructive termination. Writing for the court, Judge Evans noted that one policy behind the WFDL is to protect dealers against unfair treatment by inherently powerful grantors, and threatening to violate the WFDL was simply one of the ways that a grantor could exercise that superior power.¹⁵

However, the Seventh Circuit agreed with John Deere that, because JPM's claim was based upon termination due to an alleged involuntary sale, JPM had to prove the elements of economic duress. The Seventh Circuit looked to Wurtz v. Fleischman, the Wisconsin Supreme Court decision that sets forth the common law elements of duress.¹⁶ Under Wurtz a plaintiff claiming economic duress must prove, among other things, that the plaintiff had no adequate legal remedy for the threats at the time they were made.

The Seventh Circuit held that JPM could not meet the Wurtz test because the WFDL's preliminary injunction provision was an adequate legal remedy for John Deere's alleged threats. Under the WFDL's liberal standards for injunctions, JPM could easily have obtained a court order preventing John Deere from acting on the threats, assuming JPM could have demonstrated a likelihood of proving that the threats were made.

The court rejected JPM's argument that it would not be able to prove the irreparable injury needed to get a preliminary injunction. The court noted that the WFDL deems any violation by a grantor "an irreparable injury to the dealer" when a dealer seeks a preliminary injunction.¹⁷ In addition, JPM would have been able to recover its attorney fees and expenses for obtaining the injunction.¹⁸

JPM also argued that, had it been able to obtain a preliminary injunction, the injunction would have done JPM no good in the long run because John Deere had "poisoned" the relationship and would secretly sabotage its dealership if forced to continue the relationship by court order.¹⁹ The court rejected this argument because it was premised upon the speculative assumption that John Deere would deliberately ignore a court order.

Finally, JPM argued that the court's decision improperly limited JPM's relief for constructive termination solely to a court order. JPM argued that case law interpreting the WFDL allows a dealer a choice of remedies under the WFDL between injunctive relief or money damages.²⁰ The court held that its decision did not require plaintiffs under the WFDL to always seek injunctive relief or provide an explanation why an injunction would not work. Nor was injunctive relief even a preferred remedy under the WFDL. The court held that to prevail on the theory of constructive termination based upon duress, a plaintiff must prove the elements of a duress claim. The only difference between JPM and any other economic duress plaintiff was that JPM happened to be a WFDL-protected dealer - a fact that provided JPM with remedies far more powerful than those available to an ordinary economic duress plaintiff.

Lessons from JPM

On one hand, dealers can take comfort from JPM because it allows a dealer to take its grantor to task for simply threatening to violate the WFDL. Under JPM a claim arises under the WFDL even though a grantor has done nothing to terminate the dealer's agreement or alter the terms of the dealership agreement.

On the other hand, JPM makes clear that there are important limitations to any such claim. JPM provides a dealer with only two viable courses of action when faced with threats amounting to constructive termination. First, the dealer could wait to see if the threats become reality. A dealer who is told it must sell its business or be terminated could dig in its heels and wait to see if it is terminated. If it is not, the dealer has called the grantor's bluff. But if the threats become actions, then the dealer has the traditional remedies under the WFDL for wrongful termination (constructive or actual), cancellation or nonrenewal of its dealership agreement.

Alternatively, the dealer could seek a court order preliminarily enjoining the grantor from acting on its threats and from making additional threats. The dealer could recover its attorney fees if the court issues an injunction.

A dealer should not follow the third possible course of action - succumbing to the wishes of the grantor, then suing for money damages under the WFDL. If it does, the dealer would not pass the Wurtz test. When the dealer complies with the wishes of the grantor, in the face of a clearly adequate WFDL remedy, a court will presume that the dealer made a voluntary choice to follow the grantor's dictates.

Grantors should learn from the JPM decision to be careful when persuading their dealers to take desired actions. The WFDL does not prohibit grantors from trying to convince their dealers to do things that grantors believe are in the best interest of selling product. This could include anything from remodeling showrooms, to increasing sales staff, to requiring the dealer to spend additional money on advertising. But grantors should be wary of informing their dealers what will happen if the dealers do not comply. Grantors should take care not to threaten to terminate a dealership agreement or threaten to change the terms of a dealership agreement in a way that harms the dealer. Should this occur, the dealer may have a right to obtain a court order preventing the grantor from acting on its threats.

Conclusion

After JPM there is compelling authority for the argument that an implied claim of constructive termination exists under the WFDL, at least where a grantor threatens to terminate its dealer for failing to follow the grantor's orders. The WFDL provides strong protection for a dealer facing such economic duress in the form of a preliminary injunction and the recovery of the dealer's attorney fees. But dealers who choose not to seek a preliminary injunction cannot later claim that they acted under duress. JPM makes clear that the WFDL is a remedy that is available to stop a grantor from acting on threats, and it must be used to stop the threats or the dealer may lose its WFDL claim.

Endnotes

¹ Wis. Stat. Ch. 135.

² Foerster Inc. v. Atlas Metal Parts Co., 105 Wis. 2d 17, 24, 313 N.W.2d 60, 63 (1981), quoting Press Release, Office of Governor, April 6, 1973.

³ Remus v. Amoco Oil Co., 794 F.2d 1238, 1240 (7th Cir. 1986).

⁴ Wis. Stat.§§ 135.03 and 135.04.

⁵ JPM Inc. v. John Deere Indus. Equip. Co., 934 F. Supp. 1043 (W.D. Wis. 1995), affirmed 94 F.3d 270 (7th Cir. 1996).

⁶ Remus, 794 F.2d at 1240.

⁷ Id. at 1241.

⁸ Id.

⁹ East Bay Running Store Inc. v. Nike Inc., 890 F.2d 996 (7th Cir. 1989).

¹⁰ Id. at 998.

¹¹ Id. at 1000, n.6.

¹² Id.

¹³ Super Valu Stores Inc. v. D-Mart Food Stores Inc., 146 Wis. 2d 568, 431 N.W.2d 721 (Ct. App. 1988).

¹⁴ JPM, 94 F.3d at 272.

¹⁵ Id.

¹⁶ Wurtz v. Fleischman, 97 Wis. 2d 100, 293 N.W.2d 155 (1980).

¹⁷ JPM, 94 F.3d at 273, quoting Wis. Stat. §135.065.

¹⁸ Wis. Stat. §135.06.

¹⁹JPM, 94 F.3d at 273.

²⁰ See Frieburg Farm Equip. Inc. v. Van Dale Inc., 978 F.2d 395 (7th Cir. 1992).

Wisconsin Lawyer