The Wisconsin Fair Dealership Law's
Territorial Imperative
Two recent cases, Morley-Murphy and Generac, prescribe
the reach of the WFDL for dealerships, but raise additional issues
for future resolution.
By Kevin L. Keeler
The Wisconsin Fair Dealership Law (WFDL)1
protects businesses that fall within the statute's definition
of a "dealer" from certain business practices that
the statute deems unfair. In particular, the WFDL prohibits a
grantor of a dealership from terminating, or substantially changing
the competitive circumstances of, the dealer's dealership agreement
without good cause.2 The
statute also requires a grantor to give the dealer at least 90
days' prior written notice of termination, nonrenewal, or substantial
change in competitive circumstances, and a 60-day period to rectify
any deficiency claimed by the grantor.3
The protections of the WFDL apply only to businesses that qualify
as a "dealer," which the statute defines as "a
person who is a grantee of a dealership situated in this state."4 A "dealership" means
an agreement "by which a person is granted the right to
sell or distribute goods or services, or use a trade name, trademark,
service mark, logotype, advertising or other commercial symbol,
in which there is a community of interest in the business of
offering, selling, or distributing goods or services at wholesale,
retail, by lease, agreement, or otherwise."5
In two recent cases the United States Court of Appeals for
the Seventh Circuit has prescribed the reach of the WFDL as it
applies to dealerships with multi-state sales territories. In
Morley-Murphy Co. v. Zenith Electronics Corp.6 the court held the WFDL does
not permit an unlawfully terminated dealer to recover damages
for lost profits on projected sales outside Wisconsin. In Generac
Corporation v. Caterpillar Inc.7
the court construed the WFDL as containing its own choice of
law rule in the statute's definition of a "dealer"
as the grantee of a "dealership situated in this state,"
overruling a prior decision8
that required courts to first apply a traditional choice of law
analysis before considering whether the WFDL applied. The court
held that a purported dealer who has no Wisconsin sales is not
the grantee of a "dealership situated in this state"
for purposes of the WFDL, even if the dealer is located in Wisconsin
and conducts substantial sales support business in Wisconsin.
This focus on the necessity of a Wisconsin sales territory
as a prerequisite of WFDL protection is the legacy of Swan
Sales Corp. v. Jos. Schlitz Brewing Co.9
In that case, the Wisconsin Court of Appeals construed the WFDL
to mean that the dealership, rather than the dealer, has to be
situated in Wisconsin for purposes of the WFDL, and therefore
held that a Wisconsin business that sold Schlitz beer products
exclusively to military bases overseas was not a "dealer"
as defined by the statute. By thus tying the WFDL's protections
to the location of a dealer's customers, and looking only to
the WFDL's "situated in" test to decide choice of law
questions, the court in Generac not only confirmed that
the WFDL will not protect a Wisconsin dealer who has no Wisconsin
sales, but it implicitly approved the application of the WFDL
to protect non-Wisconsin dealers whose sales territories include
all or parts of Wisconsin.
The Procrustean Bed of WFDL Damages:
Morley-Murphy Co. v. Zenith Electronics Corp.
In Morley-Murphy Zenith terminated its independent
dealers, including the plaintiff, Morley-Murphy, so it could
sell its products directly to large retailers. As damages for
Zenith's wrongful termination under the WFDL, the jury awarded
Morley-Murphy $2,374,629 for lost profits that Morley-Murphy
would have made, but for the termination, on projected sales
of Zenith products. This amount included projected sales from
Morley-Murphy's Wisconsin location as well as its locations in
Iowa and Minnesota.
Zenith argued that awarding damages for future lost profits
on sales from Morley-Murphy's Iowa and Minnesota locations was
an extraterritorial extension of Wisconsin law in violation of
the "dormant commerce clause," which is the limitation,
implied by the U.S. Constitution's delegation to Congress of
the power to regulate commerce among the several states, on a
state's authority to regulate commerce outside its borders.10 The trial court rejected Zenith's
commerce clause argument and confirmed the jury's damage award,
noting that any extraterritorial effect was due to the fact that
Zenith voluntarily entered into a multi-state dealership contract
with a Wisconsin dealer. According to the trial court, this did
not implicate the commerce clause because the projection of Wisconsin
law into interstate commerce derived from a private source and
not any attempt by the state of Wisconsin to project its protective
regulation beyond its borders.11
Sensitive to the commerce clause implications but without
directly ruling on the constitutionality of the WFDL's extraterritorial
effect, the court of appeals held that the WFDL does not apply
to sales outside of Wisconsin. Since section
135.025(2)(d) of the Wisconsin Statutes expressly limits
the application of the WFDL to the "extent consistent with
the constitutions of this state and the United States,"
and given the troublesome constitutional questions that the extraterritorial
application of the WFDL would raise, the court of appeals predicted
that the Wisconsin Supreme Court would construe the WFDL as not
extending to Morley-Murphy's Iowa and Minnesota sales. In reference
to the view enunciated by the trial court that any extraterritorial
effect in this case was due to the parties' voluntary decision
to enter a contract that included a multi-state territory, the
court noted that "[i]t appears to us quite odd to speak
of party autonomy in a context where the parties are not permitted
to opt out of a provision of state law."12Accordingly,
on remand Morley-Murphy would not be entitled to make a claim
for lost profits on its projected sales from its Iowa and Minnesota
locations.
By drawing a line along the boundary between Wisconsin and
non-Wisconsin sales territories, the court in Morley-Murphy
for the first time imposed a geographical limitation on lost
profits damages available under the WFDL. However, the brightness
of that line was still open to question given the facts of the
case. The lost profits damages that the court disallowed were
for projected sales from Morley-Murphy's separate locations
in Iowa and Minnesota to customers in those states. Those sales
therefore constituted commercial activity wholly outside
Wisconsin that arguably would have been unconstitutionally regulated
by Wisconsin if the WFDL were construed to reach that far. Under
these facts, the case appeared to leave room for the argument
that lost profits from sales made from a dealer's Wisconsin
location to customers in another state are still recoverable
under the WFDL. In Generac the court foreclosed that argument.13
Generac Corporation v. Caterpillar Inc.
In 1992 Generac entered into a contract with Caterpillar that
granted Generac the exclusive right to manufacture standby generator
sets and sell them to Caterpillar's independent dealers under
Caterpillar's "Olympian" trademark. The contract chose
Illinois law and allowed either party to terminate it without
cause upon two years' notice. Under the contract, Generac manufactured
the generator sets at its Wisconsin plant and sold them to Caterpillar
dealers in the United States and other countries. In the United
States and Canada, the contract permitted Generac to sell Olympian
products only to those Caterpillar dealers who Caterpillar designated
as a Power Systems Distributor (PSD). No PSDs were located in
Wisconsin.
Pursuant to the contract, Generac invested substantial amounts
in the Olympian line, including amounts for engineering of Olympian
products, sales and service training of Caterpillar dealer personnel,
construction of a new Wisconsin production facility, and payment
of access fees to Caterpillar. By 1996 Olympian sales were a
significant percentage of Generac's total volume. Nevertheless,
effective June 1, 1998, Caterpillar terminated the contract without
cause under the two-year notice provision. Generac's resulting
lawsuit against Caterpillar included a claim that the termination
was a violation of the WFDL.
Granting Caterpillar's motion for partial summary judgment,
the trial court held that the WFDL did not override the parties'
contractual choice of Illinois law because Wisconsin law did
not apply to Generac's Olympian dealership.14In
deciding the choice of law issue, the trial court relied upon
the choice of law analysis that the court of appeals had applied
to a WFDL claim in Diesel Service Co. v. AMBAC International
Corp.15
Diesel Service: A Two-step Method of Choice of Law Analysis
According to Diesel Service, the first question to
be decided in WFDL cases is which state's law would apply without
taking into account the contractual choice of law provision.
This question must be decided by applying Wisconsin's traditional
choice of law principles for contract cases, which require the
court to determine which state has the most significant contacts
with the transaction and the parties.16
This determination must be made in light of certain choice of
law influencing factors: predictability, interstate and international
order, simplification of the judicial task, the forum government's
interest in the case, and the better rule of law.17
Only if this step points to Wisconsin law will the court go
on to consider whether the WFDL applies. If the court then finds
that the WFDL applies, the parties' contractual choice of non-Wisconsin
law is unenforceable under section
135.025(3) of the Wisconsin Statutes, which provides that
the effect of the WFDL cannot be avoided by contract.18
When the court in Diesel Service applied Wisconsin's
choice of law principles it determined that Wisconsin law did
not apply to the plaintiff's dealership agreement. Even though
34 percent of the plaintiff's sales of the defendant's products
were in Wisconsin, the plaintiff was nevertheless a Minnesota
corporation - its principal location was in Minnesota, and all
orders, payments, and product shipments went through its Minnesota
headquarters - all of which pointed to Minnesota as the primary
place of performance and subject matter of the dealership agreement.
Further, the defendant was a Delaware corporation with its principal
office in South Carolina, and the parties' agreement chose South
Carolina law. Since these non-Wisconsin contacts far outweighed
the plaintiff's percentage of sales in Wisconsin, the court held
that the application of Wisconsin's traditional choice of law
principles pointed away from Wisconsin law. Thus, the
plaintiff was not protected by the WFDL, even though the court
found that the plaintiff's Wisconsin sales would have likely
qualified the plaintiff's dealership as "situated in"
Wisconsin for purposes of the WFDL.19
In an attempt to avoid this result, the plaintiff in Diesel
Service tried to convince the court that Wisconsin's general
choice of law rules did not apply and that the court should instead
look directly to the WFDL, particularly the requirement that
the dealership be situated in Wisconsin. Describing the plaintiff's
argument as "creative," the Diesel Service court
was nevertheless unpersuaded. According to the court, "it
is quite clear that 'situated in' serves a specific purpose other
than taking over the choice of law question."20
The court explained that there are situations in which the parties
have chosen Wisconsin law in their contract or in which Wisconsin
has the most significant contacts, but the Wisconsin Legislature
did not want the WFDL to apply.
Seven years after it rejected the plaintiff's "situated
in" argument in Diesel Service as creative but unpersuasive,
the Seventh Circuit adopted that very argument, sua sponte,
in Generac.
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