Community of Interest: Clarity or Confusion?

03/01/2003 / Joseph Fittante

Most franchise practitioners are familiar with the statutory requirements of a marketing plan and substantial association with a trademark, and are generally comfortable with their meanings.[i][i][1]  But “community of interest,” which a number of statutes substitute for the marketing plan requirement, does not have common everyday meaning[ii][ii][2] and has received confusing, sometimes contradictory, interpretations from the courts.[iii][iii][3]  Nonetheless, to advise clients entering complex business relationships that may be deemed dealerships or franchises, practitioners must do their best to determine as precisely as possible what constitutes a community of interest.  Failure to understand this concept may unexpectedly subject a client to actions for violation of applicable registration and disclosure laws as well as significant liability for improperly terminating or failing to renew the “franchise” agreement.  This article surveys the reported decisions discussing the “community of interest” element of the franchise definition.[iv][iv][4]  

The Elements of a Franchise/Dealership  
Unfortunately, there is no universal legal definition of a franchise or distributorship.[v][v][5]  The federal definition of a franchise is different from many state definitions, which in turn may conflict with one another.  The choice of law is therefore crucial.

The Federal Trade Commission Franchise Rule defines a franchise as any business relationship in which: (i) the grantee sells goods or services associated with the grantor’s trademark or in compliance with the grantor’s standards; (ii) the grantor exercises significant control over, or gives the grantee significant assistance in, the grantee’s method of operation; and (iii) the grantee, as a condition of entering or continuing the business, pay the grantor $500 or more within six months of beginning to operate the business.[vi][vi][6]

Most state statutory definitions of a franchise include three elements;[vii][vii][7] the majority of statutes require that the grantee pay the grantor a fee to enter the relationship[viii][viii][8] and that the grantor license to the grantee, whether formally or informally, the grantor’s trademark, service mark, or other commercial symbol for the grantee’s use in operating its business.[ix][ix][9]  Past this point, state franchise laws diverge.

In most states with franchise statutes, to qualify as a franchise the grantor must also have given the grantee the right to engage in the business under a marketing plan or system that the grantor in substantial part prescribed.  This is a requirement in eleven registration states[x][x][10]--California, Illinois, Indiana, Maryland, Michigan, North Dakota, Rhode Island, Wisconsin (under the Wisconsin Franchise Investment Law), Washington, Virginia, and New York[xi][xi][11]--as well as under the franchise relationship laws of Arkansas, Iowa, and Oregon.[xii][xii][12]

However, Hawaii, Minnesota, South Dakota, Wisconsin (under the Wisconsin Fair Dealership Law), New Jersey, Nebraska, Mississippi, and Missouri all require, instead of the franchisor-imposed marketing plan, a community of interest as an element of a franchisor or distributorship.[xiii][xiii][13]  The Mississippi law, the Wisconsin Fair Dealership Law, the Nebraska and the New Jersey Franchise Practices Act, and the Missouri Franchise Law are not registration and disclosure laws such as are found in Hawaii,[xiv][xiv][14] Minnesota, and South Dakota, but they do restrict the grantor’s ability to terminate a relationship with its grantee.

The Wisconsin Fair Dealership Law

In 1974, the Wisconsin legislation enacted the Wisconsin Fair Dealership Law (WFDL), and an effort to protect small businesses from the perceived unfair and oppressive conduct of larger companies supplying these smaller businesses with products fro resale.[xv][xv][15]  The stated purpose of the WFDL is to promote fairness in business relations between dealers and grantors and to protect dealers from unfair treatment by grantors with superior bargaining power.[xvi][xvi][16]  In an attempt to satisfy this purpose, the WFDL requires grantors to have “good cause” before terminating or not renewing a dealership,[xvii][xvii][17] and to repurchase, at “fair wholesale market value,” inventory that the grantor sold to the dealer that bears the grantor’s identifying mark.[xviii][xviii][18]

As originally drafted, the bill was entitled the “Wisconsin Fair Franchising Law” and protected only those relationships satisfying the marketing plan element of the Wisconsin Franchise Investment Law’s franchise definition.[xix][xix][19]  If enacted, the original bill “…would have effectively limited the application of the WFDL to traditional franchises….”[xx][xx][20]

However, “[t]he [Wisconsin] legislature fixed the nub of applicability of the WFDL in a single short phrase: ‘community of interest,”’[xxi][xxi][21] The WFDL covers any business relationship in which the dealer and grantor have a “community of interest,”[xxii][xxii][22] which the statute defines as a “continuing financial interest between the grantor and grantee in either the operation of the dealership business or the marketing of such goods and services.”[xxiii][xxiii][23]  However, both the community-of-interest concept and the statutory definition have been the subject of criticism but the U.S. Court of Appeals for the Seventh Circuit, as well as by Wisconsin state courts.  As the Seventh Circuit bluntly put it, the WFDL’s community-of-interest definition is “. . . singularly unhelpful!”[xxiv][xxiv][24] and “permits no ready way to differentiate a dealership from an ordinary vendor/vendee relationship.”[xxv][xxv][25]  The Wisconsin Supreme Court, although expressing itself in more measure terms, has also complained that the community-of-interest element is troublesome and difficult to define with precision.[xxvi][xxvi][26]  Whether a community of interest will be found in a particular business relationship and therefore governed by the WFDL depends upon many factors, including whether a Wisconsin state of federal court is deciding the issue.  Accordingly, any analysis of a business relationship governed by Wisconsin law must take into account the arguably different state and federal court tests of “community of interest.”

The Wisconsin Supreme Court sought to bring clarity to this nebulous concept in Ziegler Co., Inc. v. Resnord, Inc.,[xxvii][xxvii][27] which arose out of business dealing between two companies and their affiliates and predecessors, allegedly dating back to the 1920s.  The issues was whether the relationship between the parties, as documented by a 1981 contract under which Ziegler agreed to distribute Rexnord’s aggregate roch-crushing equipment for a three-year period,[xxviii][xxviii][28] created a dealership under the WFDL.[xxix][xxix][29]

The agreement gave Ziegler primary responsibility for distributing Rexnord’s products in Wisconsin based upon sales goals set by Rexnord.  Ziegler was also required to use in its best efforts to sell Rexnord’s products, provide continuing warranty service for any Rexnord product that it sold, maintain an inventory of Rexnord spare parts, provide various personnel to sell and service Rexnord’s products, maintain place of business suitable to Rexnord, and make periodic reports to Rexnord.  Additionally, Rexnord had the right periodically to review Ziegler’s performance.

Ziegler claimed that, before establishing this arrangement, it spent approximately $1,500,000 constructing and purchasing facilities in anticipation of housing Rexnord’s products.  During the three-year relationship, Rexnord’s products accounted for only about 1 to 8 percent of Ziegler’s total revenue.  At the end of the three-year period, and after Rexnord had lover over $8 million, Rexnord decided to disband its distributorship system and notified Ziegler that it would not renew the agreement, Ziegler sued, claiming that it was entitled to protecting under the WFDL.

The trial and appellate courts held that there was no community of interest as a matter of law, but the Wisconsin Supreme Court reversed, explaining that a community of interest will exist when there is interdependence between the parties (signified by cooperation, coordination or activities, and shared financial goals), along with a continuing financial interest in the marketing of the goods and services that the grantor provides to the grantee.[xxx][xxx][30]  The court identified ten nonexclusive factors to determine if a relationship involves interdependence and a continuing financial interest: (1) the duration of the relationship; (2) the extent and nature of the parties’ obligations under their agreement; (3) the percentage of time that the dealer devotes to selling the grantor’s products; (4) the percentage of revenue that the dealer derives from the grantor’s products; (5) whether a territory has been granted, and, if so, whether the territory is exclusive; (6) the extent and nature of the dealer’s use of the grantor’s marks; (7) the extent an nature of the dealer’s financial investment in the dealership; (8) the number of personnel that the dealer devotes to selling the grantor’s products; (9) the amount that the dealer spends on advertising the grantor’s products; and (10) the type and amount of ancillary services that the dealer provides to consumers purchasing the grantor’s products.[xxxi][xxxi][31]

Based upon Ziegler’s investment in Rexnord inventory, as well as the construction and purchase of facilities allegedly in reliance on the Rexnord distributorship—an investment that Ziegler claimed was unrecoverable in the event of termination—the court concluded that a question of fact existed regarding a continuing financial interest between the parties.  The court also held that there was a question of fact on interdependence between the parties in light of the controls that the distribution agreement placed on Ziegler (e.g., use of best efforts and setting of sales targets) along with the duration of the relationship and the agreement’s stated purpose of promoting Rexnord’s good will.[xxxii][xxxii][32]  Accordingly, the Wisconsin Supreme Court remanded the case to trial court for proceedings to decide the community-of-interest question.

Unlike state court decisions, the Seventh Circuit’s WFDL opinions emphasize that importance of a plaintiff being able to demonstrate: (1) sizable investments specifically devoted in some way to the grantor’s goods or services, and hence not fully recoverable upon termination; and (2) the generation of a significant amount of revenue from the alleged dealership.[xxxiii][xxxiii][33]  Thus, the Seventh Circuit may be applying a community-of-interest test different from the Ziegler standard.

In Sales & Marketing Associates, Inc., v. Huffy Corp.,[xxxiv][xxxiv][34] Sales & Marketing claimed that Huffy had breached the WFDL when it terminated its sales representative agreement with Sales & Marketing without a good cause.  In ruling against Sales & Marketing, the Seventh Circuit held that although the revenues that Sales & Marketing generated from its relationship with Huffy were a substantial portion of its overall business, Sales & Marketing failed to prove that it has made grantor-specific investments not fully recoverable upon termination of the relationship.[xxxv][xxxv][35]  Therefore, the court concluded that there was no community of interest and that the WFDL was not applicable.

Although a relatively innocuous case, the Sales & Marketing decision is memorable for what it did not say as opposed to what it did say.  Nowhere in the opinion did the court analyze the interdependence of the parties as the Wisconsin Supreme Court specified in Ziegler.  This may not have made a difference in the outcome, but it is arguable that there was interdependence between the parties because they admittedly cooperated and collectively planned marketing promotions and programs.

Some commentators have asserted that the Seventh Circuit imposes a higher standard on dealer seeking the protections of the WFDL than do Wisconsin state courts.[xxxvi][xxxvi][36]  The Seventh Circuit has attempted to debunk this argument, asserting that its panels and Wisconsin state courts are saying the same thing, just in different ways.[xxxvii][xxxvii][37]  Nevertheless, federal courts have criticized the Ziegler approach, reasoning that “[t]he problem with the ‘totality of the circumstances’ approach involving so many factors is that it becomes easy to miss the main thrust of the statute.”[xxxviii][xxxviii][38]

Additionally, in Super Natural Distributors, Inc., v. MuscleTech Research and Development, the U.S. District Court for the Eastern District of Wisconsin, after laying out the Ziegler factors, may have chosen yet a different approach when it wrote the “[t]he Seventh Circuit Court of Appeals has suggested that it may be more useful to focus one’s attention on whether a) the revocation of the dealership would pose a threat to the company’s economic health . . ., or b) the revocation would result in a loss of considerable “ ‘sunk costs.”’[xxxix][xxxix][39]  Super Natural distributed MuscleTech’s dietary products.  MuscleTech terminated the distributorship after learning that the Super Natural had obtained approximately $1 million of allegedly counterfeit MuscleTech product from an offshore supplier recommended by an ex-MuscleTech employee who had been indicted for fraud.  Super Natural sued, and moved for a preliminary injunction requiring MuscleTech to continue to supply it with product while the case was pending.  Super Natural claimed that the relationship was a dealership under the WFDL and that MuscleTech failed to comply with the statute’s termination provisions.

The court held that Super Natural was unable to show that termination of the distributorship would pose a threat to its economic health because Super Natural’s sale of the MuscleTech product line only accounted for 13 percent of its revenues.  The court also concluded that Super Natural was unable to prove loss of sunk investments because the warehouse that Super Natural built to house MuscleTech products, as well as the tradeshow booth that Super Natural purchased to exhibit MuscleTech’s products, could be sold or dedicated to another product line.  Because Super Natural was therefore unlikely to succeed on the merits, the court denied the motion for a preliminary injunction.

New Jersey Franchise Practices Act

Although Wisconsin has generated more litigation on the meaning of community of interest that has any other state employing this concept.  New Jersey is not far behind.[xl][xl][40]  The New Jersey Franchise Practices Act (NJFPA), like the WFDL, is a franchise relationship law.  However, unlike the WFDL, which covers business relationships other than just traditional franchises,[xli][xli][41] the NJFPA was enacted specifically to regulate franchise relationships.[xlii][xlii][42]  

The NJFPA defines a franchise as a

Written permission for a definite or indefinite

period, in which a person grants to another

person a license to use a trade name, trademark,

service mark or related characteristics and in

which there is a “community of interest” in the

marketing of goods or services at wholesale, retail,

by lease, agreement or otherwise.[xliii][xliii][43]

If the relationship in question falls within the definition of a franchise, the NJFPA, among other things, prohibits the franchisor from terminating or failing to renew the relationship without a good cause.[xliv][xliv][44]

As with the WFDL’s community-of-interest element, courts have criticized this provision of the NJFPA.[xlv][xlv][45]  In 1983, a New Jersey appellate court took the first shot at defining community of interest in Neptune T.V. & Appliance Service, Inc. v. Litton Microwave Cooking Products Division.[xlvi][xlvi][46]  Neptune performed warranty work for purchasers of Litton’s ovens.  Neptune held itself out as an “Authorized Litton service source,” attended Litton training sessions, and was required to comply with the Litton Service Policy and Procedural Guide, which specified, among other things, billing and service procedures, inventory requirements, and the handling of customer complaints.[xlvii][xlvii][47]  When Litton attempted to terminate the relationship, Neptune sued, claiming that it was a franchise under the NJFPA.

The Neptune court held that there was no community of interest, and thus no franchise, because Litton did not have a financial interest in Neptune’s business and therefore Neptune was not susceptible to abuse by Litton during or upon termination of the relationship.[xlviii][xlviii][48]  It is curious, however, that in coming to this conclusion, the court focused in large part on Litton’s (the alleged franchisor’s) interest in the relationship as opposed to Neptune’s interest.[xlix][xlix][49]  The court noted that Litton’s only interest in the relationship was that repairs were performed appropriately, and concluded that since Litton did not profit from the relationship and Neptune did not contribute to building Litton’s business, it would not be unfair for Litton to terminate the relationship because Neptune had done nothing to enhance Litton’s business during the relationship.[l][l][50]

No other New Jersey appeals court addressed community of interest until 1992, when the New Jersey Supreme Court decided Instructional Systems, Inc. v. Computer Curriculum Corp.[li][li][51]  This case arose out of a reseller agreement whereby Instructional Systems (ISI) sold Computer Curriculum’s (CCC) products to customers located predominantly on the East Coast.[lii][lii][52]  When CCC confronted ISI regarding its suspicions that ISI was neglecting customers in certain states, ISI told CCC to mind its own business.[liii][liii][53]  However, when the agreement came up fro renewal, rather than let it lapse, CCC offered ISI a contract for the states in which it was concentrating its sales efforts.  Unsatisfied by this offer, ISI sued, claiming that the original agreement was a franchise under the NJFPA and that CCC’s failure to renew the agreement without good cause violated the statute.

In determining whether there was a community of interest, the court analyzed two elements—whether ISI had “sunk costs” in the relationship, and the degree of interdependence between the parties.  The court reasoned that because ISI had purchased office space, specialized computers, and computer upgrades to sell CCC’s products, the requisite franchise-specific investments has been made.  The court also found that the interdependence element was satisfied because the parties had engaged in various joint marketing activities.  Accordingly, the New Jersey Supreme Court held that the reseller agreement was a franchise under the NJFPA.

Like Wisconsin, the New Jersey courts have struggled with determining when a community of interest is present in a business relationship.  However, arguably the New Jersey courts have constructed a definition of community of interest that takes into account both Wisconsin state and federal court decisions.  Like the Wisconsin state courts, and specifically Ziegler, New Jersey uses the interdependence test.  However, like the Seventh Circuit, New Jersey also uses the “sunk costs” test.

Minnesota and South Dakota Franchise Laws
The Minnesota and South Dakota Franchise Laws[liv][liv][54] also employ the community-of-interest element in their definitions of a franchise.  However, the amount of litigation surrounding the community-of-interest element in each state’s law is scant when compared to Wisconsin and New Jersey.  Nevertheless, the Minnesota and South Dakota community-of-interest decisions are arguably as confusing as those in Wisconsin and New Jersey.

In Martin Investors, Inc. v. Vander Bie,[lv][lv][55] one of the earliest reported Minnesota state court decisions on this issue, the defendant Vander Bie, through Computer Capital Corporation, entered an agreement with the principals of Martin granting Martin the right to sell its computer services, matching the needs of potential borrowers to lenders.  Martin agreed to pay Computer Capital 1 percent of the proceeds of each loan that Martin placed using Computer Capital’s computer services.  During its operation, Martin purchased Computer Capital’s services for two clients and paid Computer Capital $800 for the services.[lvi][lvi][56]  Martin later terminated its arrangement with Computer Capital and sued for recission when it learned that the Minnesota Department of Commerce was investigating Computer Capital for alleged unregistered sale of franchises in Minnesota.[lvii][lvii][57]

The Minnesota Supreme Court held that the community-of-interest element of the Minnesota Franchise Law was satisfied, because Computer Capital received 1 percent of the proceeds of each lawn placed by the consultant, and the parties shared in fees from a common source, the borrower.[lviii][lviii][58]

In the mid-1990s, the state appeals court and the federal district court in Minnesota each had an opportunity to define community of interest.  In Unlimited Horizon Marketing, Inc. v. Precision Hub, Inc.,[lix][lix][59] the Minnesota Court of Appeals held that a community of interest existed between the manufacturer of a recycling machine and its parties would profit from a common source upon the distributor’s sale of the machines.[lx][lx][60]

In 1996, the U.S. District Court for the District of Minnesota arguably broadened Martin Investors when it decided in Metro All Snax, Inc. v. All Snax, In.,[lxi][lxi][61] which arose out of a sale of certain distribution rights by All Snax to Metro All Snax.  Metro paid All Snax a lump sum in exchange for the right to distribute certain All Snax products and to use the All Snax trademark.  However, the grantee (Metro), unlike the grantee in Martin Investors, was not required to pay a royalty or percentage of its sales to the grantor (All Snax).[lxii][lxii][62]  Nevertheless, because All Snax received a financial benefit from manufacturers of products based upon the amount of product that Metro purchased, the court concluded that the parties shared fees from a common source[lxiii][lxiii][63] and, accordingly, the court found a community of interest.  Interestingly, the court cited no evidence establishing that the manufacturers gave any financial benefit whatsoever to Metro based upon its purchases.

Before All Snax, if there was no royalty or percentage-of sales payment from the grantee to eth grantor, the parties may not have been sharing fees from a common source.  Based upon All Snax, however, practitioners must look beyond the immediate payment streams evident in the relationship to determine if the grantor is receiving a benefit from anyone (other than from a customer who purchases the product at retail) based upon the actions of the grantee.  If so, there very well may be a community of interest between the grantee and grantor.

The case law defining community of interest under the South Dakota Franchises for Brand-Name Goods and Services Act amounts to one South Dakota Supreme Court decision.  In Nielsen v. McCabe,[lxiv][lxiv][64] the court had to determine whether a lease for a pet shop known as Noah’s Critters created a franchise under the Act.[lxv][lxv][65]  Before execution of the lease, Nielsen had operated a pet shop known as Noah’s Critters on the premises.  In 1979, McCabe purchased Nielsen’s inventory and Nielsen granted McCabe the right to use the name Noah’s Critters for a five-year period.  Additionally, Nielsen subleased the premises to McCabe for a period of five years in exchange for three payments of $1,000 plus a monthly percentage payment based upon the gross income of the pet shop.[lxvi][lxvi][66]

In 1981, the premises burned and Nielsen moved the business to another location under an oral lease.  In 1984, upon expiration of the original sublease, McCabe notified Nielsen that he did not intend to renew the sublease and entered into a formal lease for the second location.  Nielsen then sued to evict McCabe from the business premises.[lxvii][lxvii][67]

In holding that the relationship was a franchise, the South Dakota Supreme Court, as opposed to setting forth a test to determine a community of interest, relied on the grantee’s agreement to furnish the grantor with financial statements and other documents of the business and the grantor’s right to inspect the grantee’s inventory and the service that is performed.[lxviii][lxviii][68]  Accordingly, one can only speculate under what circumstances a community of interest exists in South Dakota.  However, it is arguable that a community of interest will be found if the grantor’s involvement in the business is something less than “hands on” involvement but more than no involvement at all.  For example, if a grantor has the right to oversee the operation of the grantee’s business and to receive documentation of the business that would ordinarily be reserved for attorneys, accountants, or bankers of the business, that may be enough for a community of interest in South Dakota.

Missouri Franchise Law
The Missouri Franchise Law (MFL), like the WFDL and the NJFPA, places certain restrictions on a franchisor’s right to terminate or not renew a franchise agreement.[lxix][lxix][69]  The MFL’s community-of-interest element was addressed in C&J Delivery, Inc. v. Emery Air Freight Corp.,[lxx][lxx][70] which arose out of two package delivery contracts between C&J, a local St. Louis delivery company, and Emery, a nationwide package delivery company.  C&J transported packages from Emery’s facility to the package recipient’s location.  C&J personnel wore the Emery logo on their uniforms, and when delivering Emery packages drove vehicles adorned with the Emery logo.  Emery billed the recipient or sender of the package and paid C&J a fixed fee based upon the size and weight of the package as well as the delivery location. In 1985, Emery cancelled the C&J contact without giving ninety days’ notice as the MFL required.  C&J sued, alleging, among other things, that Emery violated the MFL. [lxxi][lxxi][71]

The court interpreted a “’community of interest’ to mean, at a minimum, either (1) the franchisor benefits from the franchisee’s marketing of the franchisor’s product or service, or (2) the franchisee benefits from the franchisor’s marketing of a product or service.” [lxxii][lxxii][72]  The court reasoned that each of these elements was satisfied in this case because each party’s success was dependent upon the other party’s efforts it the relationship.  Emery succeeded if C&J and other independent delivery companies delivered Emery’s customers’ packages in a timely and efficient manner.  C&J succeeded if the volume of Emery’s business increased based upon its efforts and the efforts of others like it, because there would arguably be more demand for Emery’s services and, accordingly, more business and more revenue for C&J.

Washington 
Franchise Investment Protection Act
Before 1991, the Washington Franchise Investment Protection Act’s (WFIPA) definition of a franchise contained the community-of-interest element.  However, in 1991 the Washington legislature replaced community of interest with the marketing plan requirement.[lxxiii][lxxiii][73]  The reason for the change was to align Washington’s franchise definition with the majority of registration states and to conform the definition with that proposed by the North American Securities Administrators Association under the Model Franchise Investment Act. [lxxiv][lxxiv][74]

The effects of this change were evident in East Wind Express, Inc. v. Airborne Freight Corp., [lxxv][lxxv][75]which arose out of two delivery service contracts between Airborne, a nation-wide delivery service, and East Wind, a local package delivery company located in Oregon.  In 1990, Airborne and East Wind entered a cartage contract whereby East Wind provided certain delivery services on behalf of Airborne.  In 1993, the parties terminated the original contract and executed a new agreement whereby East Wind would pick up packages from Airborne’s customers and deliver them to Airborne’s facilities.  East Wind used Airborne’s mark and logo on its uniforms and on its vehicles.  East Wind was also required to maintain the vehicles, uniforms, and logos in accordance with Airborne’s standards.  East Wind was not paid by the Airborne customers that it serviced.  Instead, Airborne paid East Wind based on the average number of packages that is delivered each day.

The relationship between the parties later soured, Airborne terminated the contract and East Wind sued, alleging violations of the WFIPA.  Airborne moved for summary judgment, asserting that the WFIPA did not apply because the relationship was not a franchise.  In granting Airborne’s motion for summary judgment (based upon a finding that no franchise fee was paid), the trial court noted that East Wind provided its services pursuant to a “highly organized and regulated marketing plan.” [lxxvi][lxxvi][76]  On appeal, East Wind argued in part that the court should have applied the franchise definition with the community-of-interest element as opposed to the franchise definition with the marketing plan requirement. [lxxvii][lxxvii][77]  Although this argument was not stated, one can assume the East Wind made this argument because it believed that it would be easier to establish a “community of interest’ between the parties than to prove its use of a marketing plan substantially prescribed by the franchisor. [lxxviii][lxxviii][78]

The appellate court held that the post-1991 “marketing plan” standard applied, and then reviewed de novo the elements of the post-1991 definition.  It noted that East Wind never sold any Airborne goods or services to customers, but basically provided a delivery service on behalf of Airborne.  The appellate court therefore concluded that Airborne did not grant East Wind the right to sell or distribute goods or services under a marketing plan prescribed by Airborne because East Wind had no participation in eh contract of sale between Airborne and its customers.  Accordingly, the relationship was not a franchise under the WFIPA.

It is instructive to compare East Wind with S&J Delivery-two cases with largely identical facts that produced markedly different decisions.  Both cases arouse out of delivery service agreements between national delivery companies and local companies.  The alleged franchisees in each case were granted the right to use the alleged franchisor’s logos on their uniforms and vehicles, and each received a set fee based upon either the quantity of packages delivered or the size and weight of the packages.

One relationship was held to be a franchise, the other was not.  These outcomes are a testament to the distinct differences between the marketing plan and community-of-interest requirements.  The C&J Delivery court took a much broader view when analyzing the applicable relationship, concluding that the mutual benefits were enough to create a community of interest between the parties, whereas the East Wind court looked only at whether or not East Wind marketed or sold goods to customers.

Conclusion

Of the eight states that include community of interest as an element in their franchise or distributorship definition, courts in five states have attempted to determine when a community of interest exists in a business relationship.  Wisconsin’s state and federal courts arguably apply different tests in making this determination and New Jersey has in essence taken one element from each of the Wisconsin tests.

Courts in Minnesota, South Dakota, and Missouri use tests dramatically different from each other and from the Wisconsin and New Jersey standards.  Minnesota’s use of the “common source” test does not focus at all on franchise-specific investments or sunk costs, as do New Jersey and the state courts in Wisconsin, but instead seems to track the flow of money.  South Dakota for its part may favor a “control” test.  However, due to the limited amount of case law in South Dakota, it is hard to predict with any certainty the level of control that must exist in order to constitute a community of interest, or whether courts will consistently employ a control test.  Likewise, due to the limited amount of case law in Missouri, it is impossible to predict whether Missouri courts will continue to employ the “mutual benefit” test.

Given this confusion, it may be prudent for states using the community-of-interest concept either to apply a substantially uniform test to determine the presence of a community of interest or to follow Washington’s lead in modifying heir franchise definitions to replace the community-of-interest element with the marketing plan requirement.

As practitioners, we crave certainty when advising clients on the potential ramifications of certain business arrangements.  Unfortunately, in light of current law in this area, only one thing is certain:  whether a community of interest exists will depend not only on the state where the business relationship exists, but also (at least in some jurisdictions) on whether a state or federal court decides the issue.

Originally published in Franchise Law Journal, Winter 2003 at 160.
© The American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.



[i][i][1]  See, e.g., California Franchise Investment Law, Cal.  Corp. Code § 31005 (2001); Connecticut Franchise Act, Conn. Gen. Stat. § 42-133(e) (2001); Ill. Comp. Stat. § 705/3 (2001). Each of these states’ franchise statutes uses these terms in their definitions of a franchise.

[ii][ii][2]   See  Pride Tech. Inc. v. Sun Microsys. Computer Corp., Bus. Franchise Guide (CCH) ¶ 10, 407 (N.D. Cal.1994) (noting that community of interest is an “amorphous” phrase).

[iii][iii][3]  See cases cited infra notes 26 and 45.

[iv][iv][4]  This article analyzes the community-of-interest concept as used in franchise and distributorship laws of general applicability, but does not address industry-specific distributor statutes that may employ the community-of-interest element in defining distributorship.

[v][v][5]  Bus. Franchise Guide (CCH) ¶ 200, at 467 (2002).

[vi][vi][6] 16 C.F.R. pt. 436.2 (2001).

[vii][vii][7] See, e.g., North Dakota Franchise Investment Law, N.D. CENT. CODE § 51-19-02 (2001); Rhode Island Franchise Investment Act, R.I. Gen. Laws § 19-28.1-3 (2001).

[viii][viii][8] But see Connecticut Franchise Act, CONN. GEN. STAT. § 42-133e (2001); Florida Franchise Misrepresentation Act, FLA. STAT. § 817.416 (2001).  Neither Connecticut nor Florida requires payment of a “franchise fee” to qualify as a franchise.

[ix][ix][9] But see New York Franchise Sales Act, N.Y. GEN. BUS. LAWS § 681 (2001).  Under the New York Franchise Sales Act, a franchise relationship may still exist even if the trademark license element is not present in the relationship.

[x][x][10] The states of California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Washington, Virginia, and Wisconsin are generally referred to as franchise registration states because a franchisor is generally required to register its offering circular with each of these states before making any offers or sales of franchises in the state.

[xi][xi][11] CAL. CORP. CODE § 31005; Illinois Franchise Disclosure Act of 1987, ILL. COMP. STAT. § 705/3; Indiana Franchise Act, IND. CODE § 23-2-2.5-1 (2001); Maryland Franchise Registration and Disclosure Law, MD. CODE ANN. BUS. REG. § 14-201 (2001); Michigan Franchise Investment Law, MICH. COMP. LAWS § 445.1502 (2001); N.D. CENT. CODE § 51-19-02; R.I. GEN. LAWS § 19-28.1-3; Wisconsin Franchise Investment Law, WIS. STAT. § 553.03 (2001); Washington Franchise Investment Protection Act, WASH. REV. CODE ANN. § 19.100.010 (2001); Virginia Retail Franchising Act, VA. CODE § 13.1-559 (2001); N.Y. GEN. BUS. LAWS § 681.  Generally speaking, under these states; franchise laws, a franchise will be deemed to exist if:  (i) the grantor grants the grantee the right to engage in the business of offering or selling goods of the grantor under a marketing plan; (ii) the operation of the business is substantially associated with the grantor’s trademark; and (iii) the grantee is required to pay, directly or indirectly, a franchise fee.

[xii][xii][12] Arkansas Franchise Practices Act, ARK. CODE ANN. § 4-72-202 (2001); Iowa Franchises Act, IOWA CODE § 523h-1 (2001); Oregon Franchise Transactions Act, OR. REV. STAT. § 650.005 (2001).  Additionally, the states of Georgia, Maine, North Caroline, Oklahoma, South Carolina, Louisiana, Texas, Utah, Connecticut, Florida, Iowa, and Nebraska each have business opportunity laws that contain the “marketing plan” concept as an element of each state’s definition of a business opportunity.  Georgia Business Opportunity Sales Act, GA. CODE ANN. § 10-1-410 (2001); Maine Sales of Business Opportunities Act, ME. REV. STAT. tit. 32 ch. 69-B § 4691 (2001); North Carolina Business Opportunity Sales Law, N.C. GEN. STAT. § 66-94 (2001); Oklahoma Business Opportunity Sales Act, OKLA. STAT. tit. 71, § 802 (2001); South Carolina Business Opportunity Sales Act, S.C. CODE § 39-57-20 (Law. Co-op 2001); Louisiana Business Opportunity Sellers and Agents Act, LA. REV. STAT. § 1821 (2001); Texas Business Opportunity Act, TEX CODE § 41.004 (2001); Utah Business Opportunity Disclosure Act, UTAH CODE § 13-15-2 (2001); Connecticut Business Opportunity Investment Act, CONN. GEN. STAT. § 36B-61 (2001); Florida Sale of Business Opportunities Act, FLA. STAT. § 559.801 (2001); Iowa Business Opportunity Promotions Laws, IOWA CODE § 523B.1 (2001): Nebraska Seller-Assisted Marketing Plan Act, NEB. REV. STAT. § 59-1703 (2001).

[xiii][xiii][13] Hawaii Franchise Investment Act, HAW. REV. STAT. § 482E-3 (2001); Minnesota Franchises Law, MINN. STAT. § 80C.01 Subd. 4 (2001): South Dakota Franchises for Brand-Name Goods and Services act, S.D. CODIFIED LAWS § 37-5A-1 (2001); Wisconsin Fair Dealership Law, WIS. STAT. § 135.02 (2001); New Jersey Franchise Practices Act, N.J. REV. STAT. § 56:103 (2001); Nebraska Franchise Practices Act, NEB. REV. STAT. § 87-402 (2001); Pyramid Sales Schemes; Cancellation of Franchises, MISS. CODE § 75-24-51 (2001); Missouri Franchise Law, MO. STAT. § 407.400 (2001).  Additionally, before 1991, the State of Washington used the community-of-interest element as a part of its franchise definition, but in 1991, the Washington legislature amended the franchise definition in the Washington Franchise Investment Protection Act by replacing the community-of-interest element with the marketing plan requirement.  See infra text accompanying note 74.  Finally, although the distributorship definition in the newly enacted Alaska Distributorship Law does not specifically refer to a community of interest, id does require a “joint interest” between grantor and grantee in the marketing or sale of goods or services.  Alaska Distributorship Law, ALASKA STAT. § 45.45.700 (2002).  Because this language is more closely aligned with the community-of-interest concept as opposed to the marketing plan element, one can presume that courts interpreting this language will look for guidance to decisions determining the existence of a community of interest.

[xiv][xiv][14] The courts of Hawaii, Mississippi, and Nebraska have yet to determine under what circumstances a community of interest will exist between a grantor and a grantee.  FRANCHISE DESK BOOK 187, 469, 484 (W. Michael Garner ed., 2001).

[xv][xv][15] Bush v. Nat’l Sch. Studios, Inc., Bus. Franchise Guide (CCH) ¶ 8881, at 17,788 (Wis. 1987).  The reputation of larger companies in Wisconsin at this time had been so eroded that then-Wisconsin Governor Patrick Lucey hailed the passage of the WFDL as the “’Magna Carta’ for small businesses.”  Id.citing Milwaukee Sentinel, April 4, 1974, Business Clippings File-Legislative Reference Bureau.  However, one might argue that Governor Lucey should have hailed the WFDL as the “Lawyers Employment Act,” judging by the vast amount of litigation generated by the WFDL, specifically litigation revolving around the types of business relationships covered by the WFDL.,

[xvi][xvi][16] WIS. STAT. § 135.025.

[xvii][xvii][17] The WFDL defines “good cause” as: (i) failure by the dealer to substantially comply with essential and reasonable requirements imposed by the grantor on the dealer, which requirements are not discriminatory when applied to other similarly situated dealers; or (ii) bad faith by the dealer in carrying out the terms of the dealership.  WIS. STAT. § 135.02 Subd. 4.

[xviii][xviii][18]   Id.§ 135.045.

[xix][xix][19] Bush, Bus. Franchise Guide (CCH) ¶ 881, at 17,788-89.

[xx][xx][20] Id.at 17,789.

[xxi][xxi][21] Edison Liquor Corp. V. United Distillers & Vintners N. Am., Inc. and Capitol Hustings Co., Bus. Franchise Guide (CCH) ¶ 11,957, at 33,628 (Sept. 6, 2000), aff’d, Bus. Franchise Guide (CCH) ¶ 35,035 (Wis. Ct. App. 2001).

[xxii][xxii][22] WIS. STAT. § 135.02 Subd. (1).  It is assumed that the relationship otherwise qualifies as a dealership under the WFDL.

[xxiii][xxiii][23] Id.

[xxiv][xxiv][24] Moodie v. School Book Fairs, Inc., Bus. Franchise Guide (CCH) ¶ 9503, at 20,650 (7th Cir. 1989).

[xxv][xxv][25] Friedburg Farm Equip. v. Van Dale, Inc., Bus. Franchise Guide (CCH) ¶ 10,109 (7th Cir. 1992).

[xxvi][xxvi][26] Ziegler Co., Inc. v. Rexnord, Inc., 407 N.W.2d 873, 877 (Wis. 1987).  See also Bush v. Nat’l Sch. Studios, Inc., Bus. Franchise Guide (CCH) ¶ 8881, at 23,769 (Wis. 1987) (Steinmetz, J., dissenting) (“Whether there is a dealership by that section depends principally on whether ‘there is a community of interest in the business….’ Nothing could be more uncertain than whether a community of interest exists.”).  Interpretation of the WFDL has also caused members of the bench to lash out at one another.  In Bush, Justice Steinmetz went on to chastise the majority for adding more confusion to what constitutes a dealership when he wrote, “[o]nly an appellate court not subject to further review can label a zebra with all of its stripes a camel; nor should we label an employment contract a dealership.”  Bush, Bus. Franchise Guide (CCH) ¶ 8881, at 17,793.

[xxvii][xxvii][27] Ziegler407 N.W.2d at 873.,

[xxviii][xxviii][28] Unfortunately for both parties, this three-year period may have been the worst yeas for the aggregate equipment industry since the Great Depression.  Id.at 876.

[xxix][xxix][29] Id.

[xxx][xxx][30] Id. at 878-79.

[xxxi][xxxi][31] Id.

[xxxii][xxxii][32] This evidence the importance of the “Recitals” in an agreement.

[xxxiii][xxxiii][33] Beer Capitol Distrib., Inc. v. Guiness Bass Import Co., Bus. Franchise Guide (CCH) ¶ 12,155 (E.D. Wis. 2001).

[xxxiv][xxxiv][34] Bus. Franchise Guide (CCH) ¶ 10,707 (7th Cir. 1995).

[xxxv][xxxv][35]  Id. at 26,931.

[xxxvi][xxxvi][36] Friedburg Farm Equip. v. Van Dale, Inc., Bus. Franchise Guide (CCH) ¶ 10,109, at 23,769-70 (7th Cir. 1992), citing Bowen & Butler, Wisconsin Fair Dealership Law § 3.34, at 3-[14] (Supp. 1991).

[xxxvii][xxxvii][37] According to the Friedburg court, the reasoning of state and federal courts construing the WFDL has been consistent:  “[A] grantor can exploit a dealer’s fear of termination (our words) only if termination will have severe economic consequences (their words).  Severe economic consequences will attend termination (theirs) because the dealer will be unable to recover its sunk costs (ours).” Id. at 23,770.

[xxxviii][xxxviii][38] Beloit Beverage Co. v. Winterbrook Corp., Bus. Franchise Guide (CCH) ¶ 10,783, at 27,355 (E.D. Wis. 1995).

[xxxix][xxxix][39] Super Natural Distrib., Inc. v. MuscleTech Research and Dev., Bus. Franchise Guide (CCH) ¶ 12,039, at 34,041 (E.D. Wis. 2001); see also Cabintree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., Bus. Franchise Guide (CCH) ¶ 10,938, at 28,236 (E.D. Wis. 1996) (reasoning that the parties’ arguments about the Ziegler factors were misplaced because the Ziegler factors are not “elements,” the court is not required to consider each factor, and consideration of every factor is not “necessarily dispositive of the issue”); Beloit Beverage Co., Bus. Franchise Guide (CCH) ¶ 10,783, at 27,355 (reasoning that the Ziegler factors, although relevant, should not be applied in a way to broaden the scope of the statute).

[xl][xl][40] See, e.g., Colt Indus., Inc. v. Fidelco Pump & Compressor Corp., Bus. Franchise Guide (CCH) ¶ 9095 (3rd Cir. 1988) (holding that a community of interest will exist when the alleged franchisor maintains control over the alleged franchisee by imposing sales quotas, requiring training, and requiring the alleged franchisee to use certain advertising or promotional techniques); Southwestern Adjusting Co. v. Underwriters Adjusting Co., Bus. Franchise Guide (CCH) ¶ 10,040 (D.N.J. 1992) (analyzing not only the control of the alleged licensor over the alleged licensee but also the licensee’s economic dependence on the licensor, the disparity in bargaining power between the parties, and the presence of franchise-specific investments); Cooper Distrib. Co. v. Amana Refrigeration, Inc., Bus. Franchise Guide (CCH) ¶ 10,743 (3rd Cir. 1995) (rejecting the control test set forth in Colt, and holding that a community of interest will be found when the distributor is required by the terms of the distribution agreement to make “substantially franchise-specific investments”); Atl. City Coin & Slot Serv. Co., Bus. Franchise Guide (CCH) ¶ 11,481 (D.N.J. 1998) (analyzing the alleged franchise-specific investments of the alleged franchisee as well as the economic dependence of the alleged franchisee and the interdependence between the parties).

[xli][xli][41]  Bush v. Nat’l Sch. Studios, Inc., Bus. Franchise Guide (CCH) ¶ 8881, at 17,789 (Wis. 1987) (“The legislative intent reflected in the statute’s statement of purposes, Wis. Stat. Ann. § 135.025, coupled with the legislature’s refusal to accept a narrow definition of dealership convinces us that in determining whether a dealership exists, courts should not focus solely on identifying the telltale trappings of the traditional franchise.”).

[xlii][xlii][42] See N.J. Rev. Stat. § 56:10-3.

[xliii][xliii][43] Id. Note that there is no “fee” requirement.  However, the arrangement must have been documented.

[xliv][xliv][44] Id. § 56:10-5.  However, on the franchisor side of the ledger, the NJFPA affirmatively provides that a franchisee’s failure to comply with the NJFPA’s procedure in connection with a sale, transfer, or assignment of the franchise is a violation of the NJFPA. Id.§ 56:10-6.

[xlv][xlv][45] Neptune T.V. & Appliance Ser., Inc. v. Litton Microwave Cooking Prods. Div., Bus. Franchise Guide (CCH) ¶ 8023, at 13,786 (N.J. Super. Ct. App. Div. 1983) (noting that the community-of-interest concept found in the franchise definition of the NJFPA is nebulous at best).

[xlvi][xlvi][46] See Instructional Sys., Inc. v. Computer Curriculum Corp., Bus. Franchise Guide (CCH) ¶ 10,119, at 23,841 (N.J. Sup. Ct. 1992) (noting that prior to it, the Neptune court was the only New Jersey state court to discuss the definition of a community of interest).

[xlvii][xlvii][47] Neptune, Bus. Franchise Guide (CCH) ¶ 8023, at 13,782.

[xlviii][xlviii][48] Id.at 13,786.

[xlix][xlix][49] Id.at 13,787.  Compare Neptune with Ziegler Co., Inc., v. Rexnord, Inc., 407 N.W.2d 878-79 (Wis. 1987) (focusing on the grantee’s interest in the relationship).

[l][l][50] Neptune, Bus. Franchise Guide (CCH) ¶ 8023, at 13,787.  The court’s reasoning, however, may be suspect because if Neptune did not perform the warranty repairs in an appropriate manner, Litton’s consumers would probably not purchase Litton’s products.  Accordingly, one could argue that Neptune did in fact contribute to building Litton’s business by servicing Litton’s customers in an appropriate manner.

[li][li][51] CCH Bus. Franchise Guide ¶ 10,119 (N.J. Sup. Ct. 1992).

[lii][lii][52] Instructional Systems was responsible for selling to customers located in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington, D.C.

[liii][liii][53] Instructional Sys., Inc., Bus. Franchise Guide (CCH) ¶ 10,119, at 27,830.

[liv][liv][54] MINN. STAT. §§ 80C.01 et seq.: S.D. CODIFIED LAWS §§ 37-5a-1 et seq.

[lv][lv][55] 269 N.W.2d 868 (Minn. 1978).

[lvi][lvi][56] Id. at 871.

[lvii][lvii][57] Id.

[lviii][lviii][58] Id. at 875.

[lix][lix][59] 533 N.W.2d 63 (Minn. Ct. App. 1995).

[lx][lx][60] Id. at 66.  See also OT Indus., Inc. v. OT-Tehdas OY Santasalo-Sohlberg AB, 346 N.W.2d 162 (Minn. Ct. App. 1984); Chase Manhattan Bank, N.A. v. Clusiau Sales & Rental, Inc., 308 N.W. 2d 490 (Minn. 1981) (holding that a “community of interest” existed, but failing to provide guidance as to why).

[lxi][lxi][61] Bus. Franchise Guide (CCH) ¶ 10,885, at 27,952 (D. Minn. 1996).

[lxii][lxii][62] Id.at 27,953.

[lxiii][lxiii][63] Id.

[lxiv][lxiv][64] 442 N.W.2d 477 (S.D. 1989).

[lxv][lxv][65] Id. at 479.

[lxvi][lxvi][66] Id.

[lxvii][lxvii][67] Id.

[lxviii][lxviii][68]  Id.at 480.

[lxix][lxix][69] Mo. State. § 407.405 (grantor required to provide grantee with ninety days’ advance written notice prior to termination).

[lxx][lxx][70] 647 F/ Supp. 867 (E.D. Mo. 1986).

[lxxi][lxxi][71] Id. at 869.

[lxxii][lxxii][72] Id. at 872.

[lxxiii][lxxiii][73] East Wind Express, Inc. v. Airborne Freight Corp., Bus. Franchise Guide (CCH) ¶ 11,617, at 31,749 (Wash. Ct. App. 1999).

[lxxiv][lxxiv][74] Telephone Interview with Martin Cordell, Financial Legal Examiner, Washington Department of Financial Institutions (July 9, 2002).

[lxxv][lxxv][75] Bus. Franchise Guide (CCH) ¶ 11,617 (Wash. Ct. App. 1999).

[lxxvi][lxxvi][76] Id. at 31,749.

[lxxvii][lxxvii][77] Id.

[lxxviii][lxxviii][78] However, based upon Washington case law before 1991, it is unclear whether the parties had a community of interest in their business relationship.  Washington cases defining the community-of-interest element held that a community of interest was present if the parties shared a continuing financial interest in the sale of goods or services.  Lobdell v. Sugar N’Spice, Inc., Bus. Franchise Guide (CCH) ¶ 7947, at 13,523 (Wash. Ct. App. 1983).  A continuing financial interest arguably would have been established if the alleged franchisee were able to show a relationship between the revenues of the alleged franchised business and the amounts paid by the franchisor to the franchisee or vise versa.  Blanton v. Texaco Ref. And Mktg., Inc., Bus. Franchise Guide (CCH) ¶ 9679, at 21,538 (9th Cir. 1990).