Seventh Circuit Decision in Landmark "Market Withdrawal" Case Eases Burden on Manufacturers and Franchisors Seeking to Consolidate Branded Distribution Systems

27 March 2009 Publication
Authors: Michael J. Lockerby

Legal News Alert: Distribution & Franchise

Volvo Construction Equipment North America, Inc. (Volvo Construction), a U.S. subsidiary of Sweden’s AB Volvo, recently scored a decisive victory in the U.S. Court of Appeals for the Seventh Circuit. Reversing a $2.1 million judgment of the U.S. District Court for the Northern District of Illinois, the Seventh Circuit held that the district court had misapplied state franchise law in a claim for wrongful termination brought by a former dealer.

In FMS, Inc. v. Volvo Construction Equipment North America, Inc. (FMS), 2009 U.S. App. LEXIS 4938 (7th Cir. March 4, 2009), rev’ing 2007 U.S. Dist. LEXIS 19577 (N.D. Ill. March 20, 2007),1 the Seventh Circuit held that the scope of a “franchise” protected from termination without “good cause” is limited to the trademark that the dealer, distributor, or franchisee has been authorized to use. In so holding, the Seventh Circuit rejected the notion that “franchise” protections extend to similar goods and services that manufacturers and franchisors offer under other trademarks. The Seventh Circuit’s ruling in favor of Volvo Construction has potential implications for all suppliers whose trademarked goods and services are sold in the United States through independent dealers, distributors, and franchisees. Volvo Construction's counsel of record in the case was Foley & Lardner LLP.2

Implications of the Seventh Circuit’s Decision
The statute at issue in FMS — the Maine Franchise Law for Power Equipment, Machinery, and Appliances, 10 M.R.S.A. § 1361 et seq. (MFL) — contains a definition of “franchise” similar to that found in many federal and state franchise and dealer protection statutes. As a result, the Seventh Circuit’s decision could prove to be persuasive in interpreting other statutes. Recognizing the significance of the FMS decision, three trade associations submitted a “friend of the court” brief to the Seventh Circuit in support of Volvo Construction’s position: (1) the National Association of Manufacturers (www.nam.org), comprising 14,000 companies in every industrial sector in every state; (2) the Association of Equipment Manufacturers (www.aem.org), comprising more than 800 companies that manufacture agriculture, construction, forestry, mining, and utility equipment; and (3) the National Marine Manufacturers Association (www.nmma.org), comprising more than 1,400 companies that manufacture products used by recreational boaters — including boats and engines.

If other courts adopt the Seventh Circuit’s rationale, the FMS decision could make it easier for manufacturers and franchisors to discontinue product lines or franchise systems, rebrand products or franchise systems, and otherwise consolidate the distribution of goods and services sold under their federally registered trademarks.

For Volvo Construction, at least, the Seventh Circuit’s decision brings to an end nine years of dealer litigation in various state and federal courts across the country — including Arkansas, Connecticut, Kansas, New Jersey, North Carolina, and Texas in addition to Illinois. As a result of the Seventh Circuit’s decision in FMS, Volvo Construction has now prevailed in every single challenge to its right to do two things that were at issue in each of these various cases. The first is to rebrand with the VOLVO® trademark various types of equipment formerly manufactured by companies that were acquired by Volvo Construction and other subsidiaries of AB Volvo. The second is to terminate dealers appointed by these other manufacturers as part of a program of “dealer rationalization.” This entailed consolidating distribution of the rebranded equipment with the pre-existing Volvo Construction dealer network in North America.

The prior dealer litigation in which Volvo Construction prevailed included several cases that were ultimately resolved by the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia. In Volvo Trademark Holding AB v. Clark Machinery Co., 510 F.3d 474 (4th Cir. 2007), the Fourth Circuit affirmed a unanimous jury verdict and North Carolina district court judgment in favor of Volvo Construction in a dealer’s claim for termination without the “good cause” required by the Arkansas Franchise Practices Act (AFPA).3 Previously, the Fourth Circuit had affirmed the dismissal as a matter of law of multiple claims asserted by multiple dealers from other states, including Texas and Louisiana.4

Like many manufacturers and franchisors, Volvo Construction found itself on the “radar screen” of plaintiffs’ trial lawyers who specialize in asserting claims under state franchise and dealership laws. Such wrongful termination claims are especially common when suppliers seek to terminate independent dealers, distributors, and franchisees for reasons unrelated to performance deficiencies.5 These reasons can include a determination by the supplier that it has too many dealers or that it should eliminate overlaps in its distribution network. The need to “rationalize” distribution often results from a merger with or acquisition of another supplier of competing or complementary products. Similar issues arise when a brand or product line is discontinued — or when the supplier determines that its brand is best represented by larger and better capitalized dealers, distributors, and franchisees.

Because the issues before the Seventh Circuit in FMS are so common, set forth below is a more extensive review of the litigation’s factual background and procedural history — including the district court’s summary judgment decision that the Seventh Circuit recently reversed.

Factual Background
The FMS litigation followed the acquisition by Volvo Construction’s European affiliate of Samsung’s heavy construction equipment business. The assets acquired from Samsung included a plant in Korea used to manufacture excavators under SAMSUNG® trademark. The assets did not include the SAMSUNG® trademark, which Volvo Construction was permitted to use for a period of only three years after the acquisition.

Before the Samsung acquisition, the VOLVO®-branded excavators sold by Volvo Construction in North America had been manufactured in Sweden. Following the Samsung acquisition, plans to redesign the VOLVO® excavator line from scratch were shelved. The excavators manufactured in Korea were not, however, immediately rebranded with the VOLVO® trademark. Instead, pursuant to a program known as “Volvoization,” Volvo Construction first made 748 changes to ensure that the excavator line met the standards of quality, safety, and environmental stewardship that the company seeks to have associated with the VOLVO® trademark. Only after making these changes did Volvo Construction discontinue manufacturing and selling excavators under the SAMSUNG® trademark and begin selling the rebranded “Volvoized” excavators under the VOLVO® trademark.

As the excavators were rebranded, Volvo Construction also implemented a program of “dealer rationalization.” Pursuant to this program, Volvo Construction terminated the dealer agreements of many dealers that had previously been appointed to sell and service SAMSUNG®-branded excavators. These terminated SAMSUNG® excavator dealers included FMS. FMS had, since 1997, been party to a Samsung Dealer Agreement granting non-exclusive distribution rights in portions of four counties in the North Woods of Maine.

Procedural History
Back in 2000, FMS had joined with seven other former SAMSUNG® excavator dealers in the United States and Canada in filing suit for wrongful termination. Of the more than a dozen claims of wrongful termination asserted by the eight original plaintiffs in FMS, only one claim asserted by one dealer had survived a summary judgment motion that Volvo Construction had filed at the outset of the litigation. Following a prior appeal decided by the Seventh Circuit back in 2003,6 the only surviving claim was FMS’s claim for termination without the “good cause” required by the MFL.

The MFL defines “good cause” for termination to include discontinuing the production or distribution of the “franchise goods.”7 The MFL defines “franchise” as a contract “pursuant to which a manufacturer grants to a dealer or distributor of goods a license to use a trade name, trademark, service mark or related characteristic and in which there is a community of interest in the marketing of the goods and related services at wholesale, retail, by leasing or otherwise.”8

Following remand and the completion of discovery, both FMS and Volvo Construction moved for summary judgment on FMS’s claim for violation of the MFL. Volvo Construction sought summary judgment based on the statutory definition of “franchise.” By discontinuing production or distribution of excavators identified with the SAMSUNG® trademark, Volvo Construction contended, it had discontinued production or distribution of the “franchise goods” — thereby establishing the requisite “good cause” for termination of FMS’s “franchise.”

The undisputed facts upon which Volvo Construction based its summary judgment motion included the following:

  • Before the Samsung acquisition, Volvo Construction had appointed a dealer in Maine that had the exclusive right to sell VOLVO®-brand construction equipment
  • FMS never sold new VOLVO®-brand equipment, was never licensed to use the VOLVO® trademark, and never became or sought to become a dealer of VOLVO®-brand construction equipment

Based on the foregoing undisputed facts, Volvo Construction contended that the MFL did not permit FMS to recover damages for discontinuation of the SAMSUNG® excavator. Such a damage award, Volvo Construction argued, would be equivalent to an injunction requiring the manufacture of SAMSUNG® excavators in perpetuity for the benefit of a single dealer in Maine. Alternatively, it would be tantamount to granting FMS a VOLVO® excavator “franchise” that it never had.

The District Court’s Ruling
Although Volvo Construction and FMS both had filed motions for summary judgment, the district court held that a trial was nevertheless required to determine whether the “franchise goods” had in fact been discontinued. In this regard, the district court held that discontinuing the production or distribution of excavators under the SAMSUNG® trademark, in and of itself, was not sufficient as a matter of law to establish that the “franchise goods” had been discontinued.

At the subsequent trial, the district court instructed the jury to find that the “franchise goods” included any “substantially similar” excavator manufactured by Volvo Construction. In effect, the district court thus expanded FMS’s “franchise” to include any excavator marketed by Volvo Construction that the jury found to be “substantially similar” to SAMSUNG® excavators—regardless of the trademark to which FMS had been granted a license and regardless of the trademark in which FMS had a “community of interest.” When Volvo Construction objected to this instruction, the district court conceded that its definition of “franchise goods” would have — if FMS had sought injunctive relief rather than money damages — required the forced licensure of the VOLVO® trademark to FMS.9

Based on the district court’s definition of “franchise” as including all “substantially similar” products, the jury found that the “franchise goods” had not been discontinued. On that basis, the jury found that Volvo Construction lacked the requisite “good cause” for termination and awarded FMS its claimed damages. In deciding various post-trial motions, the district court agreed with FMS’s damage expert that FMS was entitled to recover the value of its “franchise” in perpetuity. The district court’s final judgment thus represented the “lost profits” that FMS allegedly would have made if Volvo continued manufacturing and selling SAMSUNG® excavators forever.

The Seventh Circuit’s Decision
In reversing the district court’s decision, the Seventh Circuit observed that the MFL itself had not previously been interpreted by the courts of Maine. Prior Seventh Circuit decisions interpreting similar statutes, however, had recognized that the purpose of state franchise and dealer statutes generally is to protect the franchisee’s brand-specific investments. Ultimately, the Seventh Circuit based its ruling in FMS on the identity of the “franchise goods” given the MFL’s definition of “franchise.” The statutory definition of “franchise,” the Seventh Circuit found, “centers on the grant of a license to use the franchisor’s trademark or trade name in the marketing of goods and services.”

To determine the scope of FMS’s “franchise,” the Seventh Circuit looked at the “Products” to which the Samsung Dealer Agreement granted FMS distribution rights: “All Samsung Construction Equipment for sale in North America … including their later improved or superseding models.” According to the Seventh Circuit, “The most natural reading of the first quoted phrase is that FMS was a dealer in all Samsung-brand construction equipment” (emphasis in original). Rejecting FMS’s contention that this phrase entitled the dealer to all construction equipment made by Samsung regardless of brand, the Seventh Circuit concluded:

[T]hat reading is incorrect because the dealer agreement consistently refers to Samsung Construction Equipment America Corporation either by its full name or as “the Company” — not as “Samsung.”

Nor was the Seventh Circuit persuaded by the argument that the scope of FMS’s “franchise” had been expanded to include VOLVO®-branded excavators by the contractual definition of “Products” as “including their later improved or superseding models”:

Here, “the Products” covered by the agreement are Samsung-brand construction equipment “including their later improved or superseding models” — meaning later-improved or superseding models of Samsung-brand equipment. Accordingly, only products sold under the Samsung trademark or trade name can be “later improved or superseding models” under the dealer agreement.

(emphasis in original).

Ultimately, the Seventh Circuit concluded, the scope of FMS’s “franchise” was determined by the trademark that it had been licensed to use:

It follows from this that the “franchise goods” for purposes of the Maine franchise law include only Samsung-brand equipment. As long as Volvo continued to manufacture excavators under the Samsung trademark or trade name, the statute required it to continue to supply FMS with these goods. But because the statute defines “franchise” in terms of a trademark license and the agreement authorized FMS to use only the Samsung trademark, discontinuation of the Samsung-brand line of excavators is a discontinuation of the “franchise goods” under the statute. FMS never had a Volvo franchise; nothing in the statute protects FMS from termination of a franchise it never had.

(emphasis in original).

Had the Seventh Circuit held otherwise, the FMS decision might well have been cited to support the following outcomes:

  • A distributor of an appliance or other consumer good made at the same factory as similar products sold under different trademarks would be entitled to sell all products made at that factory regardless of trademark
  • A franchisee of one hotel brand owned by a franchisor that offers multiple hotel brands would be entitled to operate hotels under every brand owned by the franchisor
  • A dealer of cars sold under one trademark would be entitled to sell every model car made by the manufacturer regardless of trademark
  • A franchisor with multiple concepts could never discontinue one of its franchise systems (for example, a fast food restaurant chain) unless it could show that it was not “substantially similar” to one of the franchisor’s other concepts (for example, a casual dining restaurant chain)

The Seventh Circuit’s ruling, however, makes such interpretations of franchise and dealer protection statutes less likely.

___________________________________

1 The Seventh Circuit’s March 4, 2009 opinion is publicly available on the Seventh Circuit Web site, as is a recording of the January 25, 2008 oral argument.

2 Designated lead counsel for Volvo Construction in the Seventh Circuit and Northern District of Illinois was Foley Partner Michael J. (Mike) Lockerby (http://www.foley.com/mlockerby), Chair of the firm’s Litigation Department in the Washington, D.C. office, and member of Foley’s Distribution & Franchise (http://www.foley.com/distribution) and Appellate (http://www.foley.com/appellate) Practices. Also on the pleadings and appearing in both the trial and the appellate court was Foley Partner Michael M. (Mike) Conway (http://www.foley.com/mconway), Chair of the Litigation Department in the firm’s Chicago office.

3 See Volvo Trademark Holding AB v. CLM Equipment Co., 2006 U.S. Dist. LEXIS 64626 (W.D.N.C. Sept. 8, 2006) (denying dealer’s motion for new trial following jury verdict that it suffered no damages as a result of termination in violation of AFPA); Volvo Trademark Holding AB v. CLM Equipment Co., 2006 U.S. Dist. LEXIS 75515 (W.D.N.C. Oct. 2, 2006) (denying dealer’s motion for costs and attorneys’ fees on the grounds that the dealer had not been harmed by the violation of the AFPA and on the grounds that a reasonable attorneys’ fee for the recovery of zero damages was zero).

4 Volvo Construction Equipment North America, Inc. v. CLM Equipment Co., 386 F.3d 581 (4th Cir. 2004), aff’ing Volvo Trademark Holding AB v. CLM Equipment Co., 236 F. Supp. 2d 536 (W.D.N.C. Dec. 13, 2002).

5 For example, the plaintiff in FMS was represented by a law firm whose Web site (www.dadygarner.com) proclaims:

Dady & Garner, P.A., limits its practice to the representation of franchisees, distributors and dealers in disputes with their franchisors and suppliers. The firm practices nationwide and delivers the highest quality representation available. Dady & Garner’s franchise attorneys (http://www.dadygarner.com/attorneys.htm) have represented a wide array of clients, from quick-service restaurant franchisees to farm and industrial equipment distributors, and have successfully resolved disputes against more than 250 different franchise and supply systems.

6 A prior decision of the Northern District of Illinois had granted summary judgment in favor of Volvo Construction and dismissed all claims asserted by all plaintiffs, including FMS. Cromeens, Holloman, Sibert, Inc. v. AB Volvo, 2001 U.S. Dist. LEXIS 15482 (N.D. Ill. Sept. 25, 2001). In a prior appeal, the Seventh Circuit had affirmed the district court’s grant of summary judgment in favor of Volvo Construction in every respect but one. “At this stage of the proceedings,” the Seventh Circuit concluded, “we believe there is a genuine factual dispute over whether Volvo had good cause to terminate FMS” under the Maine Franchise Law. Cromeens, Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 391 (7th Cir. 2003), reh’g denied, 2003 U.S. App. LEXIS 25597 (7th Cir. Dec. 17, 2003).

7 10 M.R.S.A. § 1363(c)(4).

8 10 M.R.S.A. § 1361(3) (emphasis supplied).

9 The transcript of the jury charge conference includes the following exchange on the record:

Mr. Lockerby: The consequences … if the franchise relationship is the same, whether it is a damages case or an injunction case, would the injunction say that we have to … supply excavators that say “Volvo” even though they have no license to use that trademark?

The Court: Right, right … if you are selling a machine just like what they used to buy, and you wrongfully terminated the Samsung agreement — the franchise — then the law of equity and injunctive relief would say they get to buy your Volvo machine.

Mr. Korzenowski: Your Honor —

Mr. Lockerby: So, we would be forced to license the federally-registered Volvo trademark to FMS?

The Court: Yes.

 


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Contacts

Michael J. Lockerby
Washington, D.C.
202.945.6079
mlockerby@foley.com

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