Botched Termination Leads to Preliminary Injunction, Trapping Manufacturer With Distributor
A recent federal court decision serves as a cautionary tale for manufacturers looking to terminate resellers (dealers or distributors) in their distribution networks. When weighing and executing a termination, manufacturers cannot myopically focus on business considerations and consequences. They must remember their contractual terms and, more importantly, the state statutes restricting their ability to terminate.
Issue / Case Summary
One manufacturer recently learned this lesson the hard way.1 For nearly 40 years, Wright Manufacturing Inc. sold its products through distributor Keen Edge Company, Inc.2 But after a change in leadership at Wright, Wright began planting the seeds for terminating Keen. Wright held an on-site meeting with Keen to address performance complaints; Wright later sent Keen a letter identifying 16 areas for improvement; then conducted a follow-up meeting to discuss Keen’s performance deficiencies.3
Wright then changed course. It stopped monitoring Keen’s progress and, in fact, accepted Keen’s 2020 sales and marketing budget.4 A couple months later, however, Wright issued Keen a written notice of termination that made general references to the performance issues in its previous letter.5
One year after this termination letter was sent, a federal court granted Keen’s preliminary injunction, preventing Wright from terminating Keen and preserving Keen’s position as Wright’s exclusive distributor in Wisconsin.6
What went wrong? Put simply, Wright overlooked the Wisconsin Fair Dealership Law (WFDL) when terminating Keen. The WFDL required that Wright have good cause to terminate Keen; that it provide Keen with 90 days’ written notice of termination; that its notice specify the good-cause grounds for termination; and that it give Keen 60 days to cure those grounds for termination.7 Overlooking these requirements resulted not only in litigation, but also trapped Wright in a distribution relationship with Keen for at least the pendency of their litigation.
Key Takeaways
- Check State Law: Before ending a relationship with a channel partner, check state statutes like the WFDL that potentially regulate the manufacturer, its equipment, or its channel partner. Do not ignore these statutory schemes because of a seemingly bulletproof contract. These statutes often contain anti-waiver provisions that trump contracts (including contracts’ attempt to waive them).
- Sweat the Small Stuff: Most state statutes have termination notice and cure provisions just like the WFDL. Get the small stuff right. Make sure to comply with these technical rules, which vary from state to state.
- Confirm Your Rationale: When considering whether to terminate a channel partner, a business rationale—simply preferring one distributor over another—likely won’t suffice. In Keen v. Wright, for instance, the court held that Wright’s stated reasons for termination were “potentially pretextual” and did not constitute “good cause” as defined by the WFDL.8 The basis for termination must align with the governing state statute’s standard for good cause, and must be rooted in fact.
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1 Keen Edge Co., Inc. v. Wright Mfg., Inc., No. 19-CV-1673-JPS, 2020 WL 4926664 (E.D. Wis. Aug. 21, 2020).
2 Id. at *6.
3 Id. at *2-3.
4 Id. at *3.
5 Id. at *3.
6 Id. at *8.
7 Wis. Stat. § 135.04.
8 Keen, 2020 WL 4926664, at *7.
