The Cost of a Handshake: Federal Case Highlights the Trouble and Expense of Litigating Unwritten Agreements

In the business of product distribution, the handshake is often king. The appeal of a handshake deal is obvious: It’s fast, it’s easy, and it demonstrates trust in your channel partners. Unfortunately, handshake deals can cause enormous problems if the relationship eventually breaks down, as a recent decision out of the Eastern District of Wisconsin demonstrates.

PMT, a Wisconsin distributor of industrial machinery, and Yama Seiki, a manufacturer of high-tech machine tools, struggled to communicate clearly. In late 2015, PMT contacted Yama Seiki about PMT becoming the exclusive dealer of Yama Seiki’s products in the eastern Wisconsin market. Yama Seiki embraced the opportunity but attached a series of conditions related to sales targets, marketing strategies, and product display to its response. PMT, believing that it could not fulfill these conditions, rejected the offer and continued to feature Yama Seiki products without an exclusive arrangement.

Fast forward to July 2016, when PMT again contacted Yama Seiki to inquire about an exclusive relationship. To the surprise of PMT, Yama Seiki’s operations manager told PMT that it was already in “exclusive status.” PMT took this to mean that its initial offer, without the added terms, had been accepted — that they had an open-ended, “handshake” deal. PMT later learned that Yama Seiki representatives were selling in the eastern Wisconsin market in spite of what PMT thought was an exclusive agreement. When PMT raised this, Yama Seiki responded that PMT’s exclusivity had been cancelled because it had failed to fulfill the conditions in its counter-offer from 2015. Litigation followed, with PMT alleging a violation of the Wisconsin Fair Dealership Law (WFDL).

In the absence of any written agreement between the parties, the Court could not dismiss the suit before discovery. Following discovery, Yama Seiki moved the Court for summary judgment, which was granted just weeks before the trial date, after much of the work to prepare for trial was complete. The Court’s opinion was largely a recitation of well-established case law on the meaning of “dealer” under the WFDL. The Court’s conclusion: PMT is not a dealer and not protected by the WFDL. A victory for Yama Seiki, but an expensive one.

Key Takeaways:

• Have written agreements. They clarify the expectations of the parties and prevent the sorts of disputes — of the sort described here — that can destroy business relationships. And in litigation they can save substantial time and money, as they allow for possible dismissal before discovery and well before trial.
• Ensure that your written agreements address exclusivity. Distributors and dealers are either exclusive or they are not, and your agreement should say which. Exclusivity is one of the most oft-litigated issues in the product distribution world.
• Always be wary of incomplete negotiations. PMT and Yama Seiki appeared not to have come to an agreement on the terms of their relationship, but Yama Seiki’s supplied product to PMT anyway. That’s a perilous situation, especially in jurisdictions with generally applicable statutes like the WFDL.