Editorial

When Your Franchisor or Supplier Will No Longer Provide You with Products Because of a Market Withdrawal (and What you Can Do)

Many issues arise when a franchisor or manufacturer stops supplying its franchisees or dealers with products because it is withdrawing from the market. “Market withdrawal” generally means that a manufacturer is permanently withdrawing a product or series of products from a geographic area. This simple definition can, and often is, used to describe far broader circumstances and considerably more complicated situations, which may not legally qualify as market withdrawals.

The definition of “market withdrawal” also suggests many questions. For example, what is a product? Does the term “product” mean a complete line of products, or merely one model within a line of products? Does the term “product” mean only the physical product itself? Or does it necessarily include the product’s trademark and/or trade dress? And what is a withdrawal? Certainly there is little doubt that a “withdrawal” would include the complete disappearance of the product (whatever that is) from the marketplace (whatever that is). But what about a temporary cessation of sales; does it qualify as a market withdrawal? How long must the product be off the market? Does the term encompass the sale of the product line or the sale of the entire business? What if the manufacturer simply changes distribution channels in pursuit of greater efficiency or increased profits? What if the same product (or one nearly the same) bears a different trademark? Are any or all of these actions “withdrawals?” And what about a “market?” How big does it have to be? Is it the world? A continent? A country? A state? A series of zip codes? Or is it something else? Statutory and case law is varied on this topic, and, as such, an experienced attorney can assist with this analysis.

Although the term “market withdrawal” may not be self explanatory, the need to understand its meaning and ramifications in the marketplace certainly is. Manufacturers eliminate products, change products, and sell the ability to manufacture products to others. Big-box retailers replace small dealers. The real question is whether these changes qualify as “market withdrawals,” and necessarily authorize the manufacturer to rely upon “market withdrawal” provisions in agreements and/or statutes to terminate or change distribution networks. In response to this question, it is important that individual franchisees or distributors know their rights in light of an attempted “market withdrawal.”

In general, the common thread of all market withdrawals is that the supplier permanently ceases to sell its products. Moreover, to constitute a “product withdrawal,” as defined in most statutes or agreements, a manufacturer must establish that it no longer is offering the product in “a large geographic area.” The motivation for the supplier’s market withdrawal is very important. Is the impetus behind the “withdrawal” the desire to terminate a dealer or small group of dealers? Is the supplier’s motivation grounded in a decision to stem losses because “the profitability of wide-scale sales of a product line has sunk to such a point that a sale or discontinuation of the product line is justified for the good of the corporation?”

The most contentious market-withdrawal issues arise in the context of a manufacturer’s sale of its business or part of its business. Manufacturers often argue that the sale of an entire business or the sale of a product line qualifies as a market withdrawal and, therefore, provides a justification, under the distribution agreement and/or any applicable statute, for a termination of the distribution agreement.

In order to successfully terminate a dealership agreement because of a market withdrawal, a supplier must be able to establish that a market withdrawal not only qualifies as good cause under any applicable state statute, but also that the agreement authorizes terminations based upon a market withdrawal. The question related to the agreement is a question of ordinary state contract law. If the agreement contains an at-will termination provision, it very likely will authorize terminations based upon market withdrawal, assuming the supplier can establish that the integration clauses properly exclude any oral representations and/or courses of dealing to the contrary. Increasingly, however, distribution contracts do not contain at-will termination clauses and, instead, list a variety of events that constitute cause for termination. A well drafted distribution contract will contain a provision or series of provisions addressing the supplier’s ability to terminate the contract in the event of certain system-wide changes.

The determination of whether a manufacturer lawfully can terminate a dealer will be subject, in many cases, to applicable statutes restricting the ability of manufacturers to conduct such terminations. Federal statutes and state dealership statutes related to the distribution of automobiles, heavy equipment, beer, wine and other liquors, and other products, often will preclude terminations “without cause.” The debate whether a manufacturer’s decision to withdraw a product from the market provides such “good cause” will turn, of course, on the language of the statute itself.

Generally speaking, a manufacturer that terminates a dealer in accordance with the terms of a written agreement following a product withdrawal will not be subject to any common-law claims, so long as the manufacturer has dealt with the dealer honestly and in a commercially-reasonably manner. However, there are a number of potential claims for dealers if the manufacturer, in instituting the product withdrawal, either lied about the upcoming product withdrawal and/or failed to disclose the product withdrawal in a timely fashion.

When faced with termination or some other change in the relationship with a manufacturer or franchisor, the dealer or franchisee must analyze the agreement between the parties, which often will be made up of not only what is written between the parties, but also what was said between the parties, the course of dealing and, perhaps, the usage of trade in the industry. In addition, a dealer or franchisee must consider whether an applicable statute protects the relationship, and if so, whether the statute will preclude the sort of action being taken by the manufacturer or franchisor. Finally, a dealer or franchisee must consider the common-law claims that it may be able to assert against a manufacturer or franchisor attempting to rely upon a market withdrawal to change the relationship in such a way that will damage the dealer or franchisee.

An experienced Franchise attorney can help you with all of these inquiries, and can assist you in fully understanding what, if any, rights you may have if your franchisor or supplier stops providing you with products because of a market withdrawal.