Small State's New Law Set to Cause a Big Stir - International Law Office

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Franchising - USA

Small State's New Law Set to Cause a Big Stir

August 07 2007

Relationship Regulation
Broad Definition of 'Dealership'
Potentially Unconstitutional Aspect
Termination Events
Violations of the Act
Forthcoming Flurry of Litigation


With no fanfare, Rhode Island has become the first state to enact franchise relationship legislation since Iowa did so in 1992. The Rhode Island Fair Dealership Act was enacted on June 14 2007 with almost no publicity and the act has now become law. Until now, every state that had considered enacting franchise relationship legislation since 1992 had chosen not to do so. Franchise relationship bills are currently pending in Massachusetts and Tennessee.

Relationship Regulation

The Rhode Island Fair Dealership Act is virtually identical to the Wisconsin Fair Dealership Law. It purports to impose a 'good cause' standard on franchisors for certain events, including franchise terminations, non-renewals and any undefined substantial change in competitive circumstances (known as a 'termination event'). In Wisconsin, the similar law has resulted in hundreds of litigated cases.

While Rhode Island has regulated franchise offers and sales since 1973, the state did not attempt to regulate the terms of franchise agreements or the relationship between franchisors and franchisees. However, through the act Rhode Island now regulates the franchise relationship. Moreover, as in the Wisconsin law, Rhode Island’s broad 'community of interest' definition applies not only to franchises, but also to non-franchise distributorships and dealerships.

Broad Definition of 'Dealership'

The new act defines a 'dealership' as any contract or agreement (whether express, implied, oral or written) in which one person is granted the right to (i) sell or distribute goods or services, or (ii) to use a trademark, advertising or other commercial symbol in which there is a community of interest in the business of offering, selling or distributing goods or services. A 'community of interest' means any continuing financial interest between the two parties to the contract either in the operation of the dealership business or in the marketing of the goods or services. This wide-ranging definition encompasses nearly all franchise systems and most distributorships and dealerships, but the jurisdictional scope of the act is limited only to dealers situated in Rhode Island.

The act contains few exclusions, exempting only “intoxicating liquor dealerships, motor vehicle dealerships, insurance agency relationships and door-to-door sales dealerships”.

The stated purpose of the act is remedial: to protect dealers against unfair treatment by their franchisors and to provide them with rights and remedies in addition to those existing under contract or common law. The act forbids and renders void any contract purporting to waive application of the act. Furthermore, it purports to apply to existing franchise contracts, not only prospective ones.

Potentially Unconstitutional Aspect

The act impairs existing contracts. Prior case law from other states (including Iowa) indicates that this impairment may render the act unconstitutional. Nevertheless, even if that aspect of the act is determined to be unconstitutional, it may still apply to contracts that are entered into, renewed or amended after June 14 2007.

Termination Events

Under the act, a franchisor, supplier or manufacturer – the grantor of the dealership – must give the dealer at least 90 days’ prior written notice of any termination event. The notice must state all reasons for the termination event and provide the dealer with at least 60 days to cure any claimed deficiency. The only exceptions to the notice requirement occur if the reason for the termination event is either: (i) non-payment of sums due, in which case 10 days' notice to cure the default must be given; or (ii) the dealer’s insolvency, bankruptcy or an assignment for the benefit of creditors, in which case no notice is required.

The act defines 'good cause' as either: (i) bad faith by the dealer in carrying out the terms of the dealership; or (ii) failure by a dealer to comply substantially with essential and reasonable requirements that “are not discriminatory as compared with requirements imposed on other similarly situated dealers either by their terms or in the manner of their enforcement”.

Although the act does not explicitly state that termination events can be only accomplished for good cause, it does imply a good cause requirement. This is an instance in which the Rhode Island law departs from that of Wisconsin. It is strange that, after essentially copying the Wisconsin law, the act omits the explicit prohibition contained in the Wisconsin law that forbids franchisors from engaging in any termination event without good cause. However, even with this conspicuous omission, in context the act intends to impose a good cause standard on termination events.

While the application of the act to terminations and non-renewals raises the spectre of perpetual franchises, the effect on other activities is uncertain. The phrase 'substantial change in competitive circumstances' is left undefined. Franchise and dealer suits in Wisconsin under a similar provision have challenged numerous types of conduct (eg, appointing additional dealers) and have spawned countless lawsuits.

Violations of the Act

Violations of the act entitle the franchisee to various remedies, including actions for damages, reimbursement of attorneys’ fees and costs, and both permanent and temporary injunctive relief. To support temporary injunctive relief, the act states that violations are deemed to cause irreparable harm.

The act purports not to apply to binding arbitration agreements, but only if the criteria for determining whether good cause exists for a termination event and the relief provided to a dealer are consistent with and no less than those provided for in the act. Again, this indicates that a 'good cause' standard exists under the act - even if it is not explicitly stated.

If a franchisor terminates a franchise agreement, whether or not for good cause, the dealer may force the franchisor to repurchase all inventory of merchandise sold by the franchisor to the dealer that bears the franchisor’s marks, at its fair wholesale market value.

Forthcoming Flurry of Litigation

Since Iowa passed franchise relationship legislation in 1992, that much-maligned law has been eroded several times. Now franchisors with franchisees in Rhode Island, faced with their own, possibly unconstitutional legislation, must nevertheless take special care not to violate the act in their dealings with their franchisees. As the act is a very similar to the Wisconsin law, Rhode Island courts can expect a flurry of litigation over termination events involving franchisees and dealers.


For further information on this topic please contact David Beyer at DLA Piper by telephone (+1 813 229 2111) or by fax (+1 813 229 1447) or by email (david.beyer@dlapiper.com)



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