Vol. 77, No. 12, December 2004

Determining 'Community of Interest' Under the WFDL

by Joseph P. Wright

A 2004 Wisconsin Supreme Court decision on the "community of interest" element of the definition of a "dealership" under the Wisconsin Fair Dealership Law (WFDL)¹ may lead to an increase in cases brought under the statute, make such cases more difficult to settle, and yield more trials. The WFDL provides certain protections for businesses that qualify as dealerships under the statute. A dealership is a contract or agreement that grants the right to sell or distribute goods or services, in which there is a community of interest in the business of offering, selling, or distributing those goods or services.² The "community of interest" requirement is the element of this statutory definition of dealership that has been most susceptible to differing interpretations.³ In the 1987 case Ziegler Co. v. Rexnord Inc.,⁴ the Wisconsin Supreme Court developed a framework for determining whether a community of interest exists; the framework required courts to examine numerous facets of the parties' business relationship.⁵

Since Ziegler, Wisconsin state and federal courts (that have interpreted the WFDL in diversity jurisdiction cases) have adopted the general framework set out by the supreme court but have narrowed its scope by focusing on whether alleged dealers had made substantial, unrecoverable investments to promote the products of the alleged grantors. Acknowledging the development of this sunk investment test, the supreme court recently had indicated a willingness to reformulate the Ziegler framework to focus on substantial sunk investments in the relationship and substantial revenues gained from the relationship as the two primary indicators of community of interest. But in June 2004 the Wisconsin Supreme Court wrote a decision that firmly reinstated the multifaceted Ziegler inquiry as the test for determining whether a community of interest is present in a business relationship.

In Central Corp. v. Research Products Corp,⁶ the supreme court found that summary judgment was improperly granted in favor of a manufacturer that had argued that the plaintiff wholesaler was not a dealer of the manufacturer's products under the WFDL because the companies' business relationship lacked a community of interest. The wholesaler had derived a relatively small percentage of its total revenues from sales of the manufacturer's products and did not appear to have made substantial ill-liquid investments specific to the manufacturer's product line. The court found that, nonetheless, certain facets of the relationship between the two companies indicated that they might share a community of interest and that therefore the wholesaler might qualify as a dealership protected under the WFDL from improper termination.

The supreme court's decision in Central is important for future community of interest litigation under the WFDL, because it clarifies that determining whether a community of interest exists between two parties involves a thorough examination in each case of all aspects of the business relationship, not just the traditionally important aspects of sunk investments and substantial revenues attributable to sales of the alleged grantor's products. Central has likely expanded the WFDL's reach, because the multifaceted inquiry approach of considering all relevant aspects of the business relationship as potential indicators of community of interest likely will result in including as dealers those distributors that otherwise might not have qualified as dealers under the sunk investment or substantial percentage of revenue tests.

Because the multifaceted inquiry set forth in Ziegler and reaffirmed in Central involves looking at the unique facets of each potential dealer relationship, another likely consequence of Central will be more community of interest cases going to trial. The Central court has increased the role of the fact-finder and weakened the ability of judges to conclusively rule at the summary judgment stage that a community of interest does or does not exist. Likewise, resolving cases through settlement negotiations is less likely than before, because it will be more difficult for parties to assess the strength of their positions with respect to the existence of community of interest and thus gauge the likely outcome of the case at trial.

Establishing a Broad Test for Community of Interest:
Ziegler Co. v. Rexnord Inc.

Community of interest under the WFDL is defined as a "continuing financial interest between the grantor and grantee in either the operation of the dealership business or the marketing of such goods or services."⁷ In Ziegler, the supreme court sought to clarify this definition by establishing two guideposts that would indicate whether a community of interest was present in a given business relationship.⁸ The court set the first guidepost as "continuing financial interest," which is an element of the community of interest definition noted above and which contemplates a shared financial interest in operating a dealership or marketing a good or service.⁹ The court also looked to the statutory definition of dealership and concluded that the second guidepost that marked a community of interest was "interdependence," which is the degree to which the dealer and grantor cooperate, coordinate their activities, and share common goals in their business relationship.¹⁰

After establishing "continuing financial interest" and "interdependence" as the two guideposts marking community of interest, the Ziegler court stated that these guideposts required an alleged dealer to demonstrate a stake in the relationship large enough to make the grantor's power to terminate, cancel, or not renew the agreement a threat to the economic health of the alleged dealer.¹¹ The economic health of an alleged dealer is threatened when a termination, cancellation, or failure to renew would have a significant economic impact on the alleged dealer.¹² The court concluded that a determination of whether the guideposts signal the presence of a community of interest and whether there will be a significant economic impact on an alleged dealer must be based on an examination of a wide variety of facets of the business relationship. The court listed the following 10 facets as considerations that should be made to determine whether a grantor and grantee have a continuing financial interest in the business and whether the business relationship is so interdependent that there is a community of interest:

1) How long the parties have dealt with each other;

2) The extent and nature of the obligations imposed on the parties in the contract or agreement between them;

3) What percentage of time or revenue the alleged dealer devotes to the alleged grantor's products or services;

4) What percentage of the alleged dealer's gross proceeds or profits derives from the alleged grantor's products or services;

5) The extent and nature of the alleged grantor's grant of territory to the alleged dealer;

6) The extent and nature of the alleged dealer's use of the alleged grantor's proprietary marks;

7) The extent and nature of the alleged dealer's financial investment in inventory, facilities, and goodwill of the alleged dealership;

8) The personnel that the alleged dealer devotes to the alleged dealership;

9) How much the alleged dealer spends on advertising or promotions for the alleged grantor's products or services; and

10) The extent and nature of any supplementary services provided by the alleged dealer to consumers of the alleged grantor's products or services.¹³

In setting forth this multifaceted inquiry, the supreme court created a totality of the circumstances test for determining whether an alleged grantor and alleged dealer share a community of interest.¹⁴ In doing so, the Ziegler court left the concept of community of interest highly flexible and emphasized that courts must not restrict their inquiries to any one facet of the business relationship.¹⁵ Yet in the WFDL litigation that followed Ziegler, the U.S. Court of Appeals for the Seventh Circuit and then the Wisconsin Court of Appeals took an approach to examining community of interest that emphasized the requirement that the alleged dealer had made substantial, ill-liquid investments specific to its sales of the alleged grantor's products. The result was an approach with less flexibility in finding a shared community of interest in favor of brighter lines in determining whether a community of interest existed in a given business relationship.

Narrowing the Scope of Inquiry: The Sunk Investment Test

The U.S. Court of Appeals for the Seventh Circuit has developed its own view of the Ziegler framework. The Seventh Circuit has voiced concern that multifactor tests could imply the need for jury trials in all cases, which could render the WFDL a "vapid law, uncertain in every application."¹⁶ To avoid this effect, the Seventh Circuit has endeavored to establish a bright line test that comports with the WFDL's purpose and accommodates the Ziegler guideposts. The Seventh Circuit has found that the WFDL's central function is to prevent opportunistic behavior on the part of alleged grantors once alleged dealers have sunk substantial resources into tailoring their business around and promoting a brand.¹⁷ The implication of this central purpose for the definition of community of interest is that if an alleged dealer has not committed substantial investments to an alleged grantor, there is no opportunity for the alleged grantor to exploit the relationship by changing the terms of the agreement. Thus there is no community of interest, and consequently no dealership under the WFDL.¹⁸

This "sunk investment" test developed by the Seventh Circuit is in line with the Ziegler framework, though it effects a more restrictive interpretation of community of interest than does the multifaceted Ziegler approach. The sunk investment test essentially is facet seven of the Ziegler inquiry, with the additional requirement that the investment be ill-liquid. Under the Seventh Circuit test, a substantial investment in inventory, for example, may not imply a community of interest when the inventory remaining at termination of the dealership agreement can be sold and thus substantial losses from the termination prevented. Under the Ziegler framework, however, a substantial investment in inventory, regardless of whether the inventory is easily sellable or not, is an indicator of a community of interest. Thus the sunk investment test propounded by the Seventh Circuit has the potential to yield fewer findings of community of interest, and therefore fewer dealerships under the WFDL.

As the Ziegler framework was narrowed in the Seventh Circuit, its multifaceted inquiry also was conservatively carried out by the Wisconsin Court of Appeals. In Guderjohn v. Loewen-America Inc.,¹⁹ the court of appeals thoroughly examined the parties' business relationship and found that it lacked a community of interest, notwithstanding strong indications of continuing financial interest and interdependence. In Guderjohn, sales of the alleged grantor's products accounted for a substantial percentage of total revenues and gross profits of the alleged dealer, and the alleged dealer played a role in the regional development of goodwill for those products.²⁰ But the court found that the alleged dealer had made minimal financial investment other than in easily sold inventory, and the court implied that a showing of continuing financial interest required proof of substantial sunk investments, in line with the test propounded by the Seventh Circuit.²¹ The court also examined interdependence and found that the alleged dealer's use of the alleged grantor's proprietary marks was minimal, that its levels of advertising for the alleged grantor's products were low, and that it did not have an exclusive distributorship.²²

The Seventh Circuit jurisprudence and Guderjohn indicated that Wisconsin state and federal courts sitting in diversity were beginning to stray from the Ziegler framework for determining whether the parties enjoyed a community of interest. In 2002 the Wisconsin Supreme Court indicated an awareness of these developments when the majority in Baldewein Co. v. Tri-Clover Inc.²³ stated in dicta a reformulation of the community of interest test that reconciled the Ziegler framework with the sunk investment test:

"When a dealer sinks substantial resources into its relationship with a particular grantor - time, money, employees, facilities, inventory, advertising, training - or derives substantial revenue from the relationship (as a percentage of its total), or some combination of the two, the grantor's power to terminate, cancel, or not renew the relationship becomes a substantial threat to the economic health of the dealer and a community of interest can be said to exist."²⁴

The supreme court thus acknowledged the central role of sunk investments in determining whether a community of interest exists. Contrary to the implication of Guderjohn, however, the court indicated that even if investments made by the alleged dealer are liquid, a community of interest still may be found if the alleged dealer derives a substantial percentage of its revenues from the business relationship.

But the supreme court's hint of retreat from the original Ziegler framework in Baldewein proved to be a false alarm. Two years after its reconciliatory dicta in Baldewein, the supreme court wrote a decision directly addressing the nature of the proper inquiry for determining the existence of community of interest. In this decision the supreme court firmly reinstated the multifaceted Ziegler inquiry as the appropriate test for determining whether two parties share a community of interest in their business relationship.

Ziegler Regained: Central Corp. v. Research Products Corp.

The Wisconsin Supreme Court revisited the concept of community of interest under the WFDL in the June 2004 decision Central Corp. v. Research Products Corp. The court considered whether summary judgment was appropriately granted on the issue of whether there was a community of interest, and, therefore, a dealer relationship, between a wholesaler and a manufacturer. The court concluded that summary judgment was improperly granted, holding that when there are genuine issues of material fact or reasonable alternative inferences that can be drawn from undisputed material facts, the determination of whether there is a community of interest between a wholesaler and a manufacturer is to be made by the trier of fact, based on an examination of all facets of the business relationship.

Central Corp. (Central), an Oshkosh, Wis. based wholesaler, and Research Products Corp. (Research), a Madison, Wis. based manufacturer, had a 20-year business relationship based on their oral agreement to allow Central to distribute Research's Aprilaire line of products.²⁵ Central distributed Research's products throughout northeastern Wisconsin, primarily in the Fox River Valley area, and, approximately 10 years before the dispute, expanded its territory to include Milwaukee and Madison.²⁶ With the exception of one recently introduced Research product, Central carried no brands that directly competed with Research's products and claimed that it had educated its contractor customers regarding Aprilaire products and helped to develop goodwill and brand loyalty for the product line.²⁷

Research did not require that Central maintain a fixed amount of inventory, although to function successfully Central maintained a substantial number of Aprilaire products and parts.²⁸ Central's owners built a new warehouse to store Central's inventory of products, and Central alleged that the size of the new warehouse was based on the space necessary for Central to house its inventory, which included the Aprilaire line. Central leased 7,000 square feet of warehouse space, and it claimed that approximately 2,000 square feet of the warehouse space was intended to store Aprilaire product inventory.²⁹

Central's sales of Aprilaire products comprised approximately 8 to 9 percent of Central's sales and profits over the years.³⁰ Central claimed that if it did not carry the Aprilaire line, it would lose business because its customers would buy from a wholesaler that stocked all of the brands they required instead of buying only a few items from multiple wholesalers. Central stated that it would take years to replace the business and sales that the Aprilaire products brought to it.³¹

Research registered two complaints to Central over the course of the companies' sales relationship. Research said that Central was not charging enough for products in the Aprilaire line and should stop selling Research products in the Madison and Milwaukee areas. Central refused to stop selling in the Madison and Milwaukee areas, because such areas comprised 30 percent of its total business.³² In June 2001, Research stated its intent to terminate its sales relationship with Central.³³

Central brought suit against Research, alleging that Research's decision to terminate the business relationship violated the WFDL because Central was a dealer of Research products, and because there was a lack of good cause for Research's termination and a lack of opportunity for Central to cure. In its complaint Central stated that there was a community of interest between itself and Research because there was a continuing financial interest between the parties and the parties were interdependent. Research filed a motion for summary judgment, claiming that Central was not a dealer under the WFDL because there was no community of interest between the parties. The circuit court granted Research's motion for summary judgment, finding that Central was not a dealer under the WFDL.³⁴

Central appealed and, in an unpublished per curiam opinion, the court of appeals affirmed the circuit court's judgment, stating that no reasonable person could conclude that Central had demonstrated that it and Research had a community of interest. The court of appeals noted that Research did not impose any requirements on Central; Research did its own marketing and did not expect Central to advertise on its behalf; Central did not make any investments that were unique to Research's products; Central derived a low percentage, only 8 percent, of its gross revenues from the sale of Research's products; termination of the parties' relationship would not have a significantly adverse effect on Central's financial well-being; and the inventory was not an unrecoverable investment. The court of appeals concluded that the parties were not interdependent and that Central did not have a continuing financial interest with Research.³⁵

In deciding whether summary judgment was appropriately granted in favor of Research, the supreme court considered whether genuine issues of material fact or reasonable alternative inferences drawn from undisputed material facts existed, such that a trial was warranted to determine whether there was a community of interest, and, therefore, a dealership relationship, between Central and Research.³⁶ The court looked to the two guideposts that it set forth in Ziegler to determine whether the parties shared a community of interest and then restated the 10 Ziegler business relationship facets that should be considered in determining whether a continuing financial interest and interdependence exist.³⁷

In its application of the Ziegler factors to the relationship between Central and Research, the court found that several facets of the relationship presented genuine issues of material fact and resulted in competing inferences in regard to Central's contention that the parties shared a community of interest. Significant factors included the parties' 20-year business relationship; a financial investment made by Central's owners in warehouse facilities, the size of which appeared to be based in part on the amount of Aprilaire inventory Central stored; and the dispute as to the Madison and Milwaukee areas, the last of which indicated that Central might be able to demonstrate that it had a specific sales territory.³⁸

Other factors also led the court to conclude that there were genuine issues of material fact and reasonable alternative inferences to be drawn from undisputed facts that bore on the question of whether there was a community of interest. The court noted that Central kept a supply of spare parts on hand to serve its installer contractor customers, that Central made no profits on such parts, and that Central kept a substantial amount of Aprilaire inventory in its warehouse at any given time. The court recognized that the sale of Research's products did not comprise a large percentage of Central's gross revenues or profits, but stated that the matter was to be weighed by the trier of fact and that such a fact alone was not dispositive.³⁹

The court noted that it was not concluding that Central must prevail, but rather that the case should proceed to trial for a fact-finder determination of whether a community of interest, and, therefore, a dealer relationship, existed between Central and Research.⁴⁰ Accordingly, the court reversed the court of appeals and remanded the case to the circuit court for further proceedings consistent with its opinion.

The Implications of Central for Community of Interest Litigation

The supreme court's decision in Central is striking. Based on the community of interest developments in the post-Ziegler jurisprudence, the statement made by the court of appeals in Central - that no reasonable person could conclude that Central had demonstrated that it and Research shared a community of interest - appeared to be an accurate application of the current WFDL case law to the facts. Central derived a relatively low percentage of its gross revenues and profits from sales of Research's products and did not appear to have substantial sunk investments relating to the Aprilaire product line. Central's investment in new warehouse space was only partially driven by the need for space to store Research's products. Moreover, any warehouse space dedicated to the Aprilaire brand could easily be used by Central to store new brands or increased levels of existing product lines.

Because neither the sunk investment test nor the substantial revenue from the relationship test that the supreme court endorsed in Baldewein would be easily met by Central upon remand for trial, it will be difficult for Central to show the continuing financial interest guidepost required by Ziegler. Under the previous post-Ziegler jurisprudence, these would have been significant deficiencies in an alleged dealer's case and would have likely resulted in summary judgment in favor of the alleged grantor as occurred in Central.

In its willingness to overlook these deficiencies in Central's case, the supreme court implied that community of interest inquiries that focused solely on sunk investments and substantial percentages of total revenues were excluding from the WFDL potential dealers that were otherwise deserving of its protection. The court's list of factors that tended to indicate a community of interest in this case were those that showed a likelihood of interdependence between Central and Research - a 20-year business relationship, a possible exclusive sales territory for Central, investments by Central in storage facilities, and Central's stock of spare parts for the Aprilaire brand products it sold. Though continuing financial interest between the parties was weak, these factors relating to interdependence nonetheless could point to a relationship in which the grantor was in a position to opportunistically exercise its superior bargaining power to the detriment of the dealer, which is precisely the type of situation that the WFDL was enacted to safeguard against.⁴¹

From a practitioner's standpoint, Central has clarified how disputes relating to whether parties share a community of interest will play out. In holding fast to the multifaceted, totality of the circumstances approach developed in Ziegler, the supreme court has lessened the likelihood that community of interest cases will be disposed of through summary judgment or resolved through settlement negotiations. Rather, by promoting a multifaceted approach with few bright-line indicators of community of interest, the court is guiding these cases toward trial, where juries will be responsible for finding whether the various facets of community of interest exist in a given business relationship.

How a given community of interest case will play out at trial will depend on the extent to which the facts indicate continuing financial interest and interdependence between the parties. Following Central, it is clear that even if the percentage of gross revenues derived from the product is small and sunk investments relating to the product are minimal, community of interest still could be found if other facets of the business relationship, such as duration of the relationship, level of liquid investments, development of goodwill, and exclusivity of sales territory, are strong. Central has thus extended the test for community of interest under the WFDL to be more inclusive of distributors that might not have otherwise qualified as dealers under the sunk investment or substantial percentage of revenue tests.

Conclusion

In reaffirming the Ziegler framework as the proper line of inquiry for courts to use when considering community of interest under the WFDL, the Wisconsin Supreme Court in Central implicitly expressed its belief that the WFDL's purpose of preventing unfair treatment of small business dealers arising from the superior bargaining power of certain grantors is best realized when alleged dealer relationships are analyzed from all angles on a case-by-case basis, without according too much weight to any one facet of the relationship. While this may result in more cases being taken in front of a jury, Central has clarified how a case for proving or disproving the existence of a shared community of interest must be presented at trial. A thorough examination of all facets of the business relationship is the course of action that must now be undertaken by litigators of community of interest cases under the WFDL.

Endnotes

¹Wis. Stat. ch. 135 (2001-02).

²Wis. Stat. § 135.02(3)(a).

³See Michael A. Bowen & Brian E. Butler, The Wisconsin Fair Dealership Law § 4.24 at 46 (State Bar CLE Books 3d ed. 2003).

⁴139 Wis. 2d 593, 407 N.W.2d 873 (1987).

⁵Id. at 605-06.

⁶2004 WI 76, 272 Wis. 2d 561, 681 N.W.2d 178.

⁷Wis. Stat. § 135.02(1)(a).

⁸ Ziegler, 139 Wis. 2d at 605.

⁹Id. at 604.

¹⁰Id. at 605.

¹¹Id.

¹²Id.

¹³Id. at 606.

¹⁴See Frieburg Farm Equip. Inc. v. Van Dale Inc., 978 F.2d 395, 399 (7th Cir. 1992).

¹⁵ Ziegler, 139 Wis. 2d at 605-06.

¹⁶Kenosha Liquor Co. v. Heublein Inc., 895 F.2d 418, 419 (7th Cir. 1990).

¹⁷Id.

¹⁸Id.

¹⁹179 Wis. 2d 201, 507 N.W.2d 115 (Ct. App. 1993).

²⁰Id. at 209-12.

²¹Id. at 210; see also Bowen & Butler, supra note 3, § 4.26 at 59.

²² Guderjohn, 179 Wis. 2d at 211-12.

²³2000 WI 20, 233 Wis. 2d 57, 606 N.W.2d 145.

²⁴Id. ¶ 27.

²⁵Research made Aprilaire brand humidifiers, air cleaners, water panels, and zoning systems that Central sold to installer contractors, who ultimately sold the products to homeowners and commercial builders.

²⁶Central, 2004 WI 76, ¶¶ 6-7, 272 Wis. 2d 561.

²⁷Id. ¶¶ 9-11.

²⁸Id. ¶ 12.

²⁹Id. ¶ 14.

³⁰Id. ¶ 9.

³¹Id. ¶ 10.

³²Id. ¶ 16.

³³Id. ¶ 3.

³⁴Id. ¶¶ 3-4.

³⁵Id. ¶ 5.

³⁶Id. ¶ 2.

³⁷Id. ¶¶ 31-33.

³⁸Id. ¶ 35.

³⁹Id.

⁴⁰Id. ¶ 36.

⁴¹Id. ¶ 28; Wis. Stat. § 135.025(2)(b).

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