The Wisconsin Fair Dealership Law's
Territorial Imperative

Two recent cases, Morley-Murphy and Generac, prescribe the reach of the WFDL for dealerships, but raise additional issues for future resolution.

By Kevin L. Keeler

The Wisconsin Fair Dealership Law (WFDL)¹ protects businesses that fall within the statute's definition of a "dealer" from certain business practices that the statute deems unfair. In particular, the WFDL prohibits a grantor of a dealership from terminating, or substantially changing the competitive circumstances of, the dealer's dealership agreement without good cause.² The statute also requires a grantor to give the dealer at least 90 days' prior written notice of termination, nonrenewal, or substantial change in competitive circumstances, and a 60-day period to rectify any deficiency claimed by the grantor.³

The protections of the WFDL apply only to businesses that qualify as a "dealer," which the statute defines as "a person who is a grantee of a dealership situated in this state."⁴ A "dealership" means an agreement "by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise."⁵

In two recent cases the United States Court of Appeals for the Seventh Circuit has prescribed the reach of the WFDL as it applies to dealerships with multi-state sales territories. In Morley-Murphy Co. v. Zenith Electronics Corp.⁶ the court held the WFDL does not permit an unlawfully terminated dealer to recover damages for lost profits on projected sales outside Wisconsin. In Generac Corporation v. Caterpillar Inc.⁷ the court construed the WFDL as containing its own choice of law rule in the statute's definition of a "dealer" as the grantee of a "dealership situated in this state," overruling a prior decision⁸ that required courts to first apply a traditional choice of law analysis before considering whether the WFDL applied. The court held that a purported dealer who has no Wisconsin sales is not the grantee of a "dealership situated in this state" for purposes of the WFDL, even if the dealer is located in Wisconsin and conducts substantial sales support business in Wisconsin.

This focus on the necessity of a Wisconsin sales territory as a prerequisite of WFDL protection is the legacy of Swan Sales Corp. v. Jos. Schlitz Brewing Co.⁹ In that case, the Wisconsin Court of Appeals construed the WFDL to mean that the dealership, rather than the dealer, has to be situated in Wisconsin for purposes of the WFDL, and therefore held that a Wisconsin business that sold Schlitz beer products exclusively to military bases overseas was not a "dealer" as defined by the statute. By thus tying the WFDL's protections to the location of a dealer's customers, and looking only to the WFDL's "situated in" test to decide choice of law questions, the court in Generac not only confirmed that the WFDL will not protect a Wisconsin dealer who has no Wisconsin sales, but it implicitly approved the application of the WFDL to protect non-Wisconsin dealers whose sales territories include all or parts of Wisconsin.

The Procrustean Bed of WFDL Damages:
Morley-Murphy Co. v. Zenith Electronics Corp.

In Morley-Murphy Zenith terminated its independent dealers, including the plaintiff, Morley-Murphy, so it could sell its products directly to large retailers. As damages for Zenith's wrongful termination under the WFDL, the jury awarded Morley-Murphy $2,374,629 for lost profits that Morley-Murphy would have made, but for the termination, on projected sales of Zenith products. This amount included projected sales from Morley-Murphy's Wisconsin location as well as its locations in Iowa and Minnesota.

Zenith argued that awarding damages for future lost profits on sales from Morley-Murphy's Iowa and Minnesota locations was an extraterritorial extension of Wisconsin law in violation of the "dormant commerce clause," which is the limitation, implied by the U.S. Constitution's delegation to Congress of the power to regulate commerce among the several states, on a state's authority to regulate commerce outside its borders.¹⁰ The trial court rejected Zenith's commerce clause argument and confirmed the jury's damage award, noting that any extraterritorial effect was due to the fact that Zenith voluntarily entered into a multi-state dealership contract with a Wisconsin dealer. According to the trial court, this did not implicate the commerce clause because the projection of Wisconsin law into interstate commerce derived from a private source and not any attempt by the state of Wisconsin to project its protective regulation beyond its borders.¹¹

Sensitive to the commerce clause implications but without directly ruling on the constitutionality of the WFDL's extraterritorial effect, the court of appeals held that the WFDL does not apply to sales outside of Wisconsin. Since section 135.025(2)(d) of the Wisconsin Statutes expressly limits the application of the WFDL to the "extent consistent with the constitutions of this state and the United States," and given the troublesome constitutional questions that the extraterritorial application of the WFDL would raise, the court of appeals predicted that the Wisconsin Supreme Court would construe the WFDL as not extending to Morley-Murphy's Iowa and Minnesota sales. In reference to the view enunciated by the trial court that any extraterritorial effect in this case was due to the parties' voluntary decision to enter a contract that included a multi-state territory, the court noted that "[i]t appears to us quite odd to speak of party autonomy in a context where the parties are not permitted to opt out of a provision of state law."¹²Accordingly, on remand Morley-Murphy would not be entitled to make a claim for lost profits on its projected sales from its Iowa and Minnesota locations.

By drawing a line along the boundary between Wisconsin and non-Wisconsin sales territories, the court in Morley-Murphy for the first time imposed a geographical limitation on lost profits damages available under the WFDL. However, the brightness of that line was still open to question given the facts of the case. The lost profits damages that the court disallowed were for projected sales from Morley-Murphy's separate locations in Iowa and Minnesota to customers in those states. Those sales therefore constituted commercial activity wholly outside Wisconsin that arguably would have been unconstitutionally regulated by Wisconsin if the WFDL were construed to reach that far. Under these facts, the case appeared to leave room for the argument that lost profits from sales made from a dealer's Wisconsin location to customers in another state are still recoverable under the WFDL. In Generac the court foreclosed that argument.¹³

Generac Corporation v. Caterpillar Inc.

In 1992 Generac entered into a contract with Caterpillar that granted Generac the exclusive right to manufacture standby generator sets and sell them to Caterpillar's independent dealers under Caterpillar's "Olympian" trademark. The contract chose Illinois law and allowed either party to terminate it without cause upon two years' notice. Under the contract, Generac manufactured the generator sets at its Wisconsin plant and sold them to Caterpillar dealers in the United States and other countries. In the United States and Canada, the contract permitted Generac to sell Olympian products only to those Caterpillar dealers who Caterpillar designated as a Power Systems Distributor (PSD). No PSDs were located in Wisconsin.

Pursuant to the contract, Generac invested substantial amounts in the Olympian line, including amounts for engineering of Olympian products, sales and service training of Caterpillar dealer personnel, construction of a new Wisconsin production facility, and payment of access fees to Caterpillar. By 1996 Olympian sales were a significant percentage of Generac's total volume. Nevertheless, effective June 1, 1998, Caterpillar terminated the contract without cause under the two-year notice provision. Generac's resulting lawsuit against Caterpillar included a claim that the termination was a violation of the WFDL.

Granting Caterpillar's motion for partial summary judgment, the trial court held that the WFDL did not override the parties' contractual choice of Illinois law because Wisconsin law did not apply to Generac's Olympian dealership.¹⁴In deciding the choice of law issue, the trial court relied upon the choice of law analysis that the court of appeals had applied to a WFDL claim in Diesel Service Co. v. AMBAC International Corp.¹⁵

Diesel Service: A Two-step Method of Choice of Law Analysis

According to Diesel Service, the first question to be decided in WFDL cases is which state's law would apply without taking into account the contractual choice of law provision. This question must be decided by applying Wisconsin's traditional choice of law principles for contract cases, which require the court to determine which state has the most significant contacts with the transaction and the parties.¹⁶ This determination must be made in light of certain choice of law influencing factors: predictability, interstate and international order, simplification of the judicial task, the forum government's interest in the case, and the better rule of law.¹⁷

Only if this step points to Wisconsin law will the court go on to consider whether the WFDL applies. If the court then finds that the WFDL applies, the parties' contractual choice of non-Wisconsin law is unenforceable under section 135.025(3) of the Wisconsin Statutes, which provides that the effect of the WFDL cannot be avoided by contract.¹⁸

When the court in Diesel Service applied Wisconsin's choice of law principles it determined that Wisconsin law did not apply to the plaintiff's dealership agreement. Even though 34 percent of the plaintiff's sales of the defendant's products were in Wisconsin, the plaintiff was nevertheless a Minnesota corporation - its principal location was in Minnesota, and all orders, payments, and product shipments went through its Minnesota headquarters - all of which pointed to Minnesota as the primary place of performance and subject matter of the dealership agreement. Further, the defendant was a Delaware corporation with its principal office in South Carolina, and the parties' agreement chose South Carolina law. Since these non-Wisconsin contacts far outweighed the plaintiff's percentage of sales in Wisconsin, the court held that the application of Wisconsin's traditional choice of law principles pointed away from Wisconsin law. Thus, the plaintiff was not protected by the WFDL, even though the court found that the plaintiff's Wisconsin sales would have likely qualified the plaintiff's dealership as "situated in" Wisconsin for purposes of the WFDL.¹⁹

In an attempt to avoid this result, the plaintiff in Diesel Service tried to convince the court that Wisconsin's general choice of law rules did not apply and that the court should instead look directly to the WFDL, particularly the requirement that the dealership be situated in Wisconsin. Describing the plaintiff's argument as "creative," the Diesel Service court was nevertheless unpersuaded. According to the court, "it is quite clear that 'situated in' serves a specific purpose other than taking over the choice of law question."²⁰ The court explained that there are situations in which the parties have chosen Wisconsin law in their contract or in which Wisconsin has the most significant contacts, but the Wisconsin Legislature did not want the WFDL to apply.

Seven years after it rejected the plaintiff's "situated in" argument in Diesel Service as creative but unpersuasive, the Seventh Circuit adopted that very argument, sua sponte, in Generac.

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