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.

Choice of Law Rules in WFDL Cases Meet Occam's Razor: Court Overrules Diesel Service

The trial court in Generac had found that Generac's Olympian dealership probably satisfied the minimum requirements of the "situated in" Wisconsin element of the WFDL because ancillary parts of its dealership business that were conducted in Wisconsin, including sales and service training of Caterpillar personnel, were "clearly more than a de minimis aspect" of the dealership.²¹ Nevertheless, the trial court held that under Wisconsin's choice of law rules Illinois law would apply because of the predictability afforded by the choice of Illinois law provision in the parties' contract. Further, according to the trial court, Wisconsin's interest in the case was minimal because Generac's sales territory did not include Wisconsin, and Generac and Caterpillar were sophisticated parties of equal bargaining power.²² On appeal, Generac argued that the trial court misapplied the choice of law analysis prescribed by Diesel Service, and that if properly applied Diesel Service would require the application of Wisconsin law.

The court of appeals affirmed the trial court's dismissal of the WFDL claim, but by a significantly different route. Noting that Diesel Service "does not now reflect the interaction the Wisconsin courts have established between the statutory commands of the WFDL and the general choice of law rules Wisconsin follows," the court overruled "the part of Diesel Service that holds that a court is obliged to undertake a general conflicts analysis before it applies the statutory choice of law rule contained in the WFDL."²³ Notably, the court did not cite any intervening Wisconsin case after Diesel Service as establishing the "interaction" between the WFDL and general choice of law rules. Rather, as the "strongest support for the result we reach,"²⁴ the court cited Bush v. National School Studios Inc.,²⁵ the very case that the court in Diesel Service cited as proof that the Wisconsin Supreme Court "clearly viewed the choice of law question as separate and prior to the question of the specific WFDL requirements."²⁶ Bush supported the result in Generac, according to the court, because in Bush the Wisconsin Supreme Court looked directly to the WFDL in deciding whether to enforce a choice of Minnesota law clause in the parties' contract and "said not a word about general choice of law analysis."²⁷ Following this clue from Bush, the court determined that "[t]he WFDL specifies who can take advantage of its protections through its definitions of the terms 'dealer' and 'dealership,' and thus obviates the need to resort to general choice of law principles."²⁸

Having shed the choice of law test of the "cumbersome process Diesel Service endorsed,"²⁹ the court then considered the choice of law test it deemed contained in the WFDL. That is, whether Generac was the grantee of a dealership situated in this state. The court had no trouble finding that Generac was not, since the contract between Generac and Caterpillar authorized no sales in Wisconsin (since Wisconsin had no PSD within its borders). Without mentioning the trial court's conclusion to the contrary, the court of appeals held that the "substantial investments in Wisconsin that allowed [Generac] to manufacture product for distribution and sale elsewhere" were not the kind of "infrastructure," unaccompanied by in-state sales, that is enough under the logic of Swan Sales to render the dealership situated in Wisconsin.³⁰

Finally, the court noted that its decision in Morley-Murphy would foreclose Generac from "any possibility of recovering damages under the WFDL."³¹ That is because Generac cannot seek damages under the WFDL for lost sales "arising out of the termination of out-of-state dealerships."³²

The Aftereffects of Morley-Murphy and Generac

Morley-Murphy and Generac answer some questions regarding the WFDL's application in multi-state dealership cases while at the same time they raise additional issues for future resolution by the courts or the Legislature.

Relief available under the WFDL. Morley-Murphy and Generac prevent a WFDL plaintiff from recovering damages for lost profits on projected sales to out-of-state customers, even if such sales are made from a dealer's location in Wisconsin. However, this result raises the question of whether a dealer who has enough Wisconsin sales to be protected under the WFDL, but also has significant out-of-state sales, can obtain injunctive relief under section 135.06 against the termination of its entire dealership territory, or only the Wisconsin part.³³Similarly, in a multi-state dealership, the question arises whether sales made outside of Wisconsin count in determining the percentage of a dealer's total sales that constitutes sales of the grantor's products for purposes of determining if a community of interest exists under section135.02(3).

Location of sales. In Generac the court clarified that the dispositive factor in deciding if a dealership is "located in" Wisconsin is the location of sales, but it assumed that the location of sales is the location of the buyer, even when the dealer is a Wisconsin seller. However, under sections 402.106(6) and 402.401(2)(a), the place of sale is where title to the goods passes, which is the place of shipment if the contract requires or authorizes the seller to send the goods to the buyer but does not require delivery at destination. This raises the question of whether a Wisconsin dealer with no Wisconsin sales territory can nevertheless meet the "situated in" test if all of its sales to non-Wisconsin buyers are made F.O.B. the dealer's Wisconsin plant or warehouse.³⁴

WFDL's protection of non-Wisconsin dealers. Generac did not expressly overrule Diesel Service's finding that the Minnesota dealer's Wisconsin sales would have qualified it as "situated in" Wisconsin for purposes of the WFDL. The court, therefore, implied that the WFDL may protect non-Wisconsin dealers whose only connection with Wisconsin is having a Wisconsin sales territory. This result is consistent with the court's substitution of the "cumbersome" choice of law analysis based on the most significant contacts, an analysis that requires a court to look beyond the place of sales,³⁵ by the "situated in" analysis. However, it raises the question of whether a non-Wisconsin dealer's sales to Wisconsin customers is enough of a connection to the state to permit the state to regulate the terms of a dealership agreement between two non-Wisconsin parties without running afoul of the dormant commerce clause.³⁶ Further, since a federal court is to apply the choice of law rules of the forum state,³⁷ a court sitting in a state other than Wisconsin would not apply Wisconsin's "situated in" test to deter-mine which state's law applies, but the rules of the forum state. Thus, if other states' choice of law rules select the law of a state other than Wisconsin, non-Wisconsin dealers who sell in Wisconsin may have a strong incentive to bring WFDL claims in federal courts sitting in Wisconsin to take advantage of the lower threshold of the "situated in" test.

Kevin L. Keeler, U.W. 1985, is a shareholder with the Milwaukee law firm of Beck, Chaet, Molony & Bamberger S.C. He practices primarily in business law, real estate, and commercial litigation. Keeler was one of the attorneys representing Generac in its lawsuit against Caterpillar, and argued the case on behalf of Generac before the Seventh Circuit.

The WFDL's nonapplication to Wisconsin dealers without Wisconsin sales. In Generac the court clarified that a dealer's sales support activities and investment in Wisconsin do not suffice, without Wisconsin sales, to render the dealership "situated in" Wisconsin for purposes of the WFDL. The WFDL, therefore, will not protect a Wisconsin business that sells to customers out of state, even though that business may have many employees in Wisconsin, may own Wisconsin real estate or lease office and warehouse space from Wisconsin landlords, may purchase supplies and inventory from Wisconsin businesses, and may obtain financing from Wisconsin banks. This result seems inconsistent with the legislative purpose of the WFDL "[t]o protect dealers against unfair treatment by grantors."³⁸

Conclusion

In Morley-Murphy and Generac, the Seventh Circuit has narrowed the lost profits damages available under the WFDL to only those arising from sales in Wisconsin and has restricted WFDL protection to only those dealers, whether located in Wisconsin or not, who have a Wisconsin sales territory. By so doing, the court has answered some questions regarding the scope and application of the WFDL. However, these decisions also raise interesting and important issues that go to the heart of the WFDL's purpose as a statute that expresses significant public policy interests of the state of Wisconsin. Further developments in the career of the WFDL, both in the courts and, perhaps, the Legislature,³⁹ may be needed to resolve them.

Endnotes

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¹Wis. Stat. ch. 135.

²Wis. Stat. 135.03.

³Wis. Stat. 135.04.

⁴Wis. Stat. 135.02(2).

⁵Wis. Stat. 135.02(3).

⁶Morley-Murphy Co. v. Zenith Electronics Corp., 142 F.3d 373 (7th Cir. 1998).

⁷Generac Corp. v. Caterpillar Inc., 172 F.3d 971 (7th Cir. 1999).

⁸See Diesel Service Co. v. AMBAC Int'l Corp., 961 F.2d 635 (7th Cir. 1992) (holding that under Wisconsin's choice of law rules Wisconsin law did not apply to a Minnesota dealer with 34 percent of its dealership sales in Wisconsin, though the dealership was "situated in" Wisconsin for purposes of the WFDL). See also CSS-Wisconsin Office v. Houston Satellite Systems Inc., 779 F. Supp. 979 (E.D. Wis. 1991) (holding that under Wisconsin's choice of law rules Wisconsin law applied to an Indiana dealer with a Wisconsin branch office, and the dealership was "situated in" Wisconsin for purposes of the WFDL); Process Accessories Co. v. Balston Inc., 636 F. Supp. 448 (E.D. Wis. 1986) (holding that under Wisconsin's choice of law rules Wisconsin law did not apply to a Minnesota dealer with a Milwaukee office, and the dealership was not "situated in" Wisconsin for purposes of the WFDL).

⁹126 Wis. 2d 16, 374 N.W.2d 640 (Ct. App. 1985).

¹⁰See Morley-Murphy Co. v. Zenith Electronics Corp., 942 F. Supp. 419, 422 (W.D. Wis. 1996).

¹¹See 942 F. Supp. at 424-25.

¹²142 F.3d at 381.

¹³The court issued its decision in Morley-Murphy approximately one week before the oral argument in Generac.

¹⁴See Generac Corp. v. Caterpillar Inc., No. 96-C-426-S, U.S. Dist. LEXIS 20855 (W.D. Wis. Oct. 18, 1996).

¹⁵961 F.2d 635 (7th Cir. 1992).

¹⁶The most significant contacts the court is to consider are derived from section 188 of the Second Restatement of Conflicts: the place of contracting, place of negotiating, place of performance, location of the subject matter of the contract, and the domicile, place of incorporation, and place of business of the parties. Diesel Service, 961 F.2d at 639-40. In dealership cases, the place of performance and subject matter are the most significant. See Id.

¹⁷See Diesel Service, 961 F.2d at 640 (quoting Heath v. Zellmer, 35 Wis. 2d 578, 151 N.W.2d 664 (1967)).

¹⁸See Bush v. National School Studios Inc., 139 Wis. 2d 635, 407 N.W.2d 883 (1987).

¹⁹See 961 F.2d at 644-45.

²⁰Id. at 638.

²¹No. 96-C-426-S, U.S. Dist. LEXIS 20855, at *15 (W.D. Wis. Oct. 18, 1996).

²²Id. at *15-16.

²³172 F.3d at 974-75.

²⁴172 F.3d at 975.

²⁵139 Wis. 2d 635, 407 N.W.2d 883 (1987).

²⁶961 F.2d at 638.

²⁷172 F.3d at 975. The Diesel Service court came to the opposite result in its reading of Bush, focusing instead on the Bush court's comment that the defendant's failure to argue that any other state's law applied if it lost on the contract choice of law clause was an "acknowledgment by [the defendant] that Wisconsin law applies if the choice of law clause is disregarded." 961 F.2d at 637-38, (quoting Bush, 407 N.W.2d at 888). According to the Diesel Service court, "[i]f the test of whether Wisconsin law applied were only the specific requirements of the WFDL, then the court's statement in Bush would make no sense, since the defendant certainly was contesting whether the requirements of the WFDL were met." 961 F.2d at 638.

²⁸172 F.3d at 976.

²⁹Id. at 975.

³⁰Id. at 976. The court noted that in Swan Sales "Swan plainly had substantial Wisconsin operations too, if it was handling beer sales to the American military in a dozen foreign countries, but the court there did not find that support services in Wisconsin made any difference." Id.

³¹172 F.3d at 976.

³²Id.

³³In Diesel Service, the court noted that "[t]here is nothing in Swan ... that supports splitting dealerships up, and having the WFDL apply only to a part." 961 F.2d at 645. Perhaps that dicta is no longer relevant in light of Morley-Murphy.

³⁴This argument may find some support in Dean Foods Co. v. Brancel, where the court had to decide whether a Wisconsin statute prohibiting dairies from discriminating between milk producers in the price paid for milk applied to milk sales to an Illinois dairy. Noting that Commerce Clause considerations would require that the statute be construed not to apply to sales outside the state, the court predicted that "Wisconsin courts would hold that the enabling statute applies only to sales of milk that occur in Wisconsin and they would define 'sale' according to the transfer of title and risk." 22 F. Supp. 2d 931, 940 (W.D. Wis. 1998). Since the Illinois dairy did not take title to the milk until it reached the dairy's Illinois plant, the sales were not subject to the statute.

³⁵Diesel Service observed that the place of sales is a poor indicator of which state's law should apply, since sales in a particular state may vary from year to year: "determining if Wisconsin law applied on that basis would be a nightmare." 961 F.2d at 642.

³⁶In CSS-Wisconsin Office v. Houston Satellite Systems Inc., the court refused to dismiss, as an unconstitutional extension of Wisconsin law in violation of the commerce clause, a WFDL claim by an Indiana dealer against a Colorado grantor. The dealer had a facility in Wisconsin to which the grantor's products were shipped, and the dealer sold the grantor's products in Wisconsin. Noting that the dealership involved commerce "that actually takes place in Wisconsin, the court [was] not persuaded that applying the Wisconsin Fair Dealership Law to the distributor relationship would offend the commerce clause." 779 F. Supp. 979, 986 (E.D. Wis. 1991).

³⁷See Diesel Service, 961 F.2d at 637, (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941)).

³⁸Jungbluth v. Hometown Inc., 201 Wis. 2d 320, 328, 548 N.W.2d 519, 522 (1996). In Jungbluth the Wisconsin Supreme Court acknowledged the purpose of the WFDL is to protect the "individual business person, or dealer, who inherently occupies a position of inferior economic and inferior bargaining power." 201 Wis. 2d at 329, 548 N.W.2d at 523.

³⁹Legislative action to render the statute more favorable to Wisconsin dealers is probably remote. Not only did the Morley-Murphy court place a constitutional barrier in the way of protecting Wisconsin dealers with sales territories outside Wisconsin, an organized political impetus on behalf of dealers is probably lacking. As a recent article in this publication observed, the gasoline dealers who originally pushed for the law "are no longer protected by the WFDL, their rights as state 'dealers' having been preempted more than 20 years ago by the federal Petroleum Marketing Practices Act." Robert B. Corris, OPEC, Gas Lines, and the Wisconsin Fair Dealership Law, 72 Wis. Law. 26 (April 1999).