A farm equipment dealer brought suit under the Arkansas Franchise Practices Act (AFPA) to prevent its supplier company, CNH, from terminating a relationship with that dealer, who had contracted to sell the supplier’s branded farm equipment. The federal district court hearing the case asked the Arkansas Supreme Court to answer three questions of Arkansas law for which there is no controlling precedent but which may be determinative. Among the three questions accepted for certification, the court agreed to decide whether the market withdrawal of a trademarked product constitutes “good cause” to terminate a franchise under Arkansas law.
On Nov. 24, the NAM and other groups filed an amicus brief urging the Arkansas Supreme Court to interpret the AFPA to permit a franchisor to make a good faith, commercially reasonable and nondiscriminatory withdrawal of a trademarked product from the market.
First, we argued that this interpretation best advances the law’s dual purposes of promoting the development of franchises and protecting franchisees from exploitation after they develop a local market for a trademarked product. Additionally, we pointed out that the history of franchise laws suggests that the aim was to “level the playing field” between franchisors and franchisees, not to immunize such agreements from economic reality.
Second, we argued that allowing market withdrawal based on good faith, commercially reasonable, and nondiscriminatory business decisions better aligns Arkansas with other states, none of which do what the plaintiffs want, namely, to wholly reject a market withdrawal defense.
Third, our proposed interpretation of the AFPA avoided calling it into constitutional doubt. An earlier Arkansas law that capped royalty payments paid by franchisees was declared unconstitutional on the ground that it exceeded the Arkansas legislature’s police power, as it conferred a unilateral economic benefit on franchisees. The interpretation proposed by plaintiffs likewise confers a unilateral benefit on franchisees to obligate franchisors in perpetuity, regardless of the franchisor’s economic circumstances, unless the franchisor pays the franchisee an “exit toll.”
Regrettably, on 1/22/09, the Arkansas Supreme Court ruled that market withdrawal of a trademarked product does not constitute "good cause" to terminate a franchise under Arkansas law. The court reasoned that because market withdrawal was not specifically listed as an example of good cause for termination within the law, the legislature must not have intended to include it as one.
The current economic climate can be expected to spawn more dealer termination litigation. For example, the NAM participated in a similar case, FMS Inc. v. Volvo Construction Eqpt. (7th Cir.), decided in 2009.