In Louis Degidio, Inc. v. Industrial Combustion, LLC, Louis Degidio, Inc. (Degidio) and Louis Degidio Services, Inc. (Degidio Services) sued Industrial Combustion, LLC (IC), a manufacturer of "institutional boiler system" burners, for breach of a sales representative agreement.
In 2007, IC and Degidio executed a three-year Non-Exclusive Sales Representative Agreement (Agreement). Degidio Services was not a party to the Agreement. However, an IC representative, John Stupec, explicitly promised Degidio's representative that "the signature of [Degidio's representative] would be regarded by IC as a signature made on behalf" of both Degidio and Degidio Services. Stupec also assured Degidio and Degidio Services that both companies could "keep doing what [they had] been doing for 60 years" if each "adequately performed" their services.
Relying on these assurances, Degidio's representative signed the Agreement, and the parties thereafter treated Degidio and Degidio Services as one entity. The Agreement stipulated that (1) Degidio could not assign the Agreement's rights or responsibilities without the express, written consent of IC, and (2) either party could terminate the Agreement without cause.
In 2010, Degidio ceased its business activities, and Degidio Services stepped into Degidio's shoes and started purchasing parts — sold at above-wholesale price — from IC. To remain competitive, IC did not require its distributors to buy parts from IC and offered a price-match program. IC also sent at least one sales-target email to Degidio Services even though it had never terminated a sales representative for failing to meet the target. Degidio Services met the target, but relations between the parties soured anyway. In 2019, IC gave Degidio notice of its intention to terminate the distributorship.
Degidio and Degidio Services sued IC in the U.S. District Court for the District of Minnesota, seeking declaratory judgment that the Minnesota Franchise Act (MFA) precludes termination without good cause and damages for breach of contract and promissory estoppel. The district court dismissed Degidio and Degidio Services' claims for failure to state a claim, and the plaintiffs subsequently appealed to the Eight Circuit Court of Appeals. On appeal, the plaintiffs argued the MFA's for-cause termination requirement applied and overrode the Agreement, which allowed for termination without cause. Degidio and Degidio Services additionally argued Stupec's promise (that the parties would continue doing business together if the distributors performed adequately) created an implied oral contract or, alternatively, induced their detrimental reliance.
As a threshold matter, a franchise must first exist under the MFA before it can qualify for the protection it provides. A franchise exists under Minnesota law when the franchisee (1) "has the right to distribute goods or services using the franchisor's trade name, trademark, or similar commercial symbol; (2) shares a community of interest with the franchisor in marketing goods or services; and (3) pays a franchise fee." The court focused on the issue of payment of the fee.
Under the MFA, "any fee . . . that a franchisee . . . is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement" is a franchise fee. Franchise fees may be indirect, such as price markups on goods above the bona fide wholesale price. These types of fees must demonstrate "evidence of compulsion accompanied by the threat of termination."
The Eighth Circuit held that Degidio Services' payments to IC for parts constituted neither a direct nor indirect franchise fee. The court reasoned that because (1) the price for parts would have been the same regardless of whether plaintiffs bought them, (2) the price-match program was merely an inducement, not a purchase requirement, and (3) the sales-target email never demanded compliance, there were no threats of termination for non-payment or requirements to pay IC above the bona fide wholesale price. Thus, Degidio Services could not seek relief under the MFA.
The court then analyzed the breach of contract claim. First, the court noted that because (1) IC and Degidio executed the Agreement understanding that Degidio and Degidio Services were to be treated as the same entity and (2) Degidio Services later "stepped into the shoes of [Degidio]" once Degidio stopped its business activities, Degidio Services was bound by the written terms of the contract. The court then held Minnesota contract law prohibited contradictory oral statements from modifying the terms of a written contract. Moreover, Stupec's promise did not alter the Agreement's termination provision. The court also noted that even if the parties had entered an implied oral contract with no temporal limit — as Degidio Services argued — such contracts are still terminable at will by either party.
Finally, the court of appeals affirmed the district court's dismissal of the promissory estoppel claims. A plaintiff alleging promissory estoppel claims under Minnesota law must show "the promisor intended to induce reliance and such reliance occurred." Reliance must be reasonable, and reliance on oral representations that completely contradict the written terms in an agreement are unreasonable as a matter of law. The court held that any reliance on Stupec's promises concerning the term of the Agreement was unreasonable because they contradicted the Agreement's express termination provision.
This case is instructive because it illustrates what qualifies as a franchise fee under the MFA. The case also demonstrates the importance of a contract's written terms, rather than contradictory, oral statements.
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