The Franchise Memorandum

In Kamco Industrial Sales, Inc. v. Lovejoy, Inc., 2011 U.S. Dist. LEXIS 25240 (E.D. Pa. Mar. 10, 2011), a commissioned sales representative sued the manufacturer for whom it sold products, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The sales representative agreement at issue required the plaintiff to sell the defendant’s power transmission products on an exclusive basis. The agreement term automatically renewed on a year to year basis, unless either party gave 60 days’ notice of nonrenewal. The agreement also contained a provision that defined certain customers as “house accounts.” For these customers, defendant could sell directly and the plaintiff would receive no sales commissions. The agreement broadly gave the defendant “the right to redefine these accounts.” As part of an effort to reduce overall costs and become more competitive in the marketplace, the defendant manufacturer sought to terminate the sales representative agreement in the middle of its term.  When plaintiff did not agree to terminate, the defendant elected to redefine the “house accounts” list so that it included substantially all of plaintiff’s customers.

The Eastern District of Pennsylvania determined that, although it had not yet done so, the Pennsylvania Supreme Court would adopt the concept of a covenant of good faith implied into every contract. The court also found that the defendant’s redefinition of the house accounts list to include all of the plaintiff’s customers amounted to a breach of the covenant because it exploited a provision giving the defendant broad discretion to deny the plaintiff any benefit under the agreement. Moreover, the defendant’s use of the house account clause to functionally end the parties’ relationship rendered the automatic renewal, notice, and termination provisions of the agreement meaningless. The court granted summary judgment in favor of the plaintiff.