The Franchise Memorandum

The United States District Court for the District of Minnesota recently granted summary judgment to a beverage manufacturer, as the court concluded that the manufacturer had not violated the Minnesota Franchise Act by terminating the plaintiffs’ distributorship agreements. In Day Distributing Co. v. Nantucket Allserve, Inc., 2008 WL 2945442 (D. Minn. July 25, 2008), the court granted summary judgment in favor of Cadbury, the manufacturer, on all claims presented by the plaintiffs. The court first determined that the plaintiffs were not franchisees under the “business opportunity” provision of the MFA. This rarely cited provision of the statute, which no Minnesota court had yet to interpret, required the court to address the meaning of the phrase “start a business.” The plaintiffs argued that Cadbury had enticed them to start a business by expanding their offerings from beer, their primary business, to include Cadbury’s upscale “Stewarts” sodas, and that they thus qualified for the protection of this provision. The court, however, found that Cadbury did not offer the plaintiffs an opportunity to start a business by distributing Stewart’s sodas—rather Cadbury offered them an opportunity to add a line of products to an already existing business. Thus, the plaintiffs were not franchisees under the business-opportunity provision of the MFA. Were it to hold otherwise, the court noted that “the scope of the MFA would be breathtakingly broad.”

The court also rejected the plaintiffs’ argument that they were franchisees under the MFA because they met all three required elements of a franchise. Cadbury denied that the plaintiffs had paid a franchise fee. The plaintiffs argued that by purchasing supplies and marketing materials from Cadbury, and participating in required marketing, advertising, and discount programs, they had paid an indirect franchise fee. The court disagreed, finding no evidence that any of the marketing or advertising expenses the plaintiffs had incurred were unreasonable or lacked a valid business purpose, and there was no evidence that Cadbury ever told the plaintiffs they had to participate in any of these programs for the right to continue the business. Thus, there were no indirect franchise fees paid to Cadbury and the plaintiffs were not franchisees under the MFA.