The Franchise Memorandum

A federal court in Ohio partially granted a manufacturer's motion to dismiss certain claims in a suit challenging the termination of a distribution agreement brought by one of its former dealers. Palmer-Donavin Manufacturing Co. v. Rheem Sales Co., 2014 U.S.  Dist. LEXIS 82993 (S.D. Ohio June 18, 2014). Palmer-Donavin had been a dealer of the manufacturer Rheem's heating, ventilation, and air conditioning equipment for more than forty years pursuant to a series of written distribution agreements, the last of which had expired in 2009. After 2009, they had continued their relationship through Rheem's approval of Palmer-Donavin's yearly sales plan. The complaint alleged that, after the written contract had lapsed, Rheem convinced Palmer-Donavin to take various actions to promote its products and discontinue the sale of any of its competitor's HVAC equipment, based on the understanding that the relationship would continue. Nonetheless, without Palmer-Donavin's knowledge, Rheem entered into discussions with a different distributor and eventually terminated its relationship with PalmerDonavin in early 2013. Palmer-Donavin brought claims for breach of a written contract, breach of an oral agreement, promissory estoppel, breach of fiduciary duty, and negligent misrepresentation, among others. Rheem moved to dismiss on the ground that the complaint failed to state a claim upon which relief could be granted.

The court denied the motion as to some of the claims. It held that the lapsed written agreement, which permitted Rheem to terminate the relationship at any time, no longer governed the relationship between the parties. Although expired written commercial contracts are generally enforced if the parties continue to act according to their terms, the court noted that these parties had significantly altered their positions by moving from a nonexclusive to an exclusive distribution relationship. Thus, it concluded that they were no longer operating under the expired written agreement, but instead had formed a series of new contracts evidenced by their agreed-to annual sales plans. Since the new agreements arguably prohibited Rheem from terminating the relationship before the end of the calendar year, the court rejected Rheem's attempt to dismiss Palmer-Donavin's breach of contracts claims. The court also kept Palmer-Donavin's promissory estoppel claim alive because it sufficiently alleged that it had taken various actions in reliance on explicit assurances from one of Rheem's employees that the relationship would not be terminated. The court did dismiss Palmer-Donavin's claim for breach of a fiduciary duty because, although close and long-lasting, the parties relationship was essentially "arm's-length." Similarly, the court dismissed Palmer-Donavin's claim for negligent misrepresentation because the parties had not been in the kind of "special relationship" that such claims require.