The Franchise Memorandum

The United States Court of Appeals for the Eighth Circuit affirmed a district court award of summary judgment in favor of a Minnesota supplier, finding that the supplier did not breach its contract with the appellant distributor. Watkins Inc. v. Chilkoot Distrib., Inc., 2013 U.S. App. LEXIS 13716 (8th Cir. July 8, 2013). The parties had entered into a series of two agreements through which Chilkoot became a Watkins sales associate in Canada. Chilkoot then recruited a new sales associate, the Lambert Group, which became a profitable part of Chilkoot’s downline sales network. Watkins subsequently changed the classification of the Lambert Group to “manufacturing representative” and as a result, Chilkoot was no longer eligible to receive commissions by the Lambert Group. Watkins, the supplier, sought a declaratory judgment that it did not breach its contract with Chilkoot by reclassifying the Lambert Group. Chilkoot counterclaimed for breach of contract and equitable remedies.

To prove breach of contract under Minnesota law, which governed the case, the breaching party must show (1) formation of a contract, (2) performance by the plaintiff of any conditions precedent to its right to demand performance by the defendant, and (3) breach of the contract by the defendant. The court held that Chilkoot did not have a cause of action for breach of contract because neither contract by its terms prohibited Watkins from reclassifying a sales associate as a manufacturing representative. Chilkoot presented no case law from Minnesota—or any other authority—that found a breach of contract when the agreements were silent on reclassification. The court also found that the action by Watkins did not breach the implied covenant of good faith and fair dealing. Although the covenant of good faith and fair dealing generally is read into Minnesota contracts, it serves only to enforce existing contractual duties, not to create new ones.