The Franchise Memorandum

A federal court in Illinois granted a manufacturer’s motion to dismiss in a dispute over the nonrenewal of a distribution agreement. Fluid Power Engr. Co. v. Cognex Corp., 2022 WL 16856395 (N.D. Ill. Nov. 10, 2022). Beginning in 2015, the parties entered into a series of one-year “strategic partnership” agreements under which manufacturer Cognex granted distributor Fluid Power rights to sell its machine vision and industrial barcode reader systems in Illinois and Iowa. Under the agreement, Fluid Power was required to purchase demonstration equipment and to hire and train specialized employees. In late 2021, Cognex informed Fluid Power that it would not renew the agreement for the next year and Fluid Power sued for violation of the Illinois Franchise Disclosure Act and breach of the covenant of good faith and fair dealing, arguing that the required purchases and training constituted franchise fees making the Franchise Disclosure Act applicable. Cognex moved to dismiss all claims.

The court granted the motion, dismissing Fluid Power’s claims without prejudice. It held that the purchase and training obligations were ordinary business expenses rather than indirect franchise fees, citing precedent that the “franchise fee” requirement for the statute’s application ensures “that only those entities that have made a firm-specific investment are protected under the franchise laws; where there is no investment, there is no fear of inequality of bargaining power.” Further, the court held that exercise of a contractually stipulated term permitting nonrenewal is consistent with good faith where two sophisticated parties have entered into an agreement.