The Franchise Memorandum

A federal court in Massachusetts has dismissed franchise claims brought against a manufacturer, concluding that the distributor had failed to identify a franchise fee that would qualify it for protection from non-renewal under state law. Cognex Corp. v. Air Hydro Power, LLC, 2023 WL 5833112 (D. Mass. Sept. 8, 2023). The parties entered into a distribution agreement under which the Cognex granted distributor Air Hydro the right to sell Cognex’s products within a specified sales territory. In November 2021, Cognex informed Air Hydro that it would not renew the agreement. Air Hydro sued in Florida state court for alleged breaches of the distribution agreement and Cognex filed an action in the Massachusetts federal court seeking a declaratory judgment. Air Hydro eventually dismissed the Florida suit and instead filed eight counterclaims in Massachusetts, alleging violations of the Florida Franchise Act, the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), the Indiana Franchise Act (IFA), the Indiana Deceptive Franchise Practices Act (IDFPA), breach of the covenant of good faith and fair dealing, interference business relationships, promissory estoppel regarding promises to renew the distribution agreement, and restitution for unjust enrichment. Cognex moved to dismiss all counterclaims. The court granted Cognex’s motion. 

First, the court held that the distribution agreement’s Massachusetts choice of law provision barred Air Hydro’s Florida Franchise Act Claim. Next, the court held that the claims under the FDUTPA, IPA, and IDFPA all failed because Air Hydro had not pled facts sufficient to show a franchise relationship between the parties. Specifically, Air Hydro had not established that Cognex required a payment or fee from Air Hydro. The court held that the purchase of demonstration equipment, payment of software licensing fees, the cost to hire and train employees, and the cost to build demonstration facilities were a “sunk cost expended to further Air Hydro’s business goals,” not a fee or required payment. Furthermore, the court held that Air Hydro could not assert a promissory estoppel claim related to the nonrenewal because the distribution agreement required an agreement to renew to be in writing and it contained in integration clause disclaiming extra-contractual, oral promises. The court also dismissed Air Hydro’s tortious interference claim against because the distribution agreement expressly allowed Cognex’s allegedly improper conduct.