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Minimum Purchase Requirement and Product Mark-Up Were Not Franchise Fees Under Minnesota Franchise Act

The federal Eighth Circuit Court of Appeals has affirmed the denial of an injunction sought by a distributor under the Minnesota Franchise Act. Coyne’s & Co., Inc. v. Enesco, LLC, 553 F.3d 1128 (8th Cir. Jan. 23, 2009). The distributor had sought to prevent the termination of its distributorship agreement. Coyne’s & Co. had entered into an exclusive North American Distributorship Agreement with Country Artist, Ltd. (“CA”) for a product line manufactured in England. Several years later, CA was placed into receivership and its assets were sold to Enesco, LLC. Soon thereafter, Enesco terminated Coyne’s distributorship and announced that it would sell CA’s products in the United States directly. The federal district court held that the agreement was not subject to the MFA because there was no “franchise fee” paid by the plaintiff.

On appeal, the Eighth Circuit noted Coyne’s admission that it did not pay what would normally be considered a direct franchise fee for the right to distribute CA’s products. The Eighth Circuit then analyzed whether Coyne paid an indirect franchise fee through either the minimum purchase requirement or a 35 to 50 percent product mark-up. The appeals court acknowledged that an unreasonable minimum purchase requirement could constitute an indirect franchise fee. Because Coyne had failed to assert that CA’s minimum purchase requirements were unreasonable, however, the district court’s ruling was upheld. With respect to the product mark-up, the Eighth Circuit sustained the finding that the product mark-up was not an indirect franchise fee, but rather reflected CA’s profits on its products, i.e., a bona fide wholesale price. Because there was no franchise fee paid by Coyne, the Eighth Circuit concluded that the federal court did not err in denying the injunction.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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