FMS, Incorporated v. Volvo Construction Equipment N ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 07-1896 & 07-2016
FMS, INCORPORATED ,
a Maine corporation,
Plaintiff-Appellee,
Cross-Appellant,
v.
V OLVO C ONSTRUCTION E QUIPMENT
N ORTH A MERICA, INCORPORATED ,
Defendant-Appellant,
Cross-Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 8143—Charles P. Kocoras, Judge.
A RGUED JANUARY 25, 2008—D ECIDED M ARCH 4, 2009
Before F LAUM, R OVNER, and S YKES, Circuit Judges.
S YKES, Circuit Judge. Like many states, Maine has a
franchise statute that prohibits the termination of a fran-
chise absent “good cause.” M E. R EV. S TAT. A NN. tit. 10,
§ 1363(3)(C) (2006). FMS, Inc., was an authorized dealer
of Samsung excavators in a territory that encompassed
2 Nos. 07-1896 & 07-2016
part of the State of Maine. Volvo Construction Equipment
North America, Inc., acquired Samsung’s construction-
equipment manufacturing business and also assumed its
contractual obligations to its dealers. Volvo did not,
however, acquire the Samsung trademark or trade
name. Instead, Volvo was authorized to continue to
manufacture Samsung-brand excavators for a limited
period of three years. Volvo thus began what it called
the “Volvoization” of the excavator line; changes were
made to the excavator’s design, and the excavators were
rebranded with the “Volvo” trademark. In the course of
this transition, Volvo eventually terminated many of
the Samsung dealerships, including FMS.
FMS and five other dealers sued Volvo asserting a
multitude of claims for relief under the laws of several
states. The district court entered summary judgment
for Volvo on all claims. The dealers appealed and we
affirmed, with one exception: We reinstated FMS’s claim
under the Maine franchise law. As things stood at that
point in the litigation, there remained a factual dispute
over whether Volvo had good cause under the Maine
statute to terminate its relationship with FMS. Cromeens,
Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 391 (7th
Cir. 2003). On remand, following completion of dis-
covery, FMS and Volvo both moved for summary judg-
ment. The district court denied the motions and sub-
mitted the case to a jury, which determined that Volvo
lacked good cause and owed substantial damages to
FMS. Volvo appeals.
We reverse. The franchise agreement in question ap-
pointed FMS as an authorized dealer of Samsung con-
Nos. 07-1896 & 07-2016 3
struction equipment, a brand that Volvo, Samsung’s
successor, discontinued. Under the Maine franchise law,
discontinuation of the franchise goods—here, Samsung-
brand equipment—is good cause for termination. Accord-
ingly, Volvo was entitled to judgment in its favor.
I. Background
The background facts are described in our earlier opin-
ion, Cromeens, 349 F.3d at 382-84; we reiterate only
those relevant to FMS’s claim under the Maine
franchise law. In 1997 FMS entered into a dealer agree-
ment with Samsung Construction Equipment America
Corporation authorizing FMS to sell “[a]ll Samsung
Construction Equipment for sale in North America” on
a nonexclusive basis in a territory covering a portion of
the State of Maine. The relationship didn’t last very long.
In 1998 Samsung decided to sell its construction-
equipment business to Volvo, a competitor. Under the
deal, Volvo acquired Samsung’s construction-equipment
division, including its factory and the right to use
Samsung’s excavator designs. Volvo also assumed
Samsung’s contractual obligations to its dealers.
Volvo did not, however, acquire the Samsung trade-
mark or trade name; instead, Volvo was authorized to
manufacture and sell excavators under the Samsung
name for a period of three years following the acquisi-
tion. For a short time it did so, distributing the products
through Samsung’s network of dealers. Meanwhile,
however, it began the process of “Volvoization,” gradually
introducing changes to make the excavators more
4 Nos. 07-1896 & 07-2016
Volvo-like. When that process was completed in the fall
of 1999, Volvo began to market the excavators under its
own name. As one of Volvo’s sales bulletins described
it: “With these new Volvo excavators, we have taken a
good excavator, the Samsung, and made it better, offering
our dealers a wider range of marketing potential.”
This dispute soon followed. When Volvo completed its
redesign and rebranding of the excavators, it terminated
the agreements with a majority of the Samsung dealers,
including FMS. FMS and five of the terminated dealerships
brought this suit against Volvo alleging (among other
claims) breach of contract and wrongful termination
under various state-franchise statutes. The district court
granted summary judgment in favor of Volvo—a decision
that, for the most part, we affirmed when the case was
last before this court. Cromeens, 349 F.3d at 399. As to
FMS’s claim under the Maine franchise law, however,
we reversed the judgment.
More specifically, we held that the Maine franchise law
“evidences a strong public policy against contracts that
violate the franchise law generally” and therefore
applies “even when contracts purport to waive its
protections.” Id. at 391. Accordingly, we concluded as a
matter of law that “FMS is entitled to the protections of the
Maine franchise law.” Id. The statute requires “good cause”
before a manufacturer may terminate a franchise, and
further provides that “[t]here is good cause when the
manufacturer discontinues production or distribution
of the franchise goods.” M E. R EV . S TAT. A NN. tit. 10,
§ 1363(3)(C), (3)(C)(4). We noted that the parties dis-
Nos. 07-1896 & 07-2016 5
agreed over whether Volvo had discontinued production
of the “franchise goods” within the meaning of this
provision. Volvo maintained that it had, while the
dealers contended that because Volvo had made only
“modest improvements to some of the excavators and
rebranded them[,] . . . the excavators essentially continued
to be sold in a form covered by the Dealer Agreements.”
Cromeens, 349 F.3d at 391. Based on this framing of the
dispute, we concluded that “[a]t this stage of the pro-
ceedings, we believe there is a genuine factual dispute
over whether Volvo had good cause to terminate FMS”
and remanded the claim to the district court. Id.
Back in the district court, the parties completed discovery
and filed cross-motions for summary judgment. Volvo
argued that it had good cause to terminate the FMS
dealer agreement because it was no longer manu-
facturing Samsung-brand excavators. In its view the
“franchise goods” under the statute and the terms of the
dealer agreement included only Samsung-brand con-
struction equipment, so rebranding the excavators
amounted to a discontinuation of the franchise goods
within the statute’s definition of good cause. The district
court rejected this argument, concluding that rebranding
alone did not qualify as discontinuation of the franchise
goods. In its view, “discontinuation” occurred only if
Volvo made such substantial changes to the excavators
that they could be considered a distinct product. On
that issue there were disputed facts, so the court denied
both motions for summary judgment and the case was
tried to a jury.
6 Nos. 07-1896 & 07-2016
At the close of the evidence, Volvo unsuccessfully
moved for judgment as a matter of law, once again
arguing that its rebranding had been the equivalent of a
discontinuation of the franchise goods. The court again
rejected the argument, this time adding that it had been
implicitly rejected by this court in the first appeal. The case
was then submitted to the jury. On the central issue of
whether Volvo had “discontinued the franchise goods” and
therefore had “good cause” to terminate the franchise
relationship under the Maine statute, the jury was in-
structed that it must decide whether FMS had proven, by
a preponderance of the evidence, that as of the date of
termination, “Volvo had not substantially changed the
excavator FMS had been buying from Volvo.”
The jury determined that the changes Volvo made to the
rebranded excavators were not substantial enough to
constitute a discontinuation as defined by the court’s
instruction and that Volvo therefore lacked good cause
to terminate its relationship with FMS. For that improper
termination, the jury awarded damages of $2.1 million.
Volvo moved posttrial for judgment as a matter of law or,
in the alternative, for a new trial, reiterating its argu-
ment that the district court had misconstrued both the
Maine statute’s “discontinuation” provision and the
dealer agreement. The district court denied the motion. The
court also denied FMS’s motion for an award of prejudg-
ment interest and attorneys’ fees. Volvo appealed the
judgment, and FMS cross-appealed the denial of attorneys’
fees.
Nos. 07-1896 & 07-2016 7
II. Analysis
The Maine courts have not interpreted the Maine fran-
chise law, but we have previously observed as a
general matter that the purpose of state franchise and
dealership laws “is to protect franchisees who have
unequal bargaining power once they have made a firm-
specific investment in the franchisor.” Wright-Moore Corp.
v. Ricoh Corp., 908 F.2d 128, 135 (7th Cir. 1990). When
a manufacturer appoints a dealer and authorizes the
dealer to use its trademark, the dealer has an incentive to
promote that brand—for example, by investing in brand-
specific inventory and facilities; by advertising the prod-
ucts by their brand name; and by providing brand-name
service, often according to specifications required by the
manufacturer. But this firm- or brand-specific investment
poses a potential danger to dealers. Once a dealer sinks
time and money into developing a brand’s reputation in
its territory, there is an opportunity for the manufacturer
to free ride off this investment by terminating the
franchise agreement, opening its own stores, and then
earning an unfair profit from the local product loyalty
developed by the dealer. Id.; see also Morley-Murphy Co. v.
Zenith Elecs. Corp., 142 F.3d 373, 374 (7th Cir. 1998) (Wis-
consin law) (“Dealers invest in a great deal of firm-specific,
or brand-specific, capital, in the goods that they carry,
and many states have concluded that this leaves
the dealers vulnerable to opportunistic manufacturer
behavior . . . .”); Kenosha Liquor Co. v. Heublein, Inc., 895
F.2d 418, 419 (7th Cir. 1990) (Wisconsin law) (“We have
deduced from the structure and history of the [dealership]
statute a central function: preventing suppliers from
8 Nos. 07-1896 & 07-2016
behaving opportunistically once franchisees or other
dealers have sunk substantial resources into tailoring
their business around, and promoting, a brand.”).
We have noted that the magnitude of this risk is open
to debate. If a franchisor did attempt to free ride off the
investment of a franchisee, it would likely not be in the
franchise business for long; its reputation would quickly
be shot, leaving it unable to recruit future franchisees to
invest in its product line. See Fleet Wholesale Supply Co. v.
Remington Arms Co., 846 F.2d 1095, 1097 (7th Cir. 1988).
Still, Maine and many other states have viewed abusive
termination as a real possibility and therefore prohibit
manufacturers from terminating franchise agreements
without good cause.
What amounts to good cause isn’t always clear. Most
franchise-protection statutes define good cause to
include, at a minimum, the failure of the dealer to
comply with a material term in the franchise agreement,
and if the term in question is one that relates to the
dealer’s sales or service performance, the dealer is usually
entitled to notice and an opportunity to cure. See, e.g.,
W IS. S TAT. § 135.03, .04; 815 ILL. C OMP. S TAT. A NN . 705/19.
The Maine franchise law contains such a definition, see
M E. R EV. S TAT. A NN. tit. 10, § 1363(3)(C)(1), (2), but it goes
further. The statute also provides that “[t]here is good
cause when the manufacturer discontinues production
or distribution of the franchise goods.” Id. § 1363(3)(C)(4).
Whether Volvo had good cause under this subsection
of the definition was the subject of our earlier remand.
In the district court, Volvo argued that the “franchise
goods” under this provision, as applied here, means
Nos. 07-1896 & 07-2016 9
Samsung-brand construction equipment, and therefore
its rebranding of the excavators under the Volvo name
constituted a discontinuation of the franchise goods. The
district court thought that our opinion in the first
appeal had implicitly rejected this argument and that
Volvo was thus prohibited from raising it under the law
of the case doctrine. This was understandable but ulti-
mately incorrect. In the prior appeal, the issue was
whether Maine’s franchise statute governed the dealer-
ship relationship between FMS and Volvo. We con-
cluded that it did and remanded to the district court
because there were facts in dispute on whether Volvo had
violated the statute by terminating FMS without good
cause. Cromeens, 349 F.3d at 391.
It is true, as FMS notes, that Volvo raised its rebranding
argument in the prior appeal. Our opinion briefly mentions
the argument, as well as FMS’s counterargument that
Volvo’s mere rebranding of the excavators with only
modest design changes was insufficient to constitute a
discontinuation of the franchise goods. Id. But our
opinion did not consider these arguments on the merits,
concluding only that “[a]t this stage of the proceedings,
we believe there is a genuine factual dispute over
whether Volvo had good cause to terminate FMS.” Id.
Therefore, we remanded “for trial as to the good cause
issue under Maine law.” Id.
Accordingly, our earlier treatment of this issue was not
an implicit rejection of Volvo’s argument but a refusal to
decide it at that juncture of the case. The district court had
not previously addressed the applicability of the Maine
10 Nos. 07-1896 & 07-2016
statute, much less the issue of good cause. Id. at 389 (“[F]or
reasons not apparent from the record, the district court
never ruled on the applicability of the . . . Maine stat-
ute[].”). When the parties brief an issue that has not been
addressed by the district court, it is not unusual for
this court to remand so that the district court may con-
sider the issue in the first instance. Cf. Turner v. J.V.D.B.
& Assocs., Inc., 330 F.3d 991, 999 (7th Cir. 2003) (declining
to decide cross-motion for summary judgment because
the district court should “adjudicate [those arguments] in
the first instance”). Accordingly, after addressing the
threshold legal question of the applicability of the Maine
statute, we went no further than to sketch the argu-
ments on the issue of good cause and remand the claim
for further development and for consideration of what
then appeared to be disputed facts. As we will explain
in a moment, whether Volvo’s rebranding qualifies as a
discontinuation of the franchise goods depends largely
on the definition of “franchise” in the Maine statute
and the language of the dealer agreement, neither of
which was analyzed in our prior opinion.
Accordingly, we reject FMS’s contention that Volvo is
prohibited from raising this argument on this second
appeal and proceed now to consider it on the merits. The
statutory text states that good cause to terminate a fran-
chise exists “when the manufacturer discontinues produc-
tion or distribution of the franchise goods,” M E. R EV. S TAT.
A NN. tit. 10, § 1363(3)(C)(4), so the key to the analysis is to
pinpoint which goods are the “franchise goods.” This, in
turn, depends on the statutory definition of “franchise”
and the language of the dealer agreement. If the franchise
Nos. 07-1896 & 07-2016 11
goods were limited to goods marketed under the
Samsung brand, then discontinuation of that brand
amounted to discontinuation of the franchise goods. If not,
mere rebranding would not be enough.
The statute defines “franchise” as follows:
“Franchise” means an oral or written arrangement for
a definite or indefinite period pursuant to which a
manufacturer grants to a dealer or distributor of goods a
license to use a trade name, trademark, service mark or
related characteristic and in which there is a community
of interest in the marketing of goods and related
services at wholesale, retail, by leasing or otherwise.
M E. R EV . S TAT. A NN. tit. 10, § 1361(3) (emphasis added).
The definition thus centers on the grant of a license to
use the franchisor’s trademark or trade name in the
marketing of goods and services. (The statute’s “commu-
nity of interest” concept, often the most difficult aspect of
these laws, is not at issue here. See Fleet Wholesale, 846
F.2d at 1096 (The Wisconsin dealership law “does not
define ‘dealer’ except by saying that a dealer is a distribu-
tor in a ‘community of interest’ with the supplier . . . which
just pushes the lack of a definition to a new level of ab-
straction.”); Baldewein Co. v. Tri-Clover, Inc., 606 N.W.2d
145, 148 (Wis. 2000) (“ ‘Community of interest’ has been
the most vexing phrase in the dealership definition for
courts faced with applying this law.”).)
The Samsung dealer agreement appoints FMS as “a
nonexclusive dealer in the Territory for the sale of the
Products” upon the terms and conditions set forth in the
agreement. “The Products” are defined as “All Samsung
12 Nos. 07-1896 & 07-2016
Construction Equipment for sale in North America,”
“including their later improved or superseding models.”
The most natural reading of the first quoted phrase is that
FMS was a dealer in all Samsung-brand construction
equipment. FMS suggests that the word “Samsung” refers
not to the brand name but to the company, but that
reading is incorrect because the dealer agreement con-
sistently refers to Samsung Construction Equipment
America Corporation either by its full name or as “the
Company”—not as “Samsung.”
This understanding of the dealer agreement comports
with the statutory definition of “franchise,” which requires
a grant of “a license to use a trade name, trademark,
service mark or related characteristic.” M E. R EV. S TAT.
A NN. tit. 10, § 1361(3). Other language in the dealer agree-
ment grants FMS a right to use Samsung’s trademark or
trade name. In the section titled “Patents, Trademarks
and Product Modification,” the agreement authorizes
FMS to “refer to the Products by the trademark or trade
name” used by “the Company . . . in connection there-
with,” but only “in connection with its performance
under this Agreement.” This language permits FMS to use
the Samsung mark and name in the marketing and sale
of the construction equipment. Nothing in this language
suggests that the dealer agreement covered brands
other than Samsung.
The main issue, then, is the second quoted phrase in the
agreement’s definition of “the Products,” that is, “[a]ll
Samsung Construction Equipment,” “including their later
improved or superseding models.” (Emphasis added.) The
Volvo excavators were a design descendent of the
Nos. 07-1896 & 07-2016 13
Samsung line, and from that fact the district court con-
cluded that the new Volvo-brand excavators might qualify
as a “later improved or superseding model” of the
Samsung-brand excavators and thus be considered
“franchise goods” under the statute if the changes Volvo
made were insubstantial. The problem, however, is that
the district court’s reading doesn’t account for the word
“including.” When a contractual text specifies one thing
including another, the ejusdem generis canon generally
requires that the latter item must be a kind of the
former item. See, e.g., United States v. Sec. Mgmt. Co., 96
F.3d 260, 265 (7th Cir. 1996). Here, “the Products” covered
by the agreement are Samsung-brand construction equip-
ment “including their later improved or superseding
models”—meaning later-improved or superseding
models of Samsung-brand equipment. Accordingly, only
products sold under the Samsung trademark or trade
name can be “later improved or superseding models”
under the dealer agreement.
It follows from this that the “franchise goods” for
purposes of the Maine franchise law include only
Samsung-brand equipment. As long as Volvo continued to
manufacture excavators under the Samsung trademark or
trade name, the statute required it to continue to supply
FMS with these goods. But because the statute defines
“franchise” in terms of a trademark license and the agree-
ment authorized FMS to use only the Samsung trademark,
discontinuation of the Samsung-brand line of excavators is
a discontinuation of the “franchise goods” under the
statute. FMS never had a Volvo franchise; nothing in the
statute protects FMS from termination of a franchise it
never had.
14 Nos. 07-1896 & 07-2016
FMS makes a number of objections to this under-
standing of the statute and the dealer agreement. One is
that allowing manufacturers to terminate franchises at
will by simply rebranding their products undermines
the purpose of the good cause requirement in the statute.
Not so. As we have explained, states like Maine have
required good cause to terminate franchise relationships
in order to prevent manufacturers from free riding off a
franchisee’s firm-specific or brand-specific sunk investments.
FMS has made no investment in Volvo-brand products,
so there is no danger that “Volvoization” exploited any
franchisee investment. Nor does our interpretation
mean that manufacturers generally might resort to
rebranding in order to exploit their franchisees’ invest-
ments. Rebranding is expensive and requires a manufac-
turer to forfeit the very brand-specific recognition and
local goodwill that the use of a franchise marketing
system has built over time.
A second objection is that this reading of the dealer
agreement makes superfluous the phrase “including their
later improved or superseding models” in the agreement’s
definition of “the Products.” This is also incorrect. Recall
that the dealer agreement applies to “[a]ll Samsung
Construction Equipment for sale in North America.” This
phrase is ambiguous as to time. Is the agreement limited
to the specific Samsung equipment for sale in North
America at the time the contract was signed or does it
also cover other Samsung equipment introduced while
the dealer agreement is in effect? The “later improved or
superseding models” language clarifies the ambiguity.
Nos. 07-1896 & 07-2016 15
We conclude, therefore, that the dealer agreement
authorized FMS to sell Samsung-brand construction equip-
ment, including superseding or later-improved models
sold under that brand name. These are the “franchise
goods” for purposes of the “discontinuation” provision
in the Maine franchise law. Volvo continued to produce
the franchise goods as long as it sold excavators under the
Samsung name and thus was required by the Maine law
to continue to supply these goods to FMS. But when it
phased out the Samsung brand and began selling excava-
tors under its own name, it discontinued the goods that
were the subject of the agreement, and this was good
cause to terminate FMS’s franchise under the Maine
statute. Accordingly, Volvo was not liable for improper
termination under the statute and was entitled to the
entry of summary judgment in its favor.
In light of this determination, we need not consider
Volvo’s remaining arguments regarding liability and
damages or FMS’s cross-appeal on the issue of attorneys’
fees. The judgment of the district court is R EVERSED, and
the case is R EMANDED for entry of judgment in favor
of Volvo.
3-4-09