The Watch Company, Incorporate v. Citizen Watch Company of Ameri ( 2022 )

NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with FED. R. APP. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Submitted April 27, 2022*
Decided May 16, 2022
Before
DIANE S. SYKES, Chief Judge
MICHAEL B. BRENNAN, Circuit Judge
MICHAEL Y. SCUDDER, Circuit Judge
No. 21‐2943
THE WATCH COMPANY, INC., and Appeal from the United States District
WATCH & ACCESSORY COMPANY, Court for the Eastern District of Wisconsin.
Plaintiffs‐Appellants,
v. No. 21‐C‐344
CITIZEN WATCH COMPANY OF William C. Griesbach,
AMERICA, INC., Judge.
Defendant‐Appellee.
ORDER
Citizen Watch Company told The Watch Company, Inc., and Watch & Accessory
Company—two separate Wisconsin corporations doing business under the names The
WatchCo and WatchCo.com—that WatchCo could not sell Citizen’s watches on third‐
* We have agreed to decide the case without oral argument because the parties
jointly waived oral argument, the briefs and record adequately present the facts and
legal arguments, and oral argument would not significantly aid the court. FED. R.
APP. P. 34(a)(2)(C), (f).
No. 21‐2943 Page 2
party websites like Amazon.com unless WatchCo met certain requirements. Despite not
meeting those requirements, WatchCo continued to sell Citizen products on Amazon.
Citizen responded by terminating WatchCo as an authorized retailer of its products.
WatchCo sued under sections 135.03 and 135.04 of the Wisconsin Fair Dealership Law
alleging Citizen terminated the relationship without good cause or sufficient notice.
The district court dismissed WatchCo’s amended complaint, concluding that it
failed to allege plausibly that Citizen had granted it a “dealership” as that term is
defined by the statute. Because WatchCo does not allege that it sank substantial,
unrecoverable resources into selling Citizen products or that it derived substantial
revenue from its alleged status as a “dealer,” we affirm.
For nearly 30 years, WatchCo sold Citizen watches as an authorized retailer
pursuant to Citizen’s retail‐distribution policy. The policy defined, among other things,
WatchCo’s sales targets, the pricing scheme for Citizen watches, and the territory
within which WatchCo could sell Citizen watches. On February 24, 2021, Citizen told
WatchCo that it was updating its distribution policy on March 1. That update severely
restricted which retailers could sell Citizen watches through third‐party websites rather
than their own websites or physical stores.
WatchCo sold watches exclusively through its website and Amazon.com at the
time Citizen updated the territory policy in February 2021. Citizen watches accounted
for 10.7% of WatchCo’s sales that month, making it WatchCo’s second highest‐selling
brand. Five WatchCo employees and an outside firm helped WatchCo sell Citizen
watches and assisted its customers with warranty issues involving repairing or
replacing broken watches. WatchCo estimates that since 1993 it has invested “many
thousands of hours” into selling and servicing Citizen watches.
According to the new policy, WatchCo could have continued to sell Citizen
watches on Amazon if it met one of two detailed exceptions to the new restrictions, but
it did not (nor did it claim to). WatchCo, however, kept selling Citizen watches on
Amazon. Consequently, Citizen terminated WatchCo as an authorized retailer.
WatchCo’s remaining inventory of 808 Citizen watches, which it remains free to sell, is
worth more than $186,000.
WatchCo sued Citizen in Wisconsin state court alleging that Citizen updated its
territory policy and then terminated its relationship with WatchCo without good cause,
sufficient notice, or an opportunity to cure its alleged defect, all in violation of the
No. 21‐2943 Page 3
Wisconsin Fair Dealership Law. See WIS. STAT. §§ 135.03–.04. Citizen removed the case
to federal court based on the parties’ diverse citizenship, 28 U.S.C. §§ 1332, 1441, and
thereafter moved to dismiss WatchCo’s amended complaint for failure to state a claim,
FED. R. CIV. P. 12(b)(6). Citizen argued, among other things, that its relationship with
WatchCo was not subject to the statute because Citizen and WatchCo did not share the
community of interest necessary to create a dealership.
The judge dismissed WatchCo’s amended complaint with prejudice. He
determined that WatchCo failed to plausibly allege that it shared a community of
interest with Citizen, explaining: “There’s simply not sunk costs … that would create …
the community of interest required … to establish a dealership.”
On appeal WatchCo maintains that its complaint stated a facially plausible claim
under the Wisconsin Fair Dealership Law. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009);
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); FED. R. CIV. P. 8(a)(2). We accept as
true all well‐pleaded allegations in the amended complaint and apply de novo review.
Marion Diagnostic Ctr., LLC v. Becton Dickinson & Co., 29 F.4th 337, 349 (7th Cir. 2022).
The Fair Dealership Law applies to “dealerships,” which the statute defines in
relevant part as:
A contract or agreement, either express or implied, whether oral or
written, between 2 or more persons, by which a person is granted the right
to sell or distribute goods or services, or use a trade name, trademark,
service mark, logotype, advertising or other commercial symbol, in which
there is a community of interest in the business of offering, selling or
distributing goods or services at wholesale, retail, by lease, agreement or
otherwise.
WIS. STAT. § 135.02(3)(a). This “extremely broad and highly nuanced” definition,
Baldewein Co. v. Tri‐Clover, Inc., 606 N.W.2d 145, 148 (Wis. 2000), has three essential
components: (1) a contract or agreement; (2) that grants a person one of the enumerated
rights; and (3) that demonstrates the existence of a community of interest, Benson v. City
of Madison, 897 N.W.2d 16, 27 (Wis. 2017). The parties debate all three elements, but this
case, like so many brought under the statute, primarily turns on whether there is a
community of interest, and we focus our analysis there.
No. 21‐2943 Page 4
We conclude that WatchCo’s complaint fails to allege facts that plausibly suggest
a community of interest, which is defined as “a continuing financial interest between
the grantor [of a dealership] and grantee in either the operation of the dealership
business or the marketing of such goods or services.” WIS. STAT. § 135.02(1). In Zeigler
Co. v. Rexnord, Inc., 407 N.W.2d 873, 879–80 (Wis. 1987), the Wisconsin Supreme Court
identified ten facets of a business relationship that bear on the existence of a community
of interest. But no single factor is dispositive; we consider the entirety of the parties’
dealings. Cent. Corp. v. Rsch. Prods. Corp., 681 N.W.2d 178, 188 (Wis. 2004). We have
distilled the Zeigler factors into two overarching questions: (1) does the alleged dealer
derive a large proportion of its revenues from the dealership, and (2) has the alleged
dealer sunk substantial, unrecoverable investments into the dealership. Frieburg Farm
Equip., Inc. v. Van Dale, Inc., 978 F.2d 395, 399 (7th Cir. 1992).
WatchCo argues that the judge improperly focused on the sunk‐cost
consideration and submits that although sunk costs are an important consideration, its
complaint contains facts relevant to each Ziegler factor, so it stated a plausible claim.
WatchCo, however, merely points to its allegations that correspond to each Zeigler
factor without addressing the essential question whether Citizen’s ability to terminate
the relationship threatened WatchCo’s economic viability. See Benson, 897 N.W.2d at 32.
According to the complaint, it did not. The percentage of revenue WatchCo derived
from selling Citizen watches was as much as 10.7%. That proportion, though non‐
trivial, is insufficient to establish a community of interest. See, e.g., Sales & Mktg. Assocs.,
Inc. v. Huffy Corp., 57 F.3d 602, 605–06 (7th Cir. 1995) (finding 23% of revenue is not
dispositive). Even if WatchCo will lose some profits because it is no longer an
authorized retailer of Citizen watches, the Wisconsin Fair Dealership Law does not
protect against that type of sustainable economic damage. Home Protective Servs., Inc. v.
ADT Sec. Servs., Inc., 438 F.3d 716, 720 (7th Cir. 2006).
WatchCo, alternatively, could plead a community of interest by alleging that it
made substantial, unrecoverable investments to be a Citizen “dealer.” Frieburg Farm,
978 F.2d at 399; Baldewein, 606 N.W.2d at 151. It has not done so. WatchCo alleges that it
spends tens of thousands of dollars annually on advertisements “to benefit the Citizen
brand.” But it does not contend that this sum is only for Citizen products rather than for
advertisements featuring multiple brands. And WatchCo never suggests that it could
not recoup its advertising investment by selling Citizen watches at a premium or that it
is now “over a barrel” by spending money to advertise the products. See Home Protective
Servs., 438 F.3d at 720. Further, WatchCo has not alleged that it made any
unrecoverable, Citizen‐specific investment in its facilities or that it suffered any
No. 21‐2943 Page 5
opportunity costs because of its relationship with Citizen. See Frieburg Farm, 978 F.2d at400–01; Cent. Corp., 681 N.W.2d at 189. And WatchCo can recoup the cost of its existing
inventory by selling it. See Frieburg Farm, 978 F.2d at 399.
Nor is this a case where the “combination of revenues and investments could
manifest a community of interest, even if neither could standing alone.” Id. Again,
WatchCo derives, at best, 10.7% of its revenues from selling Citizen watches and has not
alleged any unrecoverable sunk costs. Because one of the relevant considerations is
deficient and the other is absent, they cannot combine to produce a plausible allegation
of a community of interest. Consequently, WatchCo’s complaint failed to state a claim
under the Wisconsin Fair Dealership Law.
AFFIRMED