A Minnesota distributor of burners is not a franchisee of the manufacturer of the burners under the Minnesota Franchise Act (“MFA”), held a federal district court in Minnesota in an action in which the distributor attempted to enjoin the manufacturer from terminating the contract between the parties. In Louis DeGidio, Inc. v. Industrial Combustion, LLC, the court found that while the distributor satisfied the first two requirements of the definition of “franchise” by using the manufacturer’s trade name and purchasing goods from the manufacturing, the distributor failed to prove the last requirement; the payment of a franchise fee.
In practice, a franchise fee is often paid as a flat fee or royalty fees based on sales, but it can also be paid indirectly through various requirements the franchisor imposes. In Minnesota, requirements that can constitute a franchise fee include “(i) requiring a party to purchase an unreasonable minimum of inventory; (ii) mandatory fees for required training; and (iii) charging inflated prices for parts.”
In this case, the parties had a contract which, among other provisions, required the distributor to “maintain minimum stock at its place of business for the efficient sale, service and repair of [the manufacturer’s] products” and required the manufacturer to provide training when the distributor deemed necessary. The manufacturer sold the inventory to the distributor at cost and the distributor was not required to attend training.
The court held that requiring a minimum stock for promoting efficient operations did not constitute an unreasonable minimum of inventory. Further, the training fee was not mandatory since training was not mandatory, and selling goods at cost did not constitute inflated prices. Therefore, the distributor did not pay the manufacturer a franchise fee. As a result, the distributor was not a franchisee and not entitled to the protections of the MFA. Therefore, the distributor could not enjoin the manufacturer from terminating the contract.