Franchise Termination. AB & B, Inc, sold wines produced by Banfi Products, Inc, under a distributorship agreement. In 1986, AB & B experienced a severe decline in the demand for one of Banfi's wines, Riunite, mostly because of a recall of that wine

Question

resulting from contamination problems in the fall of 1985. Because of decreasing sales, Banfi sent a letter to AB & B, which stated as follows: "You are aware that Banfi's corporate policy requires our distributors to maintain no less than a 60-day inventory of products. Not only are you out of stock on most items in our line, but our records indicate that the last activity on your account was a credit in January of 1986, and your last purchase was in April of 1985. Your lack of interest in and support of the Banfi line leaves us no alternative but to terminate our distributorship relationship with you, effective sixty (60) days from your receipt of this notice." In fact, AB & B held, on average, a ninety-six-day inventory of Banfi wines. In support of its allegation that AB & B showed a "lack of interest in and support of the Banfi line," Banfi had indicated that AB & B routinely failed to send a representative to Banfi's sales meetings. Yet there was no evidence that those meetings were mandatory, and AB & B always received notebooks from Banfi containing the information from those meetings. Although AB & B requested a meeting with Banfi to discuss these issues, Banfi terminated the franchise relationship without responding to AB & B's request. In AB & B's lawsuit against Banfi for wrongful termination of the franchise relationship, what should the court decide? Discuss.

Answer 1

Franchise termination
The trial court entered a judgment in favor of AB & B, and Banfi appealed. The appellate court held that Banfi did not demonstrate bad faith in terminating the distributorship but that Banfi did show a lack of just cause. In examining the issue of bad faith, the court noted that the state Alcoholic Beverages Franchise Act defined good faith as "the duty of any party to any franchise * * * to act in a fair and equitable manner toward each other so as to guarantee each party freedom from coercion or intimidation." Thus, the court focused on the elements of coercion and intimidation. In this case, "[f]irst, appellee did not allege in its complaint that any coercion or intimidation existed. We find no evidence in the record of coercion or intimidation. * * * The fact that appellant's premise for termination was faulty and that appellant failed to attempt to reconcile before the cancellation does not constitute coercion or intimidation." Regarding the assertion that Banfi terminated the franchise agreement without just cause, the court concluded that there was sufficient evidence for the trial court to find that Banfi lacked just cause. For a definition of just cause, the appellate court looked to previous cases, in which just cause was represented by decisions that were "not arbitrary and [were] made for fundamental business reasons." In this case, the court pointed out that Banfi's inventory requirement was never set out in writing, that other distributors were not terminated when they failed to maintain similar inventory levels, and that AB & B's inventory level averaged above the requirement. As for the other reasons given by Banfi for the termination, the court emphasized that none of them constituted acts that were "against any of appellant's policies."