Cambee's Furniture, Inc. v. Doughboy Recreational, Inc.

• Citation: 825 F.2d 167
• Decision Date: 22 July 1987
• Docket Number: No. 86-5325,86-5325
• Parties: 4 UCC Rep.Serv.2d 665 CAMBEE'S FURNITURE, INC., a South Dakota Corporation and Donald E. Hinks, d/b/a Waterbed Company and Pool Center, Appellants, v. DOUGHBOY RECREATIONAL, INC., a foreign corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 167

825 F.2d 167

4 UCC Rep.Serv.2d 665

CAMBEE'S FURNITURE, INC., a South Dakota Corporation and Donald E. Hinks, d/b/a Waterbed Company and Pool Center, Appellants, v. DOUGHBOY RECREATIONAL, INC., a foreign corporation, Appellee.

No. 86-5325.

United States Court of Appeals Eighth Circuit.

Submitted May 15, 1987.

Decided July 22, 1987.

Thomas J. Welk, Sioux Falls, S.D., for appellants.

Monte R. Walz, Sioux Falls, S.D., for appellee.

Before ARNOLD, Circuit Judge, and WRIGHT ^* and HENLEY, Senior Circuit Judges.

HENLEY, Senior Circuit Judge.

Plaintiffs Cambee's Furniture, Inc. (Cambee's) and Donald E. Hinks, Cambee's sole shareholder, appeal the district court's order granting summary judgment in favor of the defendant, Doughboy Recreational, Inc. (Doughboy). Plaintiffs' amended complaint in this diversity action seeks damages for Doughboy's termination of Cambee's ¹ as an authorized dealer of Doughboy swimming pool products in the Sioux Falls, South Dakota area. The amended complaint alleges violations of the South Dakota Franchise Act, S.D. Codified Laws Ann. Secs. 37-5A-1 to -87 (1986); breach of a fiduciary duty; breach of an implied covenant of good faith and fair dealing; breach of contract; and wrongful termination of the distributorship agreement. The district court granted Doughboy's motion for summary judgment on each of plaintiffs' claims, and this appeal followed. We affirm in part and reverse in part.

I. BACKGROUND

For the purpose of reviewing on appeal the order granting summary judgment, the following facts will be taken as established. In April of 1981 Hinks contacted Chuck Brount, Doughboy's authorized manufacturer's representative, to inquire about obtaining a Doughboy franchise. The parties entered into an oral agreement permitting Hinks to distribute Doughboy products provided that he purchase annually at least $15,000.00 to $20,000.00 worth of swimming pools or a minimum of fifteen pools. ² Hinks was to be the exclusive dealer within a one hundred mile radius in the Sioux Falls area. The question whether the agreement constituted a franchise is disputed. Plaintiffs concede that Brount told Hinks he could not give him a written franchise, but say that Brount promised one orally. Defendant denies that Brount used the word "franchise." In any event, Hinks maintains that he was promised an exclusive dealership in the delineated area for as long as he met the minimum purchase requirements.

Pursuant to the agreement, Hinks purchased $14,683.00 worth of Doughboy products in 1981, and in subsequent years made purchases exceeding Doughboy's minimum requirements. In 1983 and 1984 Hinks received letters from Doughboy's president praising the quality of his performance and referring to him as the only factory authorized dealer in the Sioux Falls area.

Starting in 1983 Hinks began receiving indications that others were distributing Doughboy products in the area covered by his agreement with Brount. Hinks received a letter from Delux Distributors in Omaha indicating that he could purchase Doughboy pools. Hinks wrote to Brount to complain and also communicated directly with Doughboy about his concerns. Hinks then learned that the proprietor of a competing store, Waterbed Factory Showroom, maintained a Doughboy swimming pool at his residence in Sioux Falls as a display for sales. In 1984 Waterbed Factory Showroom became a franchisee operation of Rec Room Shoppe of Omaha, Inc., which is associated with Delux. The Rec Room Shoppe ran an advertisement in the Sioux Falls Argus Leader in August, 1984 picturing Doughboy pools, but stating that they were not available in Sioux Falls. Hinks called Rec Room's attorney, who he claims told him that she had heard Rec Room was selling Doughboy pools in Sioux Falls. John Holm, a pool installer who worked for Hinks, told Hinks he observed a Doughboy swimming pool at the Rec Room Shoppe parking lot in Sioux Falls in 1984.

Acting on his belief that Doughboy was permitting its swimming pools to be sold within his exclusive area, Hinks in September of 1984 informed Doughboy that he was withholding payment on his account with Doughboy because of the failure to resolve his complaints. In October of the same year Mr. Brount solicited Cambee's order for 1985. Then, in January of 1985 Doughboy sent a written notice to Hinks informing him that his Doughboy dealership was terminated. Although the Cambee's account was not delinquent when the termination notice was sent, Hinks had been late in paying Doughboy for merchandise in the past. Doughboy asserts that Cambee's record of delinquent payments formed the basis for the termination.

The district court found that no franchise existed under South Dakota law inasmuch as no franchise fee was paid for the distributorship. The district court rejected as a matter of law plaintiffs' argument that the minimum purchase requirement amounted to a franchise fee. The court dismissed the claim for breach of a fiduciary duty along with the franchise claim, finding the former dependent on the latter. The court found the existence of a contract between plaintiffs and Doughboy, but determined that Doughboy had not breached it, reasoning that the contract was of indefinite duration and therefore terminable at will by either party. The wrongful termination claim was dismissed as the same cause of action alleged in the count for breach of contract, and plaintiffs' claim that Doughboy violated an implied covenant of good faith and fair dealing was dismissed as well.

II. THE FRANCHISE CLAIM

Plaintiffs allege that the distributorship agreement established a franchise, and that defendant violated the South Dakota Franchise Act by failing to register the purported franchise. S.D. Codified Laws Ann. Sec. 37-5A-6 (1986). Consequently, plaintiffs seek treble damages and attorney's fees as provided by the Act. Secs. 37-5A-83 to -85. Plaintiffs also allege that Doughboy owed Cambee's a fiduciary duty arising from the franchise relationship, and that Doughboy breached that duty.

A franchise exists under South Dakota law when the following elements are present: (1) a grant to the franchisee of the right to use the trade name, commercial symbol or advertising of the franchisor; (2) a community of interest in marketing the goods or services; and (3) a franchise fee, "which the franchisee is required to pay, directly or indirectly...." Sec. 37-5A-1 (1986). Each of these elements must be present before a court may find that the parties have entered into a franchise agreement. See OT Industries v. OT-Tehdas Oy Santasalo-Sohlberg AB, 346 N.W.2d 162, 166 (Minn.Ct.App.1984) (construing a substantially similar provision of the Minnesota Franchise Act, Minn.Stat. Sec. 80C.01 subd. 4(a) (1982)). The presence of the third element, the payment of a franchise fee, is at issue here.

The South Dakota Franchise Act broadly defines a franchise fee as "any fee or charge ... for the right to enter into a business or to continue a business under a franchise agreement...." S.D. Codified Laws Sec. 37-5A-3 (1986). The Act narrows this definition somewhat by excluding "[t]he purchase of goods or agreement to purchase goods at a bona fide wholesale price." Sec. 37-5A-4(1). Hinks does not deny that the price he paid for Doughboy pools was a bona fide wholesale price; rather he urges that a franchise fee may be found in the requirement that he make a minimum purchase of a certain quantity of Doughboy's pools or expend a minimum dollar amount. ³

The Supreme Court of South Dakota has not directly confronted the issue whether a minimum purchase requirement may constitute a franchise fee. ⁴ Plaintiffs do not argue that a minimum purchase provision in a franchise agreement is always a franchise fee. Instead, they urge that we apply the principles developed by the Minnesota Court of Appeals, which has stated that "a minimum volume requirement, even at bona fide factory prices, may in itself be a franchise fee if the franchisee is required to purchase amounts or items that it otherwise would not." OT Industries, 346 N.W.2d at 166. The court also analyzed the purchase requirement in terms of whether it served a valid business purpose. Id. In a subsequent decision the Minnesota Court of Appeals stated that its holding in OT Industries turned on whether the required purchase "correspond[s] to the reasonable requirements of the business." American Parts System, Inc. v. T & T Automotive, Inc., 358 N.W.2d 674, 676 (Minn.Ct.App.1984). ⁵

The district court did not choose to follow the Minnesota rule in interpreting the law of South Dakota. When, as here, the state's highest court has not decided a question, the trial judge's interpretation "is entitled to substantial deference unless it is 'fundamentally deficient in analysis or otherwise lacking in reasoned authority.' " Dabney v. Montgomery Ward & Co., 761 F.2d 494, 499 (8th Cir.), cert. denied, 474 U.S. 904, 106 S.Ct. 233, 88 L.Ed.2d 232 (1985) (quoting Kansas City Power & Light v. Burlington Northern R.R., 707 F.2d 1002, 1003 (8th Cir.1983)).

Section 37-5A-1(3) of the South Dakota Franchise Act includes indirect payments in its definition of a franchise fee. Thus, we are called upon to determine whether a minimum order requirement may fall within that definition. An indirect payment might be found, for example, in a markup on the goods or services a franchisee is required to purchase, or in a price discount on goods or services the franchisee is required to provide the franchisor. See Communications Maintenance, Inc., 761 F.2d at 1206 n. 3 (discussing Illinois franchise regulations); Fern, The Overbroad Scope of Franchise Regulation: A Definitional Dilemma, 34 Bus.Law. 1387, 1392 (1979) (discussing various types of payments which might constitute a franchise fee). Nothing in this case, however, indicates that Cambee's paid a hidden or indirect fee for the right to sell Doughboy pools, or that the payments made were for...