The Minnesota Supreme Court (Court) recently granted review of two franchise questions in the case of Cambria Co., LLC, v. M&M Creative Laminants, Inc:
- whether the Minnesota Franchise Act (MFA) can apply to protect franchisees based outside Minnesota; and
- whether service fees bundled with the product cost constitute a “franchise fee” under the MFA.
While the Court found that the bundled costs did not constitute a franchise fee, the MFA may apply to franchisees located outside the state of Minnesota.
Pennsylvania based distributor, M&M Creative Laminants’ (M&M), bought fabricated countertops from Minnesota manufacturer, Cambria Company, LLC (Cambria), and then sold the finished products to consumers. Cambria terminated its business relationship with M&M and sued to recover amounts owed on various unpaid invoices. M&M counterclaimed Cambria arguing that the relationship between the parties was governed by the MFA and Cambria unlawfully terminated the parties’ alleged franchise agreement by not providing the good cause or 90-day advance notice required under the MFA. Cambria responded by arguing that (1) M&M was prohibited from bringing the counterclaim under the MFA because M&M is located outside of Minnesota and (2) M&M could not satisfy the “franchise fee” element to meet the definition of a franchise to trigger application of the MFA.
The Court found that the MFA may apply extraterritorially to an out-of-state company that otherwise meets the MFA’s definition of “franchisee.” The Court rejected Cambria’s argument that the termination and damages provisions of the MFA were only applicable to franchisees within Minnesota.
- First, the Court emphasized that the definition of the term “franchisee” under the MFA is not limited to only Minnesota companies and that the “relationship” provisions under the MFA do not include territorial limitations as set in other provisions contained within the MFA. Therefore, the omission of the territorial limitation was done intentionally by the legislature and that the Court will effectuate the legislature’s intent.
- Second, the Court refused to treat as binding its statement in a previous opinion that the MFA “was adopted in 1973 as remedial legislation to protect franchisees within Minnesota[.]” The MFA’s purpose to protect Minnesota franchisees does not mean that the MFA’s purpose is to protect only Minnesota franchisees.
- Lastly, unlike other state franchise laws, such as Arkansas, California and Iowa, that apply its “relationship” provisions to protecting in-state franchisees only, the Minnesota legislature did not impose such territorial limitations on the applicability of the MFA.
However, the Court emphasized that the MFA does not protect every out-of-state company. Instead, the Court concluded that an out-of-state company must satisfy the MFA’s definition of “franchisee” and “companies without a connection to Minnesota may face jurisdictional or other hurdles.”
Next, the Court affirmed the entry of summary judgment, dismissing M&M’s claim that bundling fabrication services with the cost of the unfabricated quartz material invalidated the bona fide wholesale price exception to the definition of a franchise fee. As a result, the “fee element” for purposes of determining whether the relationship meets the definition of a franchise under the MFA was not satisfied.
The Court rejected M&M’s argument on the grounds that the purchase of the unfabricated quartz material and the fabrication services were not separate transactions. Even though the fabrication services were listed on a separate line item on the parties’ invoices, they were still included in the final purchase price of the finished quartz products and, after purchasing the products from Cambria, M&M usually resold the products to its customers at around a 100 percent markup, indicating that the products were sold to M&M at a wholesale price. The Court also emphasized that the wholesale price payments did not include any “hidden” franchise fee because M&M was not required to purchase more quantity than what it needed and the price paid by M&M did not exceed bona fide wholesale price.
This case is an important reminder that although the definition of “franchise” under the MFA is intended to read very broadly, it is not without limits. Further, franchisors should be careful about assuming the MFA does not apply to out of state franchisees.