Nathan Schultz and Duane Schultz, Individually and Tradingas J. C. Schultz Company, a Partnership v. Onan Corporation and A. F. Shane Company Onan Corporation, Appellant, 681 F.2d 177 (3d Cir. 1982)

FACTS

Onan Corporation ("Onan," "defendant"), a manufacturer of electrical equipment, and Joseph Schultz Co. ("Schultz," "plaintiffs"), a distributor, were parties to a distributorship agreement signed by Joseph Schultz on June 3, 1977, and by Onan on June 15, 1977. The 1977 agreement was the last in a series of similar agreements, the first of which had been signed in 1961. Article 10 of the 1977 agreement provided in pertinent part:

ARTICLE 10

Effective Date of Agreement and Termination

A. Effective Date. This Agreement shall become effective on the date of acceptance by Onan as evidenced by the signature of its authorized officer hereon and shall remain effective until the 31st of December in the year of the 3rd anniversary of this agreement, unless terminated by either party in accordance with this Article.

B. Termination. Termination shall be governed by the following ....

1. Either party may terminate this Agreement for any reason upon sixty (60) days written notice to the other.

2. Onan may terminate this Agreement upon thirty (30) days written notice to Distributor in the event Distributor shall have failed to fulfill any one or more of Distributor's responsibilities set forth in Article 9 of this Agreement.

Appendix at 423A.¹  Thus, even if none of its termination provisions was invoked, by its own terms the 1977 agreement had a fixed duration and would terminate on December 31, 1980.² 

On March 24, 1978, Onan wrote to Schultz that "(i)n accordance with previous communications with you, please be advised that Onan is hereby giving notice that the distributorship relationship between Onan and J. C. Schultz Company is to be terminated sixty (60) days from the date of this letter." Appendix at 17A.³  Schultz filed suit seeking damages for alleged federal antitrust and state law violations, and the jury awarded Schultz $45,500 under the Minnesota doctrine of recoupment. That doctrine, which is discussed infra, allows a franchisee/distributor under certain circumstances to recover from the franchisor the amount of his investment which he has not reclaimed from the operation of the franchise at the time of its termination by the franchisor.

Onan has appealed. The parties agree that Minnesota law applies,⁴  and that the sole theory of recovery presented to the jury was the Minnesota doctrine of recoupment. On appeal, the only issue is whether or not the trial judge correctly ascertained and applied Minnesota recoupment law.⁵ 

DISCUSSION

The threshold question here is whether recoupment law applies to the facts presented by this case. The sole issue on which the parties requested jury instructions, and the sole subject on which the jury was charged, was the Minnesota doctrine of recoupment. Appendix at 22A-23A (Plaintiffs' Points for Charge); 24A-27A (defendant's Requested Points for Charge); 28A-38A (jury instructions).⁶  Both sides relied below on three cases: Ag-Chem Equipment Co., Inc. v. Hahn, Inc., 480 F.2d 482 (8th Cir. 1973), McGinnis Piano and Organ Co. v. Yamaha International Corp., 480 F.2d 474 (8th Cir. 1973), and Clausen & Sons, Inc. v. Theodore Hamm Brewing Co., 395 F.2d 388 (8th Cir. 1968).⁷  On appeal, the parties rely on these three cases, and also cite Gilderhus v. Amoco Oil Co., 1980-81 Trade Cases P 63,647 (D. Minn. 1980), which was decided immediately before the trial in this case, and of which neither the court nor the parties had any knowledge at the time of the trial. See transcript of oral argument at 18.

In Clausen, the court defined the Minnesota doctrine of recoupment:

(U)nder Minnesota law where an exclusive franchise dealer under an implied contract, terminable on notice, has at the instance of a manufacturer or supplier invested his resources and credit in establishment of a costly distribution facility for the supplier's product, and the supplier thereafter unreasonably terminates the contract and dealership without giving the dealer an opportunity to recoup his investment, a claim may be stated (in recoupment).

395 F.2d at 391.⁸  In Ag-Chem, the court emphasized that "a threshold requirement to the right (of recoupment) is the existence of an agreement which is terminable at will." 480 F.2d at 487.⁹ 

In Clausen, Ag-Chem, and McGinnis the contracts were all oral agreements of unspecified duration, and the courts applied recoupment doctrine in suits based on their termination. In Gilderhus, on the other hand, the court examined a written contract and ruled that recoupment doctrine did not apply. In that case, plaintiff, as in the other three cases, sought to recover its unrecouped investment under Minnesota's recoupment law. The court, relying on Ag-Chem, ruled that "(i)f the franchise agreement is not terminable at will, but rather is for a fixed duration, the recoupment theory is inapplicable." 1980-81 Trade Cases at 77,492. The franchise agreement in Gilderhus was for a fixed duration and terminable for just cause, id.; thus, recoupment doctrine could not apply in a suit based on its termination.

If the agreement here fulfills the criteria of Gilderhus-i.e., if the agreement (1) specified its duration and (2) could not be terminated except for just cause-then recoupment law does not apply. It is clear that the agreement specified its duration: the agreement was signed in June 1977 and was to run through December 1980. Thus, the question becomes whether the agreement, which stated that it was terminable by either party "for any reason," was an "at will" contract, or whether the agreement was only terminable for just cause.

The record below is somewhat confusing as to the positions of the parties on this issue. In their pre-trial narrative (document 34 in the record), plaintiffs argued that Onan's termination of the distributorship agreement was wrongful because it was done "without any adequate reason as required in the agreement." Document 34 at 3. Onan, in its pre-trial narrative (document 36 in the record), argued that the distributorship agreement was "terminable at will." Document 36 at 2. On appeal, plaintiffs at oral argument contended that the distributorship could only be terminated for a "proper reason," transcript of oral argument at 22-23, and cited the Minnesota Franchise Act, Minn.St. 80C, which, according to plaintiffs, established the rule that "you cannot cancel a franchise in Minnesota without just cause." Transcript of oral argument at 16. However, at oral argument, counsel for plaintiffs apparently altered his position to assert that the distributorship agreement was terminable at will. Transcript of oral argument at 23.¹⁰  Counsel for defendant, on the other hand, argued before this court that the agreement was not an "at will" contract. Appellant's Brief at 16; transcript of oral argument at 10.

We think, as plaintiffs at first argued, that as a matter of Minnesota law a franchise agreement to which Minnesota law applies cannot be terminated prior to its end date except for just cause. In Mason v. Farmers Insurance Companies, 281 N.W.2d 344, 348 (Minn.1979), the Supreme Court of Minnesota cited Minn.Reg. SDiv 1714(e, f), which "requires good cause for any franchise termination as well as 60 days notice."¹¹  The regulation apparently became effective on January 13, 1975, 281 N.W.2d at 348, and thus applies to the agreement at issue here, which ran from June 1977.¹² 

Thus, by operation of the Minnesota Franchise Act, the agreement here could only be terminated prior to its end date for just cause. Further, if the agreement's provision that it was terminable "for any reason" is interpreted as meaning that the agreement was terminable "at will," then that provision is void under Minn.St. 80C.21, which states that "Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of sections 80C.01 to 80C.22 or any rule or order thereunder is void." If "for any reason" means "at will," it would require plaintiffs to waive their right to an agreement terminable for just cause; thus, under Minn.St. 80C.21 the provision is void. If, on the other hand, "for any reason" means "for any good reason," the provision is valid under Minnesota franchise law. In accordance with Minnesota law, which states that a franchise may only be terminated for good cause, in accordance with the rule requiring that a contract be interpreted, if possible, in a manner upholding all of its provisions, see Restatement (Second) of Contracts § 203(a), and in accordance with the statement that "Minnesota courts lean towards a liberal construction of any contract, as not being terminable at will," Clausen, 395 F.2d at 391 n.4, we therefore conclude that "for any reason" means "for any good reason," in other words, "for just cause."¹³ 

Under Gilderhus, if a written franchise agreement specifies its duration and may only be terminated in the interim for just cause, the doctrine of recoupment does not apply. Because the agreement here had those characteristics, plaintiffs may not recover under recoupment doctrine.

The fact that plaintiffs may not recover under recoupment theory, however, does not necessarily end this case. The Minnesota Franchise Act explicitly states that nothing in that Act "shall limit any liability which may exist by virtue of any other statute or under common law if sections 80C.01 to 80C.22 were not in effect." If, for example, plaintiffs are entitled to an opportunity to prove that defendant terminated the agreement without just cause, then plaintiffs might be entitled to recover under a breach of contract theory, given that the contract itself requires good cause for interim termination. We express no view, however, on the question of whether plaintiffs are now entitled to assert any alternative breach of contract theory of recovery, or on whether plaintiffs have waived any such claim.

Because the trial court did not have the benefit of the ruling in Gilderhus that recoupment theory does not apply where an agreement specifies its duration and is terminable in the interim only for just cause, and for the reasons set forth above, we reverse and remand for proceedings consistent with this opinion.