Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Haw.: Harley distributor considered a franchise for Franchise Investment Law purposes, (May 28, 2015)

By Jody Coultas, J.D.

Harley-Davidson Motor Company, Inc. was denied dismissal of a Hawaii Franchise Investment Law claim filed by former distributor Cycle City, Ltd. by the federal district court in Honolulu based on the relationship between the parties and terms of the parties’ License Agreement (Cycle City, Ltd. v. Harley-Davidson Motor Company, Inc., May 26, 2015, Gillmor, H.).

Cycle City has been the exclusive distributor of Harley-Davison motorcycles, parts, accessories, and Harley-branded items in Hawaii since 1966, and owns and operates Harley-Davidson dealerships in Hawaii. In addition to the distribution agreements between the parties, Cycle City had a separate License Agreement to manufacture and sell certain goods bearing Harley-Davidson trademarks. After Harley-Davidson declined to renew the distributorship and license agreements, Cycle City filed suit for breach of the distributorship agreement and violations of the Hawaii Motor Vehicle Industry Licensing Law and Hawaii Franchise Investment Law (HFIL).

Specifically, Cycle City alleged that Harley-Davidson violated the HFIL by: 1. not dealing in good faith; 2. imposing unreasonable and arbitrary standards of conduct; and 3. failing to renew the License Agreement. Harley-Davidson moved to dismiss the HFIL claim based on Cycle City’s failure to show it constituted a franchise for the purposes of the HFIL, and that the License Agreement was not the type of agreement that was intended to be regulated as a franchise.

Royalty payments made by Cycle City to Harley-Davidson as required by the License Agreement constituted a franchise fee under the HFIL, according to the court. Cycle City alleged that the License Agreement constituted a “franchise” under the HFIL, and that the payment of royalties satisfied the HFIL definition of “franchise fee.” “Franchise fee” is defined as any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement, including any fee based upon a percentage of gross or net sales whether or not referred to as royalty fees. Cycle City was required to pay at least $30,000 per year for the three-year duration of the Agreement regardless of sales. The royalty payments made by Cycle City did not fall under the HFIL exclusion regarding agreements to purchase goods at certain prices because the License Agreement concerned the right to use Harley-Davidson marks, rather than the purchase of branded goods. The Distributorship Agreement covered the purchase of goods, but was a separate agreement.

Based on the relationship between the parties and the terms of the License Agreement, the court found a community interest between Cycle City and Harley-Davidson. A “franchise” also requires that a community interest exist between the manufacturer and the dealer or distributor. A “community interest” is “a continuing financial interest between the franchisor and franchisee in the operation of the franchise business.” Cycle City pointed to the license to use Harley-Davidson’s trademarks and its payment of royalty fees to Harley-Davidson for the sale of licensed products to show a community interest. Also relevant were the terms of the License Agreement allowing Harley-Davidson to control Cycle City’s sale of licensed products. There was sufficient evidence of a continuing financial interest between Cycle City and Harley-Davidson in the operation of Cycle City’s business.

The case is No. 14-00148 HG-RLP.

Attorneys: Alejandro Brito (Zarco Einhorn Salkowski & Brito PA), and Jesse J.T. Smith (McCorriston Miller Mukai MacKinnon LLP) for Cycle City, Ltd. Francis P. Hogan (Ashford & Wriston), and Roberta F. Howell (Foley & Lardner, LLP) for Harley-Davidson Motor Company, Inc.

Companies: Cycle City, Ltd.; Harley-Davidson Motor Company, Inc.

Cases: FranchisingDistribution HawaiiNews