Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Distributor stated sufficient causes of action after manufacturer terminated 40 year business relationship, (Jun 20, 2014)

By Greg Hammond, J.D.

A heating and cooling equipment manufacturer’s motion to dismiss a distributor’s breach of contract, estoppel, fraud, misrepresentation, and fiduciary duty claims was partially denied by the federal district court in Columbus, Ohio, after the manufacturer allegedly represented that the distributor-producer relationship of 40 years would continue, but shortly thereafter terminated the relationship (Palmer-Donavin Manufacturing Co. v Rheem Sales Co., June 18, 2014, Smith, G).

Background. Rheem Sales Company manufactures and Palmer-Donavin Manufacturing Company distributes, in part, heating and cooling equipment. The two companies were in business together for over 40 years, in which Rheem would manufacture products and Palmer-Donavin would distribute them. Over the course of the 40 year business relationship, Rheem assured Palmer-Donavin that the distributor relationship would continue. Pursuant to such assurances, according to the court, Palmer-Donavin: focused its distribution business on Rheem; supported Rheem’s Top Tech Training and Boot Camps; assisted in Rheem’s new product rollouts; discontinued distribution of a competing product line, at Rheem’s request; bolstered its heating, ventilation, and air conditioning (HVAC) division, at Rheem’s request; and added Rheem water heaters to its distribution line, at Rheem’s request. However, Rheem was working with a competing distributor to replace Palmer-Donavin and subsequently terminated its relationship. Palmer-Donavin was consequently forced to liquidate its HVAC division. Although the formal distributor agreement expired in 2009, Palmer-Donavin submitted a distribution plan on an annual basis and Rheem approved them.

Consequently, Palmer-Donavin filed suit, alleging breach of written contract, breach of oral contract, detrimental reliance/promissory estoppel, equitable estoppel, breach of fiduciary duty, fraud in the inducement, and negligent misrepresentation. Rheem moved to dismiss Palmer-Donavin’s claims.

Breach of contract. As a preliminary matter, the court determined that the various causes of action should not be reviewed pursuant to the distributor agreement, because the agreement—which contemplated an open business relationship—conflicted with Palmer-Donavin’s allegation that the parties agreed it would be faithful solely to Rheem. To that end, the court denied Rheem’s motion to dismiss Palmer-Donavin’s breach of written and oral contract claims, reasoning that (1) because neither party attached the latest distribution plan, which was approved by Rheem one month prior to Palmer-Donavin’s termination, dismissal of the breach of written contract claim would be premature, accepting Palmer-Donavin’s allegations as truth, and (2) allegations of partial performance and a 40 year business relationship were sufficient to infer a meeting of the minds as to the essential terms of an alleged oral contract.

Estoppel. The court also denied Rheem’s motion to dismiss with regard to Palmer-Donavin’s promissory estoppel claim, noting that there were sufficient allegations that: (1) Rheem promised Palmer-Donavin that it would continue to use the company as a distributor; (2) Palmer-Donavin, in reasonable reliance on Rheem’s promise, became a single-line distributor for Rheem and took other affirmative steps to bind itself more closely to the manufacturer; and (3) Rheem terminated the long-standing relationship to Palmer-Donavin’s cost. However, Palmer-Donavin’s equitable estoppel claim was dismissed, as the company did not argue against the conclusion that the claim was a defense, not a cause of action.

Fiduciary duty and negligent misrepresentation. Palmer-Donavin’s fiduciary duty and negligent misrepresentation claims were also dismissed by the court. It reasoned that because Palmer-Donavin failed to allege that Rheem had a duty to act “primarily for the benefit” of Palmer-Donavin, which is the essence of a fiduciary relationship, Palmer-Donavin’s fiduciary relationship cause of action must fail. In addition, because Palmer-Donavin could not allege that Rheem supplied information to the company for “guidance as part of a special relationship like that between client and account or client and attorney,” the negligent misrepresentation claim must also fail.

Fraud. Rheem’s motion to dismiss the misrepresentation/fraud in the inducement claim was denied. The court found that Palmer-Donavin sufficiently alleged a claim for fraud in the inducement, by asserting: (1) Rheem represented that the distributor-producer relationship would continue; (2) the representation was material in Palmer-Donavin’s decision to become a single-line distributor; (3) Rheem was planning to discontinue the relationship, rendering the representation false; (4) Rheem intended that Palmer-Donavin rely on its representation by requesting the company to discontinue other product lines; (5) Palmer-Donavin was justified in relying on Rheem’s assurances, based on the 40 year business relationship; and (6) Palmer-Donavin was greatly injured by Rheem’s false representations when it was unexpectedly fired in favor of its competitor.

The case number is 2:14-cv-91.

Attorneys: James Michael Wiles (Wiles Boyle Burkholder & Bringardner) for Palmer-Donavin Manufacturing Co. Ann M. Maher (Whyte Hirschboeck Dudek SC) for Rheem Sales Co., Inc.

Companies: Palmer-Donavin Manufacturing Co.; Rheem Sales Co., Inc.

Cases: FranchisingDistribution OhioNews