Praefke Auto v. Tecumseh Products ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3821
Praefke Auto Electric &
Battery Company, Inc.,
Plaintiff-Appellee,
v.
Tecumseh Products Company, Inc.,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 99 C 830--Lynn Adelman, Judge.
Argued February 26, 2001--Decided June 29, 2001
Before Bauer, Posner, and Kanne, Circuit
Judges.
Posner, Circuit Judge. Tecumseh Products
Company, the defendant in this diversity
suit for violation of Wisconsin’s Fair
Dealership Law, Wis. Stat. ch. 135,
appeals from the grant of a preliminary
injunction to the plaintiff, Praefke Auto
Electric & Battery Company. 110 F. Supp.
2d 899 (E.D. Wis. 2000). The injunction,
ten pages long with 31 numbered
paragraphs, requires Tecumseh to
reappoint Praefke as a Tecumseh
"Authorized Service Distributor" even
though it had never appointed Praefke in
the first place, and to provide Praefke
with the services that Tecumseh’s
"Central Warehouse Distributors" provide
Authorized Service Distributors even
though Tecumseh is not a Central
Warehouse Distributor but is instead the
Central Warehouse Distributors’ supplier.
This relief is unprecedented and, as we
shall see, improper.
Tecumseh manufactures small gasoline
engines used in lawnmowers, snowblowers,
and similar machines. It sells
replacement parts for its engines to
warehouse distributors, which it calls
Central Warehouse Distributors. The CWDs
in turn sell both directly to dealers,
called Registered Service Dealers, and
indirectly to them via Authorized Service
Distributors, which are wholesalers that
resell to Registered Service Dealers. For
simplicity, we’ll call these three tiers
of distributor "warehouse distributors,"
"wholesalers," and "retailers."
Ordinarily a warehouse distributor sells
to wholesalers at a lower price than it
sells to retailers, so that the
wholesaler can resell at a profit to the
retailers.
Tecumseh does not select the wholesalers
or have a contract with them, but its
contracts with the warehouse distributors
entitle it to veto a warehouse
distributor’s choice of a wholesaler to
resell to. Tecumseh gives the warehouse
distributors a form contract to use in
contracting with wholesalers and issues
each approved wholesaler a certificate
describing him as a Praefke dealer and
authorizing him to do warranty work on
Praefke engines. The form contract
contains a space for Tecumseh to sign to
signify its approval of the wholesaler,
but also states that Tecumseh is not a
party to the contract. Tecumseh does some
joint advertising with the wholesalers
but in general its contacts with them are
quite limited and sporadic. Although it
suggests retail prices for the
wholesalers to charge for Tecumseh
replacement parts, it makes no attempt to
bring about compliance with those prices,
as it has no authority to terminate a
wholesaler--indeed it has no contractual
rights over the wholesalers at all, once
they are appointed, and it extracts no
commitments from them. Crucially, it does
not control the prices at which warehouse
distributors resell to wholesalers.
In 1987 one of the warehouse
distributors, Industrial Engine,
appointed Praefke, which carries a number
of different producers’ lines, to be a
wholesaler of Tecumseh parts. The
contract (which, remember, is a form
contract furnished to the warehouse
distributors by Tecumseh) provided that
it would terminate automatically if
Industrial’s contract with Tecumseh
terminated. Twelve years later, Tecumseh
terminated its contract with Industrial
Engine, a move that automatically
canceled Praefke’s appointment as a
Tecumseh wholesaler. Tecumseh appointed a
new warehouse distributor, Central Power,
to serve the same territory as the old.
Central Power decided to sell directly to
retail dealers, and so it did not
reappoint Praefke as a wholesaler. It was
perfectly willing to continue to sell
Tecumseh parts to Praefke, and Tecumseh
was perfectly content for Praefke to
continue selling those parts at retail
and performing warranty repairs of
Tecumseh engines. But Central Power would
not give Praefke a discount for being a
wholesaler, instead charging Praefke the
same price it charged retail dealers. The
denial of the wholesaler discount made it
more difficult for Praefke to profit from
reselling Tecumseh parts and precipitated
this suit, in which Praefke argues that
despite the absence of a contract with
Tecumseh it was a franchisee of Tecumseh
terminated without cause, in violation of
the dealership law.
The district judge issued a preliminary
injunction (which has been stayed,
however, pending this appeal) because he
thought that Praefke was likely to
prevail in an eventual trial and that the
balance of irreparable harms favored it
over Tecumseh. Actually there was no
showing that Praefke would incur
irreparable harm if the preliminary
injunction wasn’t issued. Praefke
continues to buy Tecumseh parts from
Central Power and to resell them to
dealers; there has been no disruption of
its dealer network. The higher price that
it pays for the Tecumseh parts that it
resells has reduced its profits, its
price to dealers being constrained by the
fact that they can buy parts from Central
Power at the same price that Praefke has
to pay. But because Tecumseh parts are
only a small part of Praefke’s business
(about 13 percent of its total sales
revenues and a slightly higher percentage
of its profits, before Central Power
replaced Industrial Engine), Praefke’s
profits have not fallen to a point that
threatens its solvency. Its losses are
purely financial, easily measured, and
readily compensated. There is therefore
no showing of irreparable harm, Roland
Machinery Co. v. Dresser Industries,
Inc., 749 F.2d 380, 386 (7th Cir. 1984),
and on this ground alone the preliminary
injunction should have been denied.
But in addition Tecumseh did not violate
the fair dealership statute when, by
terminating Industrial, it precipitated
Praefke’s loss of a wholesaler discount.
Praefke was not a Tecumseh dealer, and so
the statute is inapplicable. A
dealership, so far as bears on this case,
is created by (1) a "contract or
agreement, either express or implied,
whether oral or written," by which (2) "a
person is granted the right to sell or
distribute goods or services," in which
(3) there is "a community of interest in
the business of offering, selling or
distributing goods or services." Wis.
Stat. sec. 135.02(3)(a). The second
requirement is satisfied here, but not
the other two requirements. There was no
contract between Tecumseh and Praefke.
The contract was between Industrial and
Praefke. Tecumseh insisted on a right of
approval of Industrial’s subdistributors
because they would be distributing
Tecumseh’s parts at wholesale, a
responsible function that if performed
incompetently could injure Tecumseh’s
reputation. By reserving this right,
Tecumseh was not making any commitments
to Praefke.
True, the statute is explicit that the
dealership contract doesn’t have to be
written, or even express, id.; it can
thus be inferred from a course of
dealing. See California Wine Ass’n v.
Wisconsin Liquor Co., 121 N.W.2d 308, 315
(Wis. 1963); Wojahn v. National Union
Bank, 129 N.W. 1068, 1075-76 (Wis. 1911);
Bong v. Cerny, 463 N.W.2d 359, 362 (Wis.
App. 1990); Schaller v. Marine Nat’l
Bank, 388 N.W.2d 645, 649 (Wis. App.
1986); Restatement (Second) of Contracts
sec. 4, comment a (1981); E. Allan
Farnsworth, Contracts sec. 3.10, pp. 132-
33 (3d ed. 1999). The dealings between
Tecumseh and Praefke were slight and
intermittent; but that is an aside. To
infer a contract from a course of dealing
requires evidence of an intention by both
sides to make legally enforceable
commitments. E.g., Bong v. Cerny, supra,463 N.W.2d at 362; Schaller v. Marine
Nat’l Bank, supra, 388 N.W.2d at 649.
There is no evidence of such an intention
here. One can see this by asking in what
circumstances Praefke might have sued
Tecumseh, or Tecumseh Praefke, for breach
of contract. Tecumseh couldn’t have sued
Praefke for selling below or above a
particular price, for selling outside a
particular territory, for selling to
dealers assigned to other distributors,
for not selling enough, for not
advertising enough, or for carrying and
promoting competing goods; for Praefke
had made no express or implied promise to
Tecumseh concerning any of these matters.
And Praefke couldn’t have sued Tecumseh
for not selling it enough parts at a
particular price, because Praefke did not
buy from Tecumseh at all, but from
Industrial, and Tecumseh could not
legally have fixed Industrial’s resale
prices and did not attempt to do so. Nor
could Praefke have sued Tecumseh for
terminating Industrial, or for appointing
Central Power in Industrial’s place, or
for not compelling Central Power to
continue Praefke’s status as an
authorized wholesaler entitled to a
discount; for Tecumseh never made an
express or implied promise to Praefke to
retain Industrial or to assure the
maintenance of Praefke’s status.
The complexity of the preliminary
injunction confirms the absence of a
contract between Tecumseh and Praefke.
Had there been a contract between the two
firms that Tecumseh terminated, the
preliminary injunction would have been
short and sweet; it would have said,
resume performance in accordance with the
contract. Because there was no contract,
the preliminary injunction had to create
one. And so it establishes a territory of
primary responsibility for Praefke,
entitles Praefke to buy from Tecumseh at
the price that Tecumseh suggests that its
warehouse distributors sell to approved
wholesalers, entitles Praefke to credit
"according to the terms most recently
offered to Praefke by its former
[warehouse distributor, i.e.,
Industrial]," requires Tecumseh to
"accept from Praefke its pre-season
stocking order" on terms the
"reasonableness of [which] shall be
determined by comparison to the most ASD-
friendly terms offered by CWDs Central
Power and W.J. Connell Company," and on
and on, paragraph after paragraph. In
effect, the injunction makes Tecumseh
Praefke’s warehouse distributor, knocking
out Central Power, which apparently,
however, has no contractual right to
complain.
A preliminary injunction is often said
to be designed to maintain the status quo
pending completion of the litigation.
Chathas v. Local 134 IBEW, 233 F.3d 508,
513 (7th Cir. 2000); IDS Life Ins. Co. v.
SunAmerica, Inc., 103 F.3d 524, 527 (7th
Cir. 1996); Board of Education v.
Illinois State Bd. of Education, 79 F.3d
654, 657 (7th Cir. 1996); Textile
Unlimited, Inc. v. A..BMH & Co., 240 F.3d
781, 786 (9th Cir. 2001); United States
ex rel. Rahman v. Oncology Associates,
P.C., 198 F.3d 489, 498 (4th Cir. 1999).
This is not the happiest formula--in fact
it’s both inaccurate (as preliminary
injunctions are often issued to enjoin
the enforcement of a statute or contract
and thus interfere with existing
practices) and empty. Suppose Praefke had
been a Tecumseh dealer with a real
contract of its own that allowed
termination without liability on 30 days’
notice, and Tecumseh gave the required
notice and on the twenty-ninth day
Praefke asked for a preliminary
injunction to prevent the termination.
Would such an injunction "maintain the
status quo" because an established
dealership would continue, or change the
status quo by suspending a term of the
contract, making Praefke a dealer with at
least temporary tenure rather than a
dealer subject to termination at the will
of his supplier?
The answer isn’t important. What’s
important is that the preliminary
injunction in this case creates a
dealership where there was none, in the
teeth of the parties’ contract. The
implications of the injunction are
breathtaking: a manufacturer is locked
into a contractual relationship with all
his distributors’ subdistributors and
dealers, provided only that he had
reserved in his contracts with his
distributors the right to veto the
distributor’s choice of a particular
subdistributor or dealer. There is no
basis in the fair dealership law for such
a result.
There also was no "community of
interest" between Tecumseh and Praefke,
as the statute requires. The function of
this requirement is to identify
situations in which the manufacturer has
the dealer over a barrel. If a dealer in
vests heavily in the promotion of the
manufacturer’s brand, the manufacturer
may be tempted to threaten the dealer
with termination unless the dealer
knuckles under to the manufacturer’s
demands, since termination would prevent
the dealer from recouping his brand-
specific investment. Ziegler Co. v.
Rexnord, Inc., 407 N.W.2d 873, 879-80
(Wis. 1987); Moodie v. School Book Fairs,
Inc., 889 F.2d 739, 744 (7th Cir. 1989).
Whether such threats are credible or
common--a manufacturer who behaved in
this way would find it difficult to
attract new dealers on favorable terms--
and inadequately deterred by tort or
contract law may be doubted. Fleet
Wholesale Supply Co. v. Remington Arms
Co., 846 F.2d 1095, 1097 (7th Cir. 1988).
But that is not for us to say. The
important point is that the Wisconsin
statute targets those situations in which
a relation of dependence has been created
and confines statutory protection to
those situations. Baldewein Co. v. Tri-
Clover, Inc., 606 N.W.2d 145, 151 (Wis.
2000); Ziegler Co. v. Rexnord, Inc.,
supra, 407 N.W.2d at 879-80; Foerster,
Inc. v. Atlas Metal Parts Co., 313 N.W.2d
60, 63 (Wis. 1981); Moodie v. School Book
Fairs, Inc., supra, 889 F.2d at 744-45;
Fleet Wholesale Supply Co. v. Remington
Arms Co., supra, 846 F.2d at 1097. This
is not one of those situations. Praefke
has made no significant brand-specific
investments in promoting Tecumseh’s
products, and its commitment to those
products is too small to enable Tecumseh
to bludgeon it into accepting inferior
terms. It can switch, so far as appears
painlessly, to other lines. Nor can we
find any evidence that Tecumseh’s
cancellation of Industrial was intended
to pressure Praefke or somehow confiscate
goodwill for Tecumseh that Praefke had
created by an investment that the
cancellation would prevent Praefke from
recouping. It is no doubt possible that
Tecumseh cancelled Industrial and
appointed Central Power to enable the
latter (at a price, of course) to
appropriate goodwill that Praefke had
created, by selling directly to the
retail dealers served by Praefke, but
there is no evidence of so Machiavellian
a scheme. The district court’s
unelaborated references to Tecumseh’s
behavior as "predatory," 110 F. Supp. 2d
at 915, 917, have no basis in the record,
in Praefke’s ar-guments (its brief in our
court assigns no reason for Tecumseh’s
cancellation of Industrial), or even in
informed speculation.
The judgment is reversed and the
preliminary injunction dissolved.
Reversed.