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Schultz v. Onan Corp.

June 15, 1984


On Appeal From The United States District Court For The Western District Of Pennsylvania.

Gibbons and Sloviter, Circuit Judges and Bissell, District Judge.*fn*

Author: Gibbons


GIBBONS, Circuit Judge.

Onan Corp. appeals from a judgment against it in the amount of $72,500 with costs in favor of Nathan and Duane Schultz, trading as J.C. Schultz Co., a partnership (Schultz). That judgment, entered on a jury verdict after a second trial, followed a reversal and remand by this court in a prior appeal. Schultz v. Onan Corp., 681 F.2d 177 (3d Cir. 1982).We reluctantly conclude that a new trial on liability and damages is required.


A. The First Trial

On August 1, 1975, Schultz acquired a distributorship previously operated by Joseph C. Schultz. The business distributed engine-driven electrical generators, manufactured by Onan Corp., in eleven counties in northwestern Pennsylvania. A series of written distributorship agreements, each for a three-year term, governed the relationship between Schultz and Onan. The last such agreement was executed on June 3, 1977 and specifies a termination date of December 31, 1980. By its terms, the agreement is to be "governed and construed in accordance with the laws of the State of Minnesota," where Onan has its principal place of business. The contract provides for earlier termination by either party "for any reason upon sixty (60) days written notice to the other," and by Onan "upon thirty (30) days written notice to [Schultz] in the event [that Schultz] shall have failed to fulfill any one or more of [its] responsibilities set forth in Article 9 of this Agreement." App. at 459. These provisions permitting termination are set forth in greater detail in Part III A infra.

By letter dated March 24, 1978, Onan notified Schultz that "[i]n accordance with previous communications with you, . . . the distributorship relationship between Onan and J.C. Schultz Company is to be terminated sixty (60) days from the date of this letter." App. at 467. Thereafter Onan appointed A.F. Shane Co. as distributor for northwestern Pennsylvania.

On June 25, 1979, Schultz filed a four-count complaint against Onan and A.F. Shane. Count I alleged violations of sections 1 and 2 of the Sherman Act and section 2(a) of the Clayton Act. Counts II, III, and IV sought damages on Minnesota state-law causes of action for equitable recoupment, conspiracy, and restitution of profits retained by the defendants. The complaint did not plead a cause of action under the Minnesota Francise Act. Minn. Stat. Ann. §§ 80C.01 to 80C.22 (West Supp. 1983) (MFA). The section 2 Sherman Act and section 2(a) Clayton Act claims were voluntarily withdrawn before the first trial. At the end of the plaintiffs' case in that trial, the district court directed verdicts against Schultz on all remaining claims except Count II, which sought damages against Onan under Minnesota law for equitable recoupment.*fn1 No appeal was taken from the directed verdicts.

We examine the equitable recoupment claim at greater length below. For present purposes, the recoupment claim involves a Minnesota doctrine that an exclusive franchise dealer who has invested in distribution facilities may recoup his investment from the franchisor if the distributor is terminated "without just cause" before the franchise has been afforded a reasonable opportunity to recoup that investment. See Ag-Chem Equipment Co. v. Hahn, Inc., 480 F.2d 482, 486 (8th Cir. 1973); Clausen & Sons, Inc. v. Theo. Hamm Brewing Co., 395 F.2d 388, 391 (8th Cir. 1968). In the first trial the jury returned a verdict on that claim for $45,500. Onan's motions for judgment notwithstanding the verdict and for a new trial were denied, and Onan appealed. This court, in turn, reversed the $45,500 judgment. We held that as a matter of Minnesota law, the equitable recoupment doctrine was not applicable to contracts terminable only for "just cause." 681 F.2d at 179-80. Moreover, we reasoned, that MFA applied to the Schultz-Onan contract. As interpreted in the case of Gilderhus v. Amoco Oil Co., 1980-81 Trade Cas. (CCH) para. 63,647 (D. Minn. 1980), contracts governed by the MFA could be terminated prior to their expiration date only for just cause. 681 F.2d at 181. Hence, we concluded, Schultz "may not recover under [the] recoupment doctrine." Id. We then remanded for consideration of any possible recovery on a breach of contract theory. Id.

Unfortunately, the first reference to the MFA was made during oral argument on the prior appeal. Thus, no record has been made with respect to the elements of a claim under that Act. Under Minnesota law, the MFA is only applicable to franchises for which a "franchise fee" has been paid. Minn. Stat. Ann. § 80C.01 Subd. 4(a)(3) (West Supp. 1983); RJM Sales & Marketing, Inc. v. Banfi Products Corp., 546 F. Supp. 1368, 1373 (D. Minn. 1982). As we observe below, there is no evidence in the record that a franchise fee has been paid. Consequently, it seems clear that the precise ground relied upon for reversing the $45,500 judgment had no factual foundation. Nor did the panel address the main points briefed by Onan on the inapplicability of the recoupment doctrine or the propriety of the court's instructions on damages.*fn2

B. The Second Trial

On remand, the district court permitted Schultz to amend the complaint to assert, for the first time, a breach of contract claim asserting that the franchise agreement had been breached without just cause and sufficient notice. Schultz pleaded this contract claim in counts V through VIII of the amended complaint. The contract theory was predicated upon the applicability of the MFA as interpreted in Gilderhus and our first appeal. Over Onan's objection, the case was presented to the jury with a binding instruction that the MFA applied. The jury returned a verdict of $72,500 for Schultz, and Onan again appealed. Onan now contends that the district court erred in charging the jury that the MFA applied, arguing that the record contains no evidence satisfying the elements of that Act. Onan relies on other trial errors as well which we need reach only if further proceedings are necessary on the amended complaint.


A. Applicability of the Minnesota Franchise Act

The Schultz-Onan contract is a "franchise" within the meaning of the MFA if it is a contract:

(1) by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the francisor's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics;

(2) in which the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by ...

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