Obtain Their Consent Before Transferring A Franchise

Mulcahy LLP Wins Significant Ninth Circuit Ruling on Behalf of Isuzu Motors, Providing Template for Franchisors

By James M. Mulcahy on November 21, 2012

Recently, the Ninth Circuit issued a ruling that should be of interest to any franchisor. Almost all franchisors require in their franchise agreements that their franchisees obtain their consent before transferring a franchise, with such consent not to be unreasonably withheld. For motor vehicle franchises, this requirement is also codified in state laws.

On September 27, 2007, the Ninth Circuit ruled on the appeal of a motor vehicle dealer in a case involving the requirement in dealer agreements and the California Vehicle Code that dealers obtain their franchisor’s consent before transferring their franchised dealership, with such consent not to be unreasonably withheld. The court made it clear that a dealer who believes that its franchisor has wrongfully withheld consent to a transfer may not simply proceed with the transfer, and that doing so will expose the transferee dealer to liability to the franchisor for trademark infringement and related unfair competition claims.

In 2002, for tax reasons, an Isuzu dealer secretly transferred its Isuzu dealership to a related entity without informing Isuzu or obtaining Isuzu’s consent. When Isuzu learned of the secret transfer, Isuzu, represented by Mulcahy LLP, sued the transferee dealer in federal court for trademark infringement and related torts. In its defense, the dealer argued that Isuzu had unreasonably withheld consent to the transfer. Isuzu argued to the court that any purported evidence that Isuzu unreasonably withheld consent to the transfer was irrelevant and should be excluded from the trial. The district court agreed, and, after a jury trial, Isuzu won a significant damages award. The dealer appealed, claiming that the district court erred in excluding evidence regarding the propriety of Isuzu’s election not to consent to the transfer. The Ninth Circuit rejected the appeal, agreeing with the district court that the evidence was indeed irrelevant, because the dealer had no right to infringe Isuzu’s trademarks, even if, for the sake of argument, Isuzu should have consented to the transfer.

The ruling, of course, does not give a free pass to franchisors to withhold consent to transfers. However, it does demonstrate that franchisors may have an avenue of recourse against transferee franchisees who operate without first obtaining franchisor consent – even if the franchisor should have consented to the transfer.

Read the full Ninth Circuit decision
Read the full Mulcahy LLP press release




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