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Coyne's & Co., Inc. v. Enesco, LLC: FRANCHISE - no clear error finding no indirect franchise fee was paid, so Minnesota Franchise Act not applicable

1The Honorable Michael J. Davis, United States District Judge for the District
of Minnesota.
United States Court of Appeals
No. 07-3627
Coyne's & Co., Inc., *
Plaintiff Appellant, *
* Appeal from the United States
v. * District Court for the District
* of Minnesota.
Enesco, LLC, *
Defendant Appellee. *
Submitted: October 16, 2008
Filed: January 23, 2009
Before LOKEN, Chief Judge, BYE and SMITH, Circuit Judges.
BYE, Circuit Judge.
Coyne's & Co. appeals the district court's1 denial of its motion for a preliminary
injunction. We affirm.
In 2005, Coyne's & Co. ("Coyne"), a Minnesota corporation, entered into a
distributor agreement (the "Agreement") with Country Artist, Ltd. ("CA"), a company
formed under the laws of England. The Agreement granted Coyne the exclusive right
to sell, distribute, market, and advertise all CA products (the "Products"), as well as
the use of the trademarks and copyrights associated with the Products, in the United
States and Mexico through December 2007. In exchange, Coyne paid CA a 35-50%
mark-up on the Products.
On August 10, 2007, CA was placed into receivership under the United
Kingdom's Insolvency Act of 1986. The receivers for CA immediately entered into
an asset sale agreement with Enesco, LLC ("Enesco"), an Illinois corporation. CA
sold Enesco "such right, title and interest as it may have in the Business and Assets."
Enesco "acknowledge[d] that [the CA name] may not be the property of [CA] and that
accordingly any use of the Name by [Enesco] shall be at [Enesco's] own risk."
On August 21, 2007, Coyne received a letter from CA's receivers terminating
the Agreement pursuant to Section 5.4, which allows a party to terminate the
Agreement if the other party becomes insolvent. Because this section does not permit
an insolvent party to use its own insolvency to terminate the Agreement, Coyne
responded the termination had no legal effect.
On September 21, 2007, Enesco issued a press release announcing it would be
distributing the CA Products in the United States.
On September 29, 2007, Coyne filed suit against Enesco, alleging claims under
the Lanham Act, the Copyright Act, the Minnesota Deceptive Trade Practices Act, the
Minnesota Uniform Trade Secrets Act, and Minnesota common law (interference with
contractual relations, interference with prospective business relations, and
misappropriation of goodwill). The next day, it filed a motion for a temporary
retraining order and preliminary injunction to prevent Enesco from distributing the
Products in the United States.
2The MFA provides in relevant part:
No person may terminate or cancel a franchise unless: (i) that person has
given written notice setting forth all the reasons for the termination or
cancellation at least 90 days in advance of termination or cancellation,
and (ii) the recipient of the notice fails to correct the reasons stated for
termination or cancellation in the notice within 60 days of receipt of the
notice . . . .
Minn. Stat. 80C.14, subd. 3(a).
3Because the district court subsequently dismissed Coyne's trademark and
copyright infringement claims, Coyne's & Co., Inc. v. Enesco, LLC, 565 F. Supp. 2d
1027, 1043, 1044 (D. Minn. 2008), the appeal as to those claims is moot.
The district court denied Coyne's motion. The court found Coyne could not
demonstrate a likelihood of success on its claims unless the Agreement was still in
effect. Coyne argued CA's termination was not valid, and thus the Agreement was
still in effect, because CA failed to comply with the Minnesota Franchise Act's (the
"MFA") termination requirements.2 The district court rejected this argument, finding
Coyne did not pay CA a franchise fee, as required to bring the Agreement within the
scope of the MFA. Therefore, the Agreement was not still in effect, and Coyne had
not demonstrated a likelihood of success on its claims.
The district court also found, even if the Agreement was still in effect, Coyne
likely did not have standing to pursue a claim for infringement of intellectual property
rights against Enesco because it neither owned the copyrights and trademarks for the
products, nor did it have an exclusive license to those copyrights and trademarks.
On appeal, Coyne asserts the district court incorrectly determined the
Agreement was not subject to the MFA because Coyne paid CA a franchise fee.3
Whether a preliminary injunction should issue turns upon: (1) the probability
of the movant succeeding on the merits; (2) the threat of irreparable harm to the
movant; (3) the balance between this harm and the injury in granting the injunction
will inflict on the non-movant; and (4) the public interest. Dataphase Sys. Inc. v. CL
Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981) (en banc). We review the denial of a
motion for preliminary injunction for abuse of discretion. Phelps-Roper v. Nixon, 509
F.3d 480, 484 (8th Cir. 2007), as modified on rehearing, 2008 WL 4755559. "An
abuse of discretion occurs where the district court rests its conclusion on clearly
erroneous factual findings or erroneous legal conclusions." Lankford v. Sherman, 451
F.3d 496, 503-04 (8th Cir. 2006).
The district court's conclusion that the Agreement was not governed by the
MFA because Coyne did not pay CA a franchise fee was not erroneous. The MFA
defines a franchise as:
(1) A right granted to the franchisee to engage in business using the
franchiser's trade name or other commercial symbol, (2) a "community
of interest" in the marketing of goods or services between the franchisee
and franchiser, and (3) a "franchise fee" paid by the franchisee.
Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868, 874 (Minn. 1978); see also
Minn. Stat. 80C.01, subd. 4(a)(1).
The dispute centers around the third elementwhether Coyne paid CA a
franchise fee. The MFA defines a franchise fee as:
[A]ny 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, but not limited to, the
payment either in lump sum or by installments of an initial capital
investment fee, any fee or charges based upon a percentage of gross or
net sales whether or not referred to as royalty fees, any payment for
goods or services, or any training fees or training school fees or charges;
provided, however, that the following shall not be considered the
payment of a franchise fee:
(a) the purchase of goods or agreement to purchase goods at a bona fide
wholesale price; . . . .
Minn. Stat. 80C.01, subd. 9.
Coyne admits it did not pay what would ordinarily be considered a "franchise
fee," i.e., an up-front, direct fee for the right to distribute CA's products. Instead,
Coyne argues it paid an indirect franchise fee in the form of a minimum purchase
requirement and a 35-50% mark-up on the Products.
A. Minimum Purchase Requirement
A minimum purchase requirement can be a franchise fee "if the distributors
were required to purchase amounts or items that they would not purchase otherwise."
Twin Cities Galleries, LLC v. Media Arts Group, Inc., 476 F.3d 598, 601 (8th Cir.
2007) (quoting Upper Midwest Sales Co. v. Ecolab, Inc., 577 N.W.2d 236, 242 (Minn.
Ct. App. 1998)). To so determine, the Court applies an objective test, examining
"whether the [minimum purchase] requirements were unreasonable." Id. (quoting
Upper Midwest, 577 N.W.2d at 242).
Coyne does not assert, nor did it below, the minimum purchase requirement was
unreasonable, so the district court did not clearly err in finding the minimum purchase
requirement is not an indirect franchise fee under the MFA.
B. Product Price Mark-Up
A price mark-up on goods above a bona fide wholesale price may constitute an
indirect franchise fee. Cambee's Furniture, Inc. v. Doughboy Recreational, Inc., 825
F.2d 167, 171 (8th Cir. 1987) (interpreting South Dakota's franchise regulation, which
is substantially similar to the MFA); Upper Midwest, 577 N.W.2d at 242; OT Indus.,
Inc. v. OT-tehdas Oy Santasalo-Sohlberg Ab, 346 N.W.2d 162, 166 (Minn. Ct. App.
1984). The question of whether the mark-up is a bona fide wholesale price or an
indirect franchise fee is a fact-specific inquiry.
The district court found the CA Product mark-up is not an indirect franchise
fee; rather, the mark-up merely represented CA's profits on the Products, i.e. a bona
fide wholesale price. Coyne argues the court was incorrect because it is illogical to
assume that all of the rights granted to Coyne under the Agreementsuch as the
license to use the Trademarks, the limitation on CA's right to compete with Coyne in
the Territory, and CA's obligation to pay a substantial termination feeare merely in
consideration for Coyne's payment of a bona fide wholesale price for CA products.
This argument, however, falls short of demonstrating the district court's factual
finding is clearly erroneous. See Commc'n Maint., Inc. v. Motorola, Inc., 761 F.2d
1202, 1206-07 (7th Cir. 1985) (holding that mark-up retained by alleged franchisor
was not an indirect franchise fee under Indiana's franchise regulation); Corporate Res.,
Inc. v. Eagle Hardware & Garden, Inc., 62 P.3d 544, 548 (Wash. Ct. App. 2003)
(holding that profit margins on installation contracts was not an indirect franchise fee
under Washington's franchise regulation). Therefore, the Court will not disturb the
district court's finding on appeal.
Accordingly, the district court did not clearly err in finding Coyne did not pay
a franchise fee, and the Agreement thus did not fall within the protections of the MFA
for purposes of a preliminary injunction.
We affirm the district court.


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