Opinion
No. DBDCV-09-4010861
October 1, 2009
MEMORANDUM OF DECISION
I PROCEDURAL BACKGROUND
The parties in this action are plaintiff, Walker Industrial Products, Inc. (hereinafter referred to as "Walker"), and defendant, Intelligent Motion Systems, Inc., (hereinafter referred to as "IMS"). The plaintiff in this action filed a five-count complaint alleging breach of contract, violation of the Connecticut Unfair Trade Practices Act ("CUTPA"), General Statutes § 42-110b et seq., violations of the Connecticut Franchise Act ("CFA"), General Statutes § 42-133 et seq., breach of the implied covenant of good faith and fair dealing, and tortuous interference with Walker's business relationships.
In connection with the claims asserted, plaintiff has requested that the Court issue a preliminary injunction to halt the termination of the IMS Stocking Distributor Agreement between the parties, from announcing the termination, from terminating and/or cutting off the supply of new goods and products to Walker, from changing the payment terms for said goods to a prepaid program, from soliciting potential replacement distributors and from soliciting Walker's customers on behalf of any successor/replacement to Walker. The Court held a three-day evidentiary hearing on the plaintiff's Application for Preliminary Injunction in which both parties called numerous witnesses and submitted numerous exhibits to support their respective positions.
II THE EVIDENCE
Based upon the evidence presented, and the reasonable inferences drawn therefrom, including the court's observations of the demeanor of the witnesses, the Court makes the following factual findings.
The plaintiff, Walker, is a private Connecticut corporation that distributes products mainly relating to the automation of equipment, with motion control products comprising the bulk of its business. One of the manufacturers of automated equipment for which Walker distributes product is IMS. The defendant, IMS, is also a Connecticut corporation that sells stepper motor drivers and motor controls for machinery commonly used in factories, with a focus on electrical motion control. A number of these products utilize patented technology, and according to IMS marketing materials, this patented technology gave the product "exceptional performance." In connection with its distribution of IMS products, for the last ten years Walker has distributed and facilitated the sale of IMS product in Connecticut and provided technical and engineering support to the customers to which Walker has sold IMS product.
In April 1999, the parties entered into an agreement called the "IMS Stocking Distributor Agreement" (hereinafter the "Agreement") regarding the distribution and sale of IMS product. The Agreement was executed by the president of Walker and by the vice president, sales and marketing, of IMS. (Pl. Ex. 1.) Pursuant to that Agreement, both Walker and IMS had enumerated responsibilities to each other. (Pl. Ex. 1.) Among those responsibilities was the responsibility of Walker to work with the IMS territory representative and IMS regional manager to develop an annual marketing plan for the territory. (Pl. Ex. 1.) The Territory Marketing Plan provision of the Agreement also provided for Walker to "at a minimum, forecast revenue sources and amounts, major programs to generate revenue, and cooperative arrangements w/Rep and IMS to implement such programs." (Pl. Ex. 1.) Another responsibility of Walker under the Agreement was to "promote IMS products through advertising mailings, prospecting, shows, etc." (Pl. Ex. 1.) Walker was also required under the Agreement to stock inventory to meet territory demands based on business projections for the territory and was required under the Agreement to provide a stocking report to IMS and Representative twice a year. (Pl. Ex. 1.) Under the terms of the Agreement, Walker was also required to maintain a technical person on staff trained by IMS in IMS products who could support the distributor sales people and customers in the application of IMS' products. (Pl. Ex. 1.) Distributor pricing for products was set by IMS and OEM pricing to Walker's customers was "suggested" by IMS.
IMS also had certain responsibilities under the Agreement. Those responsibilities included: providing a formal product and sales training program at the factory for distributor personnel, making demo equipment available to distributors at 50 percent of OEM pricing, working with the distributor to create an annual marketing plan for the territory, making joint sales calls with the distributor as reasonably requested by distributor and as Representative felt was necessary to help grow their business in a territory, helping start a new distributor by giving him a basis to stock early by directing business to him early in the relationship, honoring the distributor's customer relationship, and sharing expenses for trade shows booked by the distributor which featured IMS products, unless IMS also booked a booth at the same show. (Pl. Ex. 1.)
The relationship between the parties continued for ten years without incident until August 2009. During the course of that relationship, in 2007, 2008 and 2009, IMS prepared "Mutual Action Plans" for Walker which involved an assessment by IMS of the disclosure by Walker of its actual customers and business prospects for IMS products. In connection with those Mutual Action Plans, Walker identified to IMS its customers and prospective customers in its top "Key Accounts," "Maintenance Accounts" and "Target Accounts." In connection with that disclosure, Walker identified client contacts, products relating to that sale and/or marketing, and its thought processes on how to successfully develop such business. All of that information was disclosed to IMS at its request. At the end of the Mutual Action Plan document was a "Training Log," which identified the Walker personnel that had undergone training during the course of the year in IMS products and a "Mutually Defined Objectives" page which delineated the mutual objectives of Walker and IMS in selling IMS products. (Pl. Ex. 5.)
Walker maintained on its staff at least one technical person trained by IMS in IMS products who could support the distributor sales personnel and customers in the application of IMS products. Walker also provided to IMS, at its request, information regarding the identification of Walker's personnel, the identification of other main product lines it sold and percentage of such sales. Walker did in fact promote and distribute advertising materials for IMS products using the IMS logo. Walker did stock IMS products pursuant to the IMS Distributor Agreement and priced such product pursuant to the pricing provided by IMS. According to the testimony and evidence presented during the hearing, the parties did comply with the terms of the IMS Stocking Distributor Agreement and their business relationship evolved around many aspects of that Agreement. In 2002, the IMS revenue from Walker's sales of its products was $35,000. By 2008, the IMS revenue from Walker's sales of its products had increased seven-fold to $254,516.71. From 2007 to 2008, the IMS revenue from Walker's sales of its products had increased approximately 70 percent from $142,262 to $254,516.71.
In 2008, IMS changed its manufacturer's representative from George Fede, from Applied Motion Solutions ("AMS"), to an in-house sales representative by the name of Kevin Wall. (Pl. Ex. 12.) According to a 7/30/08 letter to IMS distributors, IMS advised its distributors that had worked with AMS, that AMS was being terminated as its manufacturer's representative for IMS. (Pl. Ex. 12.) IMS advised the distributors that while AMS had been its manufacturer's representative for fifteen years and was instrumental to IMS' sales growth by developing a strong OEM customer base and effective distribution, corporate earnings pressure from its new parent company, Schneider Electric, made this decision necessary. (Pl. Ex. 12.) IMS advised the distributors that Kevin Wall, a senior application engineer at IMS, would assume sales leadership of the New England territory.
In late January 2009, Wall met with sales representative Casey Pimenta and John Ryan of Walker Industries to discuss the Mutual Action Plan for the coming year and mutually growing business in 2009. On or about January 22, 2009, Kevin Wall sent an email to John Ryan and Casey Pimenta summarizing the meeting that occurred, telling both that IMS viewed Walker as an important sales partner and was looking forward to mutually growing the business in 2009 and beyond. (Pl. Ex. 6.) Attached to that email was a Mutual Action Plan forecast for 2009 that Wall had drafted which listed key customers and prospective customers of Walker's and strategies relating to soliciting such business. According to testimony given at the hearing, the customer information contained on the 2009 Mutual Action Plan forecast relating to key OEM and Prospective OEM accounts came from Walker. Pursuant to the IMS Stocking Distributor Agreement, Walker was required to turn over this information to IMS so that a mutual marketing plan beneficial to both parties could be developed. At the hearing, evidence was presented by Walker that a number of the customers identified in the Mutual Action Plan had taken Walker years to develop a good business relationship.
According to the testimony of Kevin Wall at the hearing, a few weeks later in February 2009, he contacted and met with Axis New England ("Axis"), a potential distributor, to replace Walker. Wall further testified at that hearing that he, on behalf of IMS, signed a new distributor agreement with Axis in May or June 2009. Wall testified that in July 2009, he made the decision to terminate Walker as a distributor, but waited until August 5, 2009, to convey the termination to Walker. This Court did not find Wall's testimony credible as to the date he decided to terminate the distributor relationship with Walker. On August 5, 2009, Kevin Wall visited Walker's business premises and presented John Ryan, its president, with a letter of termination and advised Walker it would no longer be an authorized distributor of IMS products. At the meeting, John Ryan asked Wall why Walker was being terminated as a distributor and was advised that the relationship was being terminated due to poor communication between Walker and IMS. According to the credible testimony of John Ryan, at no time prior to this meeting was Walker advised that IMS was dissatisfied with its services. In fact, the evidence presented at the hearing showed that Walker's sales revenues of IMS products increased by approximately 70 percent from 2007 to 2008.
Ryan testified at the hearing that 8 percent of Walker's revenues were derived directly from sales of IMS products and that upwards of 35 percent of its business would be impacted by a termination of the IMS distribution agreement. Ryan testified that the 35 percent figure of Walker's business that he estimated would be impacted by the termination of the IMS distribution agreement would include the 8 percent of Walker's revenues from IMS products. Ryan testified that he estimated that upwards of 35 percent of Walker's business would be impacted as the IMS product was sold as part of an integrated system and there was a direct relationship between the sale of IMS products and other products that were part of the same system. Ryan further testified that his biggest concern in losing the distributor agreement was that Walker would lose sales in other product lines in which they sell the integrated system.
Ryan also testified that in his opinion Walker would not be able to use a competitor's products in place of IMS' products in that there was no product that had the same technological capabilities as the IMS motor drives and controls. Ryan testified at the hearing that the IMS drive was the "brains of the operation" and that code for operation of other equipment that ran in conjunction with the IMS drive would be based on the IMS drive. Casey Pimenta, the "IMS Champion" at Walker Industries, also testified that the IMS Stepper Drive was a unique product in its application abilities and size.
Max Wietharn, the IMS vice president of sales and marketing testified for IMS at the hearing. He testified that the new product released by IMS, the IMS Mdrive Accustep product was cutting edge technology, that there was nothing like it in the marketplace and that there was a pending patent application regarding the technology in the device. He also testified that other IMS Mdrive products contained patented technology as well. Wietharn testified, however, that Walker could easily replace any of the IMS products with a competitor's products, notwithstanding their "cutting edge" technology and/or patented technology contained in such products.
Ryan further testified that Walker would be disadvantaged in buying the IMS product as a non-distributor as (1) Walker would be paying full OEM pricing for the product, instead of distributor product; (2) would have to pre-pay for the product instead of having 30-day payment terms; (3) IMS would be advising Walker's client base that it was not an authorized distributor which would encourage his clients to look elsewhere not only for IMS products, but related products necessary to operate the machinery in question; (4) that it would not have the ability to get the latest software revisions to the product and would not have the technological support that distributors get; (5) IMS would support its distributors and provide demo equipment and sales support that Walker would not be able to get; and (6) Walker would not be able to have its personnel trained by IMS in IMS products like it trains its distributors.
In fact, testimony was presented that at or about the time Wall advised Walker that its distributor agreement was being terminated, Wall was in contact with Walker customers to advise them that Walker was no longer going to be an authorized distributor of IMS products. Casey Pimenta testified that Wall advised PDC, a client of Walker, that Walker was no longer an authorized distributor and that they should purchase their IMS product from Axis. Wall testified at trial that he had, in fact, spoken with a representative at PDC and corroborated Pimenta's testimony. Wall also confirmed that he had been in contact with another Walker customer and advised them that Walker was being terminated as a distributor. Wall further testified that it was his plan to contact Walker's clients and advise them that Walker was no longer an authorized distributor of IMS products and that he would be attempting to redirect them to Axis or another authorized distributor of IMS products.
John Ryan of Walker testified that it is not realistic that IMS would continue to sell its IMS products to Walker after termination of the Agreement as Walker would be directly competing with its new distributor, Axis, for the same clients. Ryan further testified that if the Agreement is terminated and IMS directed its current IMS customer base away from Walker, he believed Walker's 12-person business would not only be facing lay-offs, but that such an event would be catastrophic to the company.
III DISCUSSION Preliminary Injunction
Under well established Connecticut law, in order to grant a preliminary injunction the Court must consider the following factors: (1) irreparable and imminent injury; (2) lack of an adequate remedy at law; (3) likelihood of success on the merits; and (4) whether a balancing of the equities favors granting the injunction. Waterbury Teachers Ass'n v. Freedom of Information Commission, 230 Conn. 441, 446, 645 A.2d 978 (1994). "For injunctions, it is essential to establish not only a violations of the rights of the moving party, but also that such a violation . . . is or will be attended with actual or serious damage." (Internal quotation marks omitted.) Doublewal Corp. v. Toffolon, 195 Conn. 384, 392, 488 A.2d 444 (1985). The power of the court, in sitting as a court of equity, to grant injunctive relief may be exercised only under demanding circumstances. Restraining the actions of a party by injunction is an extraordinary power, and is always to be exercised with caution, and never without the utmost of satisfactory reasons apparent from the face of the record. It is a remedy that requires the exercise of discretion by the trial court in light of the totality of the relevant circumstances. Id. "[I]n exercising its discretion, the court . . . [must] consider and balance the injury complained of with that which will result from interference by injunction . . . The relief granted must be compatible with the equities of the case." (Citations omitted; internal quotation marks omitted.) Berin v. Olson, 183 Conn. 337, 343, 439 A.2d 357 (1981); see also Marquardt Roche/Meditz Hackett, Inc. v. Riverbend Executive Center, Inc., 74 Conn.App. 412, 421, 812 A.2d 175 (2003).
"Irreparable harm must be shown by the moving party to be imminent, not remote or speculative . . . and the alleged injury must be one incapable of being fully remedied by monetary damages." (Citation omitted.) Reuters, Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990). Likelihood of success on the merits does not require that the party demonstrate that success is an absolute certainty, rather the party need only show that the probability of his prevailing is better than fifty percent. Abdul Wali v. Coughlin, 754 F.2d 1015, 1025 (2d Cir. 1985).
The plaintiff has sought preliminary injunctive relief against IMS under (1) the Connecticut Franchise Act (CFA), General Statutes § 42-133e et seq. and (2) the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110b et seq. For purposes of a decision on the merits of a preliminary injunction in this case, Walker must meet the burden of the necessity and propriety of injunctive relief by demonstrating to the Court, not only the likelihood of successfully proving such violations of the CFA and CUTPA, but a resulting irreparable harm flowing from such a breach. Moreover, this Court must balance the equities between the parties and find that any harm is of such magnitude as to be incurable by any other remedy at law, such as monetary damages. This Court will first analyze the plaintiff's request under the CFA.
A Connecticut Franchise Act CT Page 19701
The Connecticut Franchise Act, General Statutes § 42-133e et seq., defines a franchise as "an oral or written agreement or arrangement in which (1) a franchisee is granted the right to engage in the business of offering, selling or distributing goods . . . under a marketing plan or system prescribed in substantial part by a franchisor; and (2) the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate." (Internal quotation marks omitted.) Hartford Electric Supply Co. v. Allen-Bradley Co., 250 Conn. 334, 347, 736 A.2d 824 (1999). The franchise act's remedial purpose is to prevent a franchisor from unfairly exerting economic leverage over a franchisee and should be liberally construed in favor of the class sought to be benefitted. Id., 345. Muha v. United Oil Co., 180 Conn. 720, 728, 433 A.2d 1009 (1980).
The plain language of the CFA "creates a broad definition of what agreements and actions the trial court should examine when applying the statute. Moreover, the statute only requires a substantial prescription of a marketing plan or system in order for a plaintiff to meet the first requirement of the definition." Hartford Electric Supply Co. v. Allen-Bradley Co., supra, 250 Conn. 348. "The relationship between the parties pursuant to Section 42-133e(b)(1) is not governed solely by the parties' main written agreement. Rather, its legal significance is fixed by reality, not by what defendant[s] or plaintiffs call it, though descriptive language may be relevant." Id., citing Petereit v. B. Thomas, Inc., 853 F.Sup. 55, 60 (D.Conn. 1993), aff'd in part, rev'd in part, 63 F.3d 1169 (2d Cir. 1995), cert. denied, 517 U.S. 1119, 1165 S.Ct 1351, 134 L.Ed.2d 520 (1996).
"Accordingly, the statutory test should be whether the parties' conduct, in addition to their words, constitutes an agreement or arrangement. Any actions constituting an agreement or arrangement, in turn must be examined when determining whether a marketing plan or system is substantially prescribed." Hartford Electric Supply Co. v. Allen-Bradley Co., supra, 250 Conn. 348. "There is no precise formula as to how many or which factors create the level of control indicative of a franchise, pursuant to the franchise act." Chem-Tek, Inc. v. General Motors Corp., 816 F.Sup. 123, 129 (D.Conn. 1983). "Nor does any one factor control. Logically, the factors to be considered largely depend on the type of business that is involved." B E Juices, Inc. v. Energy Brands, Inc., 2007 WL 3124903 (D.Conn. 2007).
In the present case, the parties entered into an agreement called the "IMS Stocking Distributor Agreement," which agreement clearly called for the mutual development of an annual marketing plan for the territory in which the plaintiff, Walker, sold IMS product. The Agreement directed the mutual creation by IMS and Walker of a territory marketing plan, where forecast revenue sources and amounts would be discussed, major programs would be created to generate revenue, and cooperative arrangements with IMS were to be done to implement such programs. In fact "MAP" or Mutual Action Plans were developed and authored by IMS for Walker sales of IMS products for the years 2007, 2008 and 2009 relating to the marketing and sale of IMS products in Walker's territory. The evidence presented established that IMS monitored Walker's compliance with the Mutual Action Plan.
The evidence presented at the injunction hearing also showed that IMS did exercise control over Walker with respect to personnel, as the Agreement specifically required Walker to maintain a technical person on staff trained by IMS in IMS products who could support distributor sales people and customers in the application of IMS products. (Pl. Ex. 1.) In the Hartford Electric case, the Court found that where an "agreement requires the plaintiff to maintain competent sales and marketing personnel who are specifically trained to sell the defendant's products" that is evidence of pressure on a franchisee with respect to personnel decisions. Hartford Electric Supply Co. v. Allen-Bradley Co., supra, 250 Conn. 353. Several federal district court opinions have found the franchisor's right to require training of the franchisee's staff to be significant when determining whether the franchisor substantially prescribes the franchisee's marketing plan or system. Hydro Air of Connecticut, Inc v. Versa Technologies, Inc., 599 F.Sup. 1119, 1124 (D.Conn. 1984); Carlos v. Philips Business Systems, Inc., 556 F.Sup. 769, 777 (E.D.N.Y. 1983), aff'd in part, rev'd in part, 744 F.3d 1 (2d Cir. 1989). Here, IMS demanded specific training of certain of plaintiff's personnel regarding defendant's products and such training did occur. The defendant also required frequent training sessions of plaintiff's sales and technical staff regarding its products and even kept a record of such training log attached to its annual Mutual Action Plan.
The evidence presented at the hearing also showed that Walker promoted IMS products through advertising and mailings. Pursuant to the Agreement, IMS agreed to share the expenses with Walker for trade shows at which Walker featured IMS products, unless IMS also booked a booth at the same show.
The evidence at the hearing further demonstrated that IMS did have substantial control over the pricing it charged to Walker and the price that Walker charged to its OEM clients. Evidence was presented at the hearing that IMS published a "suggested" OEM price list for its distributors through its website and discussed pricing with Walker. The evidence was clear that Walker adhered to IMS "suggested" OEM pricing for its customers and when IMS inquired as to what price Walker had charged its customers, Walker answered such questions. "Price is perhaps the most fundamental aspect of a marketing plan. Where the prices are controlled by a franchisor and not the [franchisee], such control effectively deprives distributors of independent judgment in conducting their business. Thus, the ability to set prices is quite indicative of a franchisor's control." Hartford Electric Supply Co. v. Allen-Bradley Co., supra, 250 Conn. 352 citing Petereit v. S.B. Thomas, Inc., 63 F.3d 1169 (2d Cir. 1995), cert. denied, 517 U.S. 1119 (1996). IMS, as did the defendant in the Hartford Electric Supply Co., case argues that the suggested pricing for the OEMS is not control over pricing as Walker was free to charge its customers any price it wishes. IMS, however, did admit at the hearing that it did not like its distributors pricing its products under the suggested pricing as it undercut other distributors and its national sales manager Max Wietharn testified he could recall only two instances where a distributor had deviated from IMS's suggested OEM pricing.
Finally, this Court finds that IMS did exert substantial control over the IMS product inventory that Walker maintained. Pursuant to the IMS Stocking Distributor Agreement, Walker was to "stock IMS products to meet territory demands based on the business projections for the territory . . . [G]uidelines will be 5-10 turns per year. [Walker to] provide a stocking report to IMS and Rep twice a year using those parameters." (Pl. Ex. 1.) Even more telling than the Agreement was IMS' management's testimony during the hearing of their concern regarding Walker's future with IMS because it had not yet stocked IMS' latest product.
In light of all of the aforementioned evidence, this Court finds that defendant did prescribe, in substantial part, the plaintiff's marketing plan and the plaintiff has met the first prong of the CFA.
The second statutory requirement pursuant to the CFA for establishing a franchise is that the franchise is substantially associated with the franchisor's trademark or symbol. The requirement that the conduct of the franchisee's business be substantially associated with the franchisor's trademark does not require exclusivity. Chem-Tek, Inc v. General Motors Corp, supra, 816 F.Sup. 128-29 (D.Conn. 1993). Instead, the plaintiff must make a showing that its business is "substantially associated with the franchisor's trademark or service mark" through "the franchisee's use of the franchisor's name, logo, and trademark in performing its services." Lopiano v. Gedney, Judicial District of Stamford-Norwalk, Complex Litigation Docket, Docket No. X05CV020191749 Nov. 15, 2004 (Rogers, J.).
The Connecticut Supreme Court in the Hartford Electric Supply case, looked to Black's Law Dictionary for the definition of "substantially" which defines "substantially" as "[e]ssentially; without material qualification; in the main . . . in a substantial manner." (Internal quotations omitted.) Hartford Electric Supply, Co. v. Allen Bradley Co., Inc., supra, 250 Conn. 359. It also looked to the definition of "substantial" and found it to be defined as "of real worth and importance; of considerable value; valuable. Belonging to substance; actually existing; real, not seeming or imaginary; not illusive, solid, true, veritable, synonymous with material . . ." Id.
It is undisputed that the Connecticut Supreme Court, in looking at how to interpret a substantial association, turned to federal caselaw for assistance. In fact, the Supreme Court in the Hartford Electric Supply case quoted from a Second Circuit opinion regarding its interpretation of this issue. "Where the franchisee is completely dependent upon the public's confidence in the franchised product for most or all of its business, abrupt severance of the franchise tie, without good cause and without sufficient notice, could spell ruination." (Internal quotation marks omitted.), Id., 360-61, citing Grand Light Supply Co. v. Honeywell, Inc., 771 F.2d 672 (2d Cir. 1985). In the Hartford Electric Supply case, the Supreme Court cited to the Grand Light Supply case for this proposition, and found the second prong of the CFA satisfied where the plaintiff was faced with losing half of its gross annual sales, plus the opportunity to distribute other complimentary products, thus clearly exceeding 50 percent of the plaintiff's business. The Supreme Court found that based on the fact the defendant's products accounted for 50 percent of the plaintiff's business and the plaintiff further received an unspecified amount of business from other manufacturers because of its sale of the defendant's products, those figures supported a finding that the parties were substantially associated.
A review of the relevant case law in this district has shown that the federal and state courts, interpreting the CFA consistently, follow the requirement that most or all of the party's business be associated with the franchisor. Rudel Machinery Co., Inc. v. Giddings Lewis, Inc., 68 F.Sup.2d 118, 124-28 (D.Conn. 1999) (no substantial association where sales of putative franchisor's products constituted 41 percent of putative franchisee's business); B E Juices, Inc. v. Energy Brands, Inc., supra, 3:07CV1321 2007 WL 3124903 (D.Conn. 2007) (no substantial association where sales constituted 40 percent of the distributor's business).
Similar to the Hartford Electric Supply case, Walker distributed the defendant's catalogues, promotional materials and flyers containing the defendant's logo. Walker also displayed the IMS logo and trademark on Walker's web page and was recognized as a leading distributor of defendant's products. In 2008, however, plaintiff's annual sales of IMS product was approximately 8 percent of its business and its supplemental business from sales of complementary products only increased that sales figure to 35 percent of its business. Plaintiff contends that 35 percent of its business is sufficient to satisfy the substantial association prong of the CFA and if it loses that amount of business it will be financially disastrous to Walker's business.
The relevant and persuasive case law cited by this Court and the record in this case, even when viewed in the light most favorable to the plaintiff, does not support a conclusion that 35 percent of Walker's business constitutes a substantial association with IMS. Accordingly, since this Court finds that the substantial association prong under the CFA is not satisfied, plaintiff's application for a preliminary injunction under the CFA is denied.
B The Connecticut Unfair Trade Practices Act
The Connecticut Unfair Trade Practices Act, General Statutes § 42-110b(a), provides in pertinent part, that "[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." The Connecticut Supreme Court has adopted the criteria set out in the cigarette rule by the Federal Trade Commission "(1) [w]hether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by the statutes, common law or otherwise . . . (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers, competitors or businessmen." Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 591, 657 A.2d 212 (1995). "All three criteria need not be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three . . ." Id., citing Associated Investment Co., Ltd. Partnership v. Williams Associates IV, 230 Conn. 148, 156, 645 A.2d 505 (1994). "Thus, a violation of CUTPA may be established by showing an actual deceptive practice . . . or practice amounting to a violation of public policy . . . Furthermore a party need not prove an intent to deceive to prevail under CUTPA." (Citations omitted; internal quotation marks omitted.) Cheshire Mortgage Services, Inc. v. Montes, 223 Conn. 80, 105-06, 612 A.2d 1130 (1992).
In the Associated Investment Co. case, the Connecticut Supreme Court found that "the General Assembly in adopting the sweeping language of Section 5(a)(1) of the Federal Trade Commission Act "upon which the CUTPA legislation was based, chose not to define the scope of unfair or deceptive acts proscribed by CUTPA so that courts may develop a body of law responsive to the marketplace practices that actually generate such complaints." Associated Investment Co., Ltd Partnership v. Williams Associates IV, supra, 230 Conn. 157. "Predictably CUTPA has come to embrace a much broader range of business conduct than does the common law tort action." Id., 157-58. "In addition to establishing a standard of conduct more flexible than traditional common law claims, the expansive language of CUTPA prohibits unfair or deceptive trade practices without requiring proof of intent to deceive, to defraud or to mislead." Id. 158, citing Web Press Services Corp. v. New London Motors, Inc., 203 Conn. 342, 262-63, 525 A.2d 57 (1987); see also Sportsmen's Boating Corp. v. Hensley, 192 Conn. 747, 754-57 (unlike tort claim for interference with business expectancies, which requires proof of malicious or deliberate interference with competitor's business expectations, CUTPA liability may be based solely on proof of unfair or deceptive acts).
It is undisputed in this case that IMS is engaged in trade or commerce in Connecticut. In its post-hearing brief, Walker claims that the IMS violation of the CFA establishes a clear violation of Connecticut public policy and CUTPA. This Court has already found that the CFA does not apply in the relationship between IMS and Walker as Walker cannot satisfy the second prong of the CFA. Accordingly, plaintiff's claim that IMS' violation of the CFA established a clear violation of public policy under CUTPA must be rejected.
It is clear that IMS had an express right under the Agreement to unilaterally terminate the relationship with Walker upon thirty days notice without cause. In the present case, Walker has failed to meet its burden with respect to the existence of a franchise relationship under the CFA and thus its argument that IMS is bound by the termination provisions under such Act must also be rejected. The termination of the distributor agreement in and of itself conformed to the express terms of the parties' agreement, therefore the Court does not find a CUTPA violation by the mere virtue of the termination of the agreement. See Edmands v. CUNO, Inc., 277 Conn. 425, 451 (2006).
Walker finally argues that IMS engaged in immoral, unethical, oppressive, or unscrupulous, or bad faith business practices that constitute a violation of CUTPA. Walker argues that beginning in January 2009, IMS mined Walker for its sales and customer information with the intention of diverting Walker's customers elsewhere, planned to terminate Walker, and prior to the termination date IMS informed at least two of Walker's customers that Walker was no longer an IMS distributor and offered to direct sell to such customer or refer them to another distributor. Walker contends that Kevin Wall's testimony at the hearing established a "time line of bad faith." This Court agrees.
On January 20, 2009, Wall met with John Ryan and Casey Pimenta at Walker to discuss a 2009 mutual marketing plan for Walker and IMS. Two days later on January 22, 2009, Wall wrote to Ryan Pimenta stating that "IMS values Walker as an important sales partner and look[s] forward to mutually growing the business in 2009 and beyond." (Pl. Ex. 6.) Attached to that email was a Mutual Action Plan forecast for 2009 which listed key Walker customers and prospective customers for IMS products. The customer information contained on the 2009 Mutual Action Plan forecast came from Walker and a number of the customers identified were acquired after years of development by Walker. Pursuant to the IMS Stocking Distributor Agreement, Walker was required to turn over this information to IMS so that a mutual marketing plan beneficial to both parties could occur.
Instead of mutually growing IMS's business with Walker, Wall within a few weeks of receiving this customer information and sending his January 22, 2009, email to Walker, solicited Axis New England to be a potential new distributor to replace Walker. According to Wall's testimony, by May or June 2009, IMS had signed a distributor agreement with Axis for the same territory that Walker covered. Wall did not advise Walker of IMS's plans to terminate it as a distributor until August 5, 2009. On that date Walker was advised such termination would be effective as of September 5, 2009.
Prior to the termination of the Agreement, Wall was in contact with two of Walker's customers to advise them: (1) that the distributor agreement with IMS was being terminated; (2) Walker would no longer be an authorized dealer of IMS products; (3) IMS could either direct sell the product the customer needed and/or purchase it from Axis, its new authorized distributor. Wall admitted during the hearing that it was his plan to contact every IMS customer of Walker to advise them that the Agreement was being terminated, that they would no longer be an authorized distributor of IMS products and to redirect such customers to IMS and/or Axis. IMS benefitted from the years Walker spent developing relationships and sales with a number of the customers identified in the Mutual Action Plan. Wall clearly stated he planned to redirect all of these same customers to IMS and/or its new distributor Axis. Instead of using the customer information and strategies that Walker, in good faith, provided in January 2009 to mutually grow and develop IMS business, IMS instead plans to use such information to benefit itself and/or its new distributor Axis.
In Larsen-Chelsey Realty Co v. Larsen, 232 Conn. 480, 656 A.2d 1009 (1995), The Connecticut Supreme Court found a CUTPA violation where prior to taking the position with a competing company, the defendant, who was plaintiff's president, engaged in a variety of fraudulent and deceptive practices designed to steal plaintiff's business. In Capitol City Personnel v. Franklin, Superior Court Judicial District of Hartford, Docket No. CV 910505367, (February 26, 1997, Hale, J.T.R), the Superior Court found a CUTPA violation when while still in plaintiff's employment, defendant launched a competing business and recruited employees and solicited clients for her new business, taking them from plaintiff.
Walker has argued that the foregoing activities of IMS constitute immoral, unethical, oppressive, or unscrupulous, or bad faith business practices that constitute a violation of CUTPA. Based on the evidence presented, this Court finds that Walker has established a likelihood of success on the merits for this CUTPA claim.
With respect to the issue of irreparable and imminent harm, Ryan testified at the hearing that upwards of 35 percent of its business would be impacted by a termination of the IMS Agreement. Ryan testified that he estimated that upwards of 35 percent of Walker's business would be impacted as the IMS product was sold as part of an integrated system and there was a direct relationship between the sale of IMS products and other products that were part of the same system. Ryan testified that his biggest concern in the Agreement being terminated was that Walker would lose sales in other product lines in which they sell the integrated system.
Ryan also testified that in his opinion Walker would not be able to use a competitor's product in place of IMS's products in that there was no product that had the same technological capabilities as the IMS motor drives and controls. Ryan further testified that Walker would be disadvantaged in buying the IMS product as a non-distributor as: (1) Walker would be paying full OEM pricing for the product, instead of distributor product pricing; (2) Walker would have to pre-pay for the product instead of having 30-day payment terms; (3) IMS would be advising Walker's client base that it was not an authorized distributor which would encourage his clients to look elsewhere not only for IMS products, but related products necessary to operate the machinery in question; (4) that it would not have the ability to get the latest software revisions to the product and would not have the technological support that distributors get; (5) IMS would support its distributors and provide demo equipment and sales support that Walker would not be able to get; and (6) Walker would not be able to have their personnel trained by IMS in IMS products like it trains its distributors. Ryan further testified that it would not be realistic that IMS would continue to sell its IMS products to Walker after termination of the Agreement as Walker would be directly competing with its new distributor Axis for the same clients.
Ryan testified that if the Agreement is terminated and IMS directed its current IMS customer base away from Walker, he believed Walker's 12-person business would not only be facing lay-offs, but that such an event would be catastrophic to the company. Because of the actions already taken and intended to be taken by IMS's sales representative Kevin Wall with respect to Walker and its customers, this Court finds that imminent and irreparable ham which cannot be adequately remedied by monetary damages will flow if a preliminary injunction is not ordered by this Court. A balancing of the equities favors the granting of a preliminary injunction in Walker's favor.
IV CONCLUSION
After having considered the evidence and testimony presented, the Court hereby orders that IMS, its agents, employees and all persons acting on or for its behalf, are preliminarily enjoined from: (1) terminating and/or refusing to continue the IMS Stocking Distribution Agreement with Walker and/or modifying any payment terms contained therein; (2) from soliciting Walker's customers on behalf of any replacement distributor to Walker; (3) from terminating or cutting off the supply of new goods and products to Walker's inventory; and (4) from revealing IMS's intentions or efforts to terminate Walker's distributor relationship and/or commenting on said intentions or efforts to any customers or identified prospective customers of Walker.