Supplier Beware Before Terminating Dealers: California’s Equipment Dealers Act

Developments in modern antitrust law have made it increasingly difficult for termination of vertical relationships between a supplier and a dealer to be actionable under the antitrust laws, particularly under a per se theory of liability.  Suppliers contemplating termination of dealer agreements, however, may need to carefully consider laws beyond contracts and antitrust.  That is, many states including California have statutes intended to afford greater substantive and procedural protections to dealers than may be found within the four corners of the dealer agreement.  What’s more, California’s statute – the Fair Practices of Equipment Manufacturers, Distributors, Wholesalers and Dealers Act (commonly known as California’s Equipment Dealers Act or CEDA), Cal. Bus. & Prof. Code § 22900 et seq. – is relatively arcane, has broad applicability to all kinds of “equipment” dealers, may apply to dealers solely doing business outside of California, and has a dearth of case law.

The original equipment dealers act in California was enacted in 1992.  The law was sponsored by an equipment dealers trade association, out of concern that mergers and acquisitions in the 1980’s resulted in significant closings of farm equipment dealerships which adversely affected rural economies and consumers.  The law thus provided protections to farm equipment dealers in their contracts with suppliers, including requiring suppliers to give prior notice of their intent to terminate a contract and provide the dealer an opportunity to cure the defect.  The law applied to equipment used for purposes of “agriculture, livestock, grazing, light industrial, and utility.”

CEDA was later amended in 2005, and among other things, broadly expanded its scope to include all agricultural, construction, utility, industrial, mining, outdoor power, forestry, and lawn and garden equipment.  While it is clear that CEDA does not apply to car dealers (who are covered under a different statutory scheme), less clear is what exactly is covered under CEDA’s expansive definition of “equipment.”  Particularly given the dearth of case law interpreting and applying CEDA, all suppliers of anything fairly characterized as machinery or equipment, or its related “implements” or “attachments” should carefully consider CEDA’s applicability.

If applicable, CEDA offers broad protections to dealers, including, for example, protecting dealers from terminations without good cause or from disparate treatment as between similarly-situated dealers in California.  CEDA also requires suppliers to give at least 90 days’ written notice of intent to terminate, to allow the dealer 60 days to cure any claimed deficiencies, and to buy back remaining inventory in the event of a termination.  CEDA also provides aggrieved dealers the right to costs and attorneys’ fees.

CEDA also has potential applicability to dealers exclusively doing business outside of California.  In a relatively recent case – and one of only a handful interpreting CEDA – the Ninth Circuit held that CEDA governed termination of a Danish dealer selling construction equipment exclusively within Denmark.  Gravaquick v. Trimble Navigation Intn’l Ltd., 323 F.3d 1219 (9th Cir. 2003).  The Ninth Circuit reached this holding because: (1) CEDA did not include a geographic scope limitation limiting it to dealers located and/or doing business in California; (2) at least one party in the dispute (the supplier) was located in California and the governing agreement included a California choice-of-law provision.

In sum, suppliers contemplating termination or other changes to their relationships with dealers possibly characterized as “equipment” dealers should carefully consider CEDA’s applicability before proceeding.