Legislature(2001 - 2002)
05/06/2001 05:08 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
SB 176 - DISTRIBUTORSHIPS CHAIR ROKEBERG announced the final order of business, CS FOR SENATE BILL NO. 176(L&C) am, "An Act prohibiting certain coercive activity by distributors; relating to certain required distributor payments and purchases; prohibiting distributors from requiring certain contract terms as a condition for certain acts related to distributorship and ancillary agreements; allowing dealers to bring certain court actions against distributors for certain relief; and exempting from the provisions of the Act franchises regulated by the federal Petroleum Marketing Practices Act, situations regulated by the Alaska gasoline products leasing act, and distributorship agreements relating to motor vehicles required to be registered under AS 28.10." [Before the committee was HCS CSSB 176(L&C).] Number 2282 JOHN HAXBY, Waukesha Alaska Corporation, came forth to discuss SB 176. He told members the company was started in 1972 by his father, and he himself has been operating the business since 1984. There are approximately 13 employees, and the main business involves the sale and distribution of machinery for all services throughout Alaska. He stated: Over the last 30 years, we've been in relationships with manufacturers. Relationships change over time, and there are occasions where distributor agreements are yanked without warning. In many cases this can cause irreparable harm financially. Alaskan small businesses see immediate losses in jobs and, in our case, it has resulted in some $300,000 in unsold inventory, which remains on our shelf. Basically, what SB 176 does ... is it levels the legal playing field in Alaska. Legal challenges are extraordinarily expensive, and in most cases deep- pocketed Outside manufacturers simply run you out of money. Cases like this can and have easily run into hundreds of thousands of dollars. ... In one noticeable instance ... legal bills have exceeded $1 million and climbing, even in a case in which the local Alaskan company has won in every court that's south of the 9th Circuit. And in that particular case, there are continuing appeals. This bill also keeps manufacturers from forcing unwanted or unordered inventory on Alaskan businesses. It's not uncommon to be made part of quotas unknown to yourselves, and [be] told, "Hey, you're going to take this inventory because you're our distributor. Take it or we're going to terminate you or we're not going to have a relationship anymore." The bill also allows for the orderly disposition of inventory if a distributor agreement is in fact yanked. It returns precious capital for that inventory, which would be remaining at the time of termination of the distributor agreement, to be returned. The inventory would go back to the manufacturer and there would be a repurchase by the manufacturer of that inventory. This allows Alaskans to take that capital and reinvest it in businesses here in the state. Number 2399 MR. HAXBY continued: The bill also allows that in the event of a death of a distributor or the death of a dealer that an orderly and equitable return of inventory can be accomplished quickly. It's especially important in these cases to be able to have an orderly disposition of inventory and/or the business, because many times the IRS [Internal Revenue Service] comes in and they value the business according to the past performance of the business. In the event that a distributorship is in fact yanked - and the IRS comes and says, "We have a tax bill because your business is valued at 'X' dollars," and they assess a tax value - ... the value of the business may in fact go to zero and ... the tax liability remains with the estate of itself. So, theoretically, it has the possibility to wipe out the heirs after the death of a dealer. I read through this committee substitute and I have pretty much agreed with the way it is written at this time, with the exception ... on page 6, ... line 11, where it talks about distributor agreement [meaning] a written agreement. In the original language ... three other words [were] in there, which stated "expressed, implied, [and] oral". And I think it's important to note that oral agreements are, ... especially in Alaska, relatively common. TAPE 01-81, SIDE B Number 2472 MR. HAXBY went on to say: I'd like to ask for your support of this bill. I think that it's good for Alaskan businesses. I think it's good for Alaskan employees, and that it should treat everyone in Alaska similar. REPRESENTATIVE BERKOWITZ asked whether anyone with legal expertise intended to testify. CHAIR ROKEBERG answered no. REPRESENTATIVE JAMES stated that she understands the conflict between big businesses and the little businesses, and between the supplier and the person who is having these distributors' products on his or her shelves. She said she has a lot of experience with this and wished this had been law on the books when she was a bankruptcy trustee. Also, as an accountant, she has seen people who have had a distributorship taken away, which was disastrous. She stated that she thinks this is a good idea to protect Alaskan businesses. She noted that she is concerned whether having an in-state distributor will be a problem. CHAIR ROKEBERG responded that [yesterday in the House Labor and Commerce Standing Committee] the testimony was that many times the manufacturers end up being distributors. He stated that he had added [to the bill], "manufacturers with 50 or fewer employees," which generally covers most manufacturers in Alaska. REPRESENTATIVE JAMES said she has also worked with wholesalers and knows they have rules and regulations about whether or not their product is being properly displayed and managed. She stated that she doesn't think that will affect people in Alaska, and she doesn't think anything in the bill would be an unfair trading practice. Number 2285 JANEECE HIGGINS, General Manager, Alaska Rubber & Supply, Inc., testified via teleconference. She stated: We had a signed dealer agreement in place .... Regional sales [representatives] made oral changes to that agreement with regard to volume discounts. For 15 years we followed the instructions of the sales [representatives], and every month the paperwork was filed, accepted, and discounts were applied to our account. The parent company sold the manufacturing plant and the variances were noted. Because we had not followed the original signed document procedures, they demanded we repay all discounts, and when we refused we were terminated as a dealer. Since the paperwork had been mailed, the distributor also charged the owners and previous general manager with RICO [Racketeer Influenced and Corrupt Organizations Act] violations and criminal charges. These were very serious charges. We have prevailed at every level, and the ruling by the court provided that the oral changes made by the sales representative and accepted for 15 years by the distributor, in fact, became the new dealer agreement. This case has been to the 9th Circuit, and we have prevailed at that level as well. Oral agreements and oral changes to existing agreements happen every day of the business world, and I urge you to keep language in this bill to cover that issue. As a side note, we also have dealers to set up throughout the state. We support them with inventory, training, and technical data. This bill will affect us from both sides of the distributor-dealer agreement, and we feel it is fair. CHAIR ROKEBERG asked Ms. Higgins for the name of the case in the 9th Circuit [Court of Appeals]. MS. HIGGINS responded that it was Aeroquip vs. Alaska Rubber & Supply, Inc. and the partners were Don Adams, Drennon (ph) Adams, Tom Moore (ph), and Alaska Interior Rubber. It is still being appealed, and the legal bills are $1.2 million. Furthermore, the 9th Circuit upheld the ruling of the lower courts. CHAIR ROKEBERG asked whether the 9th Circuit had remanded it to Judge Singleton [of the U.S. District Court]. MS. HIGGINS answered in the affirmative. CHAIR ROKEBERG asked whether the 9th Circuit talked about the oral or the implied contracts. MS. HIGGINS answered that that was the basis of the whole thing being upheld. Number 2101 DEBORAH LUPOR testified via teleconference. She stated: This is an important concern. [For] many small businesses, one of their major complaints is that [they don't] have the time, the staff, or the resources to respond to legal challenges. Whether somebody slips and falls on the sidewalk and sues for damages, or ... on the other side, the big guys decide to yank a distributorship agreement, ... they just don't have the resources to respond. I want to mention that in talking to a number of business owners, what I discovered is that yanking the distributorship agreement has nothing to do with performance in many, many cases. It has everything to do with developing new markets. Or maybe a new management comes in or maybe a big distributor is trying to sign up somebody in Seattle, and the Seattle guy goes, "Well, I will take your product only if I get the Alaska market as well." And before you know it, the Alaska business, who has trained employees and built infrastructure and has come, in fact, to depend on this product, ... is suddenly, with sometimes no notice, sometimes 30 days, ... gone. And they're left with inventory that here in the Municipality of Anchorage they continue to pay inventory tax [on]. ... I'm also very concerned about what happens when the dealer dies and passes his estate on to family. They're already dealing with a horrific loss, and then to get stuck with huge IRS bills that may actually leave them in the red with no business at all even to pay that bill is beyond contemplation. I thank you for hearing this bill [and] I urge you to pass it. Number 1984 CHAIR ROKEBERG announced that [the committee] has received suggestions for [three] amendments. He noted that they are issues discussed the day before at the House Labor and Commerce Standing Committee hearing. He offered the following corrections: the first one should say page 3, line 22, instead of [line] 16; the second one, page 3, line 26, instead of [line] 20; and the third one, page 6, line 11. CHAIR ROKEBERG made a motion to adopt conceptual Amendment 1, on page 3, line 22, to insert "without cause" following "terminates a distributorship agreement". He explained that this is a requirement that the distributor actually purchases the business if there is a termination. He said this is whether it's willful or not. With termination, there would be a statutory mandate to terminate; however, it seems to him that there would have to be a termination without cause. If there is a breach of contract on the part of the dealer, the distributor shouldn't have to buy the business if the dealer didn't meet his or her bargain. MR. HAXBY remarked that he understands; however, when this had been discussed with Legislative Legal [and Research Services] new issues regarding what is "cause" were brought up. He said that had to be taken out because they couldn't give every definition for cause. CHAIR ROKEBERG stated that it troubles him and asked, if there is a termination because the dealer is not performing, whether the distributor has to buy the dealer out. MR. HAXBY responded that the value of the business would be decimated. CHAIR ROKEBERG asked whether the "crucible" of the marketplace would take care of the valuation, which is why the House Labor and Commerce Standing Committee deleted "good will". MR. HAXBY concurred. Number 1826 REPRESENTATIVE BERKOWITZ remarked that [the committee] is trying to itemize what the harm is in Sections 1 and 2, and suggested that the distributor be liable for damages incurred. CHAIR ROKEBERG said he thinks that is difficult because of the nature of the inventory and the assets in the inventory. REPRESENTATIVE BERKOWITZ noted that the bill states, "the distributor shall be liable for damages incurred". CHAIR ROKEBERG replied that hopefully being more specific will avoid litigation. REPRESENTATIVE BERKOWITZ remarked that it seems if the distributor chose to disregard any of these requirements, he or she would go to court. Number 1768 REPRESENTATIVE JAMES stated that she can support purchasing back the inventory, since it is her experience that leftover inventory is worth nothing. She added that she agrees with Representative Berkowitz's statement that [the distributor] should pay the damages; however, she thinks they need to pay at least 85 percent of the cost of inventory. CHAIR ROKEBERG informed Representative James that on page 2 that is included under "Disposition of merchandise remaining upon contract termination." REPRESENTATIVE BERKOWITZ pointed out that AS 45.45.710 is the buy-back provision, and AS 45.45.740 specifies other damages. He stated that itemizing like this can also have the effect of being exclusionary. CHAIR ROKEBERG responded that it is not damages per se; it's the valuation of the business. REPRESENTATIVE BERKOWITZ replied that, for example, there could be costs that have nothing to do with assets, good will, or machinery; it could be the time the individual spent pursuing. He suggested just saying [the distributors] are liable for damages. CHAIR ROKEBERG remarked that there is a "without cause termination" and [the committee] wanted to narrow it. Number 1640 MR. HAXBY suggested that the change not be made. Typically, he said, in a business valuation there are all kinds of things that are taken into account at that time. He said good will was eliminated specifically because it was thought to be something that was not definable. Most of the time, in a business valuation, growth rates and growth curves of the business are looked at. If it is gaining 25 percent year over year, then that may have a multiple of earnings for one business. If it is in decline, however, it would have a more limited valuation. Rather than addressing damages, which are tough to define, a methodology like this allows it to be accomplished more quickly. REPRESENTATIVE JAMES remarked that good will can be measured; people buy businesses, including good will. CHAIR ROKEBERG agreed that it can be recognized; however, if there is a termination with or without cause, the statute would force the distributor to pay. REPRESENTATIVE BERKOWITZ stated that it can't be done without cause. He expressed that every agreement is governed by the covenant of good faith and fair dealing. CHAIR ROKEBERG responded that he thinks the contract has to be respected here. REPRESENTATIVE BERKOWITZ stated that a distributor can't just cut somebody off without suffering consequences. When there is a breach of the implied covenant, then the question arises as to what the damages are. In most instances when there are disputes between parties, the parties are allowed to "hammer out" the differences amongst themselves. [The legislature] tries not to mandate, through the legal system, specific results for instances between types of parties. Here, [the legislature] is trying to deal with a contract dispute, and should be careful about prescribing a result. CHAIR ROKEBERG remarked that he thinks [the committee] is trying to narrow the issues. Number 1499 REPRESENTATIVE JAMES stated that Chair Rokeberg is talking about a small business in Alaska with a huge distributorship Outside, and this small business has no opportunity to go to court. If something is in state law, [the distributors] will change the way they do business with Alaska. CHAIR ROKEBERG agreed and said that is why [the committee] wants to add machinery and assets into the bill. MR. HAXBY noted that other states have laws similar to this. REPRESENTATIVE BERKOWITZ remarked that this is what "tort reform" was about. [The legislature] took away some "hammers" from the small businessperson by limiting punitive damages. Number 1416 CHAIR ROKEBERG withdrew conceptual Amendment 1. [Amendment 2, which was not offered, would have amended page 3, line 26; it read: "Insert the words 'good will,' following 'including'".] CHAIR ROKEBERG made a motion to adopt Amendment 3, which read: Page 6, Line [11] Delete the words "a written agreement" Insert the words "an agreement, whether expressed, implied, oral, or written," [The foregoing was corrected regarding the change to line 11, and would place the language following "'distributorship agreement' means".] REPRESENTATIVE BERKOWITZ suggested that it say "a valid agreement". CHAIR ROKEBERG offered that the amendment could read, "to be consistent with a valid agreement that's enforced by UCC [Uniform Commercial Code]". REPRESENTATIVE BERKOWITZ stated, "within parameters." CHAIR ROKEBERG remarked that he is concerned about that, given the history of this case from Ms. Higgins. REPRESENTATIVE BERKOWITZ responded that with her case there is implied contract and there is detrimental reliance. CHAIR ROKEBERG stated that there is some type of an addition to the contract because of the implied actions of the parties. Number 1335 REPRESENTATIVE MEYER stated that [the House Labor and Commerce Standing Committee] spent a lot of time on this, and he was on the opposite side from Chair Rokeberg. He noted that [the committee] thought if a person were to go into business with a large corporation, it should be in writing. CHAIR ROKEBERG responded that according to the witness today, this common business activity doesn't necessarily mean "you have to go around and amend your contract every time you have a ... long-term relationship." REPRESENTATIVE MEYER said this is supposed to be written for future events, and he thinks [the legislature] would want more people to put their agreements in writing, rather than doing them orally and by handshake. REPRESENTATIVE JAMES stated: You wouldn't get one because the salesman has the right. He's on the grounds to make this agreement, has the rationale, ... and is authorized to do it in this particular case. And then he notifies that this has been changed and this is happening. If that had gone back to the place where they got the written agreement, they'll never get one. REPRESENTATIVE KOOKESH remarked that he doesn't have a problem with [Chair Rokeberg's] valid agreement with the UCC. Number 1222 REPRESENTATIVE COGHILL said [the committee] should study how the UCC deals with contracting some of the oral agreements. He suggested adding the expressed, implied, oral, [or written] language. REPRESENTATIVE MEYER objected to Amendment 3 [as written and provided in committee packets]. CHAIR ROKEBERG remarked that he thinks this is the right way to go, and is willing to go to UCC language. REPRESENTATIVE BERKOWITZ asked, assuming Amendment 3 passes and [the committee] finds that it crosses wires with the controlling case law, whether [Chair Rokeberg] would help repair the problem on the [House] floor. CHAIR ROKEBERG answered that he would, but doesn't think [there will be a problem]. REPRESENTATIVE MEYER stated that he thinks it is poor business practice to not have an agreement in writing. Number 0940 A roll call vote was taken. Representatives Berkowitz, Kookesh, James, Coghill, and Rokeberg voted in favor of Amendment 3. Representative Meyer voted against it. [Representative Ogan was absent.] Therefore, Amendment 3 was adopted by a vote of 5-1. Number 0925 REPRESENTATIVE JAMES moved to report HCS CSSB 176(L&C), as amended, out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, HCS CSSB 176(JUD) was reported from the House Judiciary Standing Committee.
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