Legislature(2001 - 2002)
04/19/2001 01:37 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 176-DISTRIBUTORSHIPS
CHAIRMAN RANDY PHILLIPS called the Senate Labor & Commerce
Committee meeting to order at 1:37 p.m. and announced SB 176 to be
up for consideration.
MR. JOHN HAXBY, Waukeshaw Alaska Corporation, said his business is
about 30 years old. They have been in the machinery industry all
that time and have a number of relationships with manufacturers
around the country. They support this bill, he said, "Because it
levels the legal playing field between major manufacturers and
small businesses in Alaska."
MR. HAXBY explained:
Some of the key salient points that are good for small
businesses are that it keeps manufacturers from forcing
unwanted or unordered inventory on the small businesses
in Alaska.
The second good point is that it allows for the orderly
disposition of inventory in the event that the
distributor agreement was somehow yanked or canceled.
The other thing it allows for is in the event there is
the death of a distributor or a distributor principal
that there is an orderly and reasonable recovery of the
inventory that might be left over as of the date the
agreement is yanked. It becomes especially important
when, in the case of a death, the IRS comes in to
evaluate the value of a business and they evaluate it
based upon the past performance of that business
assigning a value in a corresponding tax amount. In the
event that the distributor agreement is yanked, there may
not be any value to the business in the future, however
the tax obligation remains.
MS. DEBORAH LUPER, Eagle River former small business owner,
supported SB 176. She said:
There are many reasons why I personally support this
bill. One is that I spent approximately two years as a
representative of a major small business organization, a
national organization, and talked to hundreds of
businesses over the course of those two years.
Businesses in Alaska have unique challenges as it is, but
when they are pitted against the megaforces, represented
by manufacturers and wholesalers in the Lower 48, they
have fairly shallow pockets in comparison to the deep
pockets that these manufacturers have. They cannot
afford, just by the nature of being a small business with
limited staff and limited finances, to fight legal
battles when the playing field is already so uneven.
There are three areas of this bill that I think are
excellent. One is preventing the manufacturer from using
coercion to force a dealer or distributor to carry
product or purchase product that they did not want and
did not order.
Secondly, it sets in place a mechanism where the
inventory will be purchased back. In some cases that is
in the hundreds of thousands of dollars. It sets in place
a mechanism to purchase the inventory back if the
distributor agreement is yanked and that can be done for
any number of reasons including - in Alaska, a product
has not been offered before, the manufacturer is up here
looking for someone to distribute it. He finally gets
someone to do so. That person, then, develops the market
for it. Once that market is established, the wholesaler
manufacturer has firmer ground to stand on and at that
point, they may decide to go for someone larger or
someone who has more offices around the state or
something like that. So, they do have the right to yank
the agreement, but in a case such as that, when inventory
has been purchased to facilitate the agreement that was
in existence before that date, this law would require
that they purchase it back at the value that was
established at the time the inventory was originally
purchased.
Finally, the portion that is most meaningful to me is the
area where, if the dealer dies, that the heirs have some
recourse, if the manufacturer or wholesaler declines to
allow the heir to carry forward the agreement, which is
perfectly within their rights. But in the case where a
loved one dies and you're dealing already with the
emotional loss, you also have to deal with a significant
financial loss in terms of that business, not being able
to do anything with that inventory. You might have
hundreds of thousands of dollars worth of capital tied up
in inventory. It's just simple human interest to set in
place a mechanism where the manufacturer, if he declines
to further the agreement with the heirs, buys the
inventory back.
Number 200
MR. RON YOUNG, President, Young's Gear, Inc., supported SB 176. He
related:
Over the last few years and one particular case about
five years ago, as an example, we were a large CD axel
supplier in the state. We were a dealership for a major
manufacturer in the eastern seaboard. We built up a very
large business for this company and the product became
very popular and what happened, the company in the
eastern seaboard basically went to large chain warehouse
wholesale outlets, like Napa. The product got devalued
and part of the behind the scenes agreements, which I
will never see, was to squeeze out or eliminate the small
local representatives. Consequently, they refused to do
business short-term; they would not buy back any old
stock. Virtually the old stock that I had on the shelf,
which was current at the time, I should say, it became
old stock, outdated nonsellable. I talked to an attorney,
but there is no way to legally force them on the eastern
seaboard to come to court for the amount of the money
involved, well over $100,000 cash in reality.
That is one of the reasons I came here to testify. I
strongly believe there is a need for a law of this sort
to be passed in the State of Alaska.
MS. JANEECE HIGGINS, Alaska Rubber Supply, said:
In 1995, we had a distributorship pulled. The corporation
was a large corporation. They were given assurances by
another company in Alaska that they would be able to
triple the business. We were in the top 12 in the nation
for three years in their distributorship for
organizations. They pulled the distributorship with a 30
day notice, refused to buy back any inventory. We had
close to $600,000 worth of inventory on the shelf. They
went through our customers and notified them that we were
no longer the authorized distributor and they would not
get factory support from us and that they should be going
with the new distributor. Therefore, we couldn't even
sell the product to our customers. We lost a $600,000
customer right off the bat. The fall out from that was
close to $2 million in sales.
We counter sued and it has been through the Ninth
Circuit. They have appealed every decision that has gone
our way. We have won in every court battle; they have
appealed every one of them. It has cost us over $1
million in legal fees. In hindsight, we probably should
have settled, but the owner decided that he didn't have a
lot to leave, but he had his word and he was going to go
to the grave with it. So, here we are $1.2 million later
in legal fees. We still have over $100,000 worth of
inventory on the shelf that we have not been able to get
rid of. We have other customers that have slowly taken
the inventory at a reduced cost. This loss was quite
significant to our company. This bill certainly would
have been welcome five years ago and I urge you to pass
it.
MR. KURT WINKLER, Global Services, said he had been in business
here for about 20 years. He supported SB 176. "I'd see the far away
Alaskans get mistreated by the people in the Lower 48, especially
the east coast. We are so far away from them and we're only
Alaskans. I'd like to see the mistreatment stop…"
MR. DON DUNNAVANT, Owner, Polar Supply Co., said he got his first
business license in 1975 and employs 50 - 60 Alaskans currently. He
said, "I have plenty of horror stories to tell."
He testified on behalf of his employees who work hard on getting
trained and bringing technology to Alaska. Their families are
dependent on the success of their businesses. He supported this
bill, because it would make life a lot less risky for them.
MR. CHUCK VANORMER said his is a department manager for a large
supply house in Anchorage. He has been in customer service product
support in Alaska for about 28 years. He said:
As an employee of companies that have had
distributorships cancelled, I have been forced to lay off
other employees due to loss of business as well as pick
up a lot of dead stock inventory as has been alluded to.
It suddenly becomes wasted shelf space and is still taxed
under the inventory tax system, but is basically
worthless. It eventually ends up in a scrap pile.
Additionally, most of the products I handle are an
engineered product and when there is a change in
distributorship, sometimes you can no longer support the
products you have sold and you're forced to go to your
competition to purchase items to repair those things that
you still have under your warranty control and do start
ups and service to.
There is a major concern of mine on rolling stock
equipment. As more and more large firms move into the
state of Alaska, especially oil yards, they bring in
national agreements of distributorships of equipment from
manufacturers that give them basically predatory price
due to volume buying against the local Alaskan
distributorships.
MR. VANORMER said he knew many businessmen who had given up on
developing a line because someone else came up from the Lower 48 as
a national concern and now has that product available at a cheaper
price. He thought this bill was of the utmost importance for the
Alaskan distributor and it's going to become more important with
the passage of the gas line.
SENATOR LEMAN asked if the inventory system required him to pay tax
on the original purchase price of the item and if that was true
when the value became worthless.
MR. VANORMER answered that unless you devalue the product
immediately upon cancellation, you're stuck with it at the occurred
value. He is not sure how it's depreciated, but you carry it for a
couple of years in hopes that you can move it out as good stock or
find a wholesaler who's willing to take it off your hands.
MR. DUNNAVANT inserted that his bank finances him on the value of
his inventory and if that value goes, they are less willing to
finance him. So, it does not necessarily work to devalue the
product.
MR. ED SNIFFEN, Department of Law, said they didn't see too many
problems with this bill, but there might be one potential conflict
with the definition of distributor if it was intended to include
auto manufacturers.
CHAIRMAN PHILLIPS asked him to fax the recommendations to him.
SENATOR LEMAN asked if he had any other significant comments about
this legislation.
MR. SNIFFEN replied that he had looked through it and it appears to
be good legislation and he didn't see anything that would cause DOL
any concern.
SENATOR TORGERSON asked which would prevail: two willing parties
that enter into a contract for a distributorship - that document or
this piece of legislation.
MR. SNIFFEN replied:
That's a good question and that's why we have lawyers, I
suppose. Contract rights between private individuals are
hard to disrupt, but the state does have an interest in
enacting legislation to further legitimate state
interests. I would think if this law were in effect, it
would have some authority over a private contract that
was entered after the law was on the books that
conflicted with this legislation, but I don't' know if we
could enact something like this that would take
retroactive effect. That might be a problem. There is
also an issue that comes up sometimes dealing with some
constitutional question about impairment of contracts. I
could talk for an hour about what all that entails, but
in this case I think that most of the problems that arise
under an impairment of contract analysis are not present.
SENATOR TORGERSON said he'd had several dealerships and franchises
and he didn't have any choice. He signed a deal as it was laid out
and it had all kinds of provisions on buying back stock and how to
dissolve the contract. He was concerned if the manufacturer outside
the state was not aware of this law and someone enters into a
willing contract, what was the basis of this law.
MR. SNIFFEN replied that the manufacturer is almost presumed to
know the laws of the state that it's doing business in. "So, if
they're not aware of our law, it's almost shame on them."
If two people enter into a contract and the terms are inconsistent
with this legislation, he thought it was a gamble on behalf of both
parties. He thought in most cases, the statute would prevail.
SENATOR TORGERSON asked if he thought this would be detrimental to
getting distributorships up here.
MR. SNIFFEN replied that he couldn't' answer that.
Number 1100
MS. LUPER commented on page 5, number 3, under exceptions,
specifically excludes motor vehicle distributors and dealerships
and that should take care of the DOL's concerns.
Regarding Senator Torgerson's concerns about whether manufacturers
would be willing to enter into agreements with Alaskan business,
she said, "Alaska is one of the few states that does not have a law
that is similar to this. Businesses located in other states are
doing fine under laws that are actually more stringent than this.
In fact, some states have made some of these provisions rather than
being civil, they have actually gone to criminal ramifications."
SENATOR LEMAN asked her if she wanted to respond to what prevails,
a contract or the statute.
MS. LUPER said she wasn't qualified to comment on it.
CHAIRMAN PHILLIPS noted that this bill was going to the Judiciary
Committee where these questions would be addressed.
MR. YOUNG commented that before a person goes into a
distributorship with a large corporation, they have to sign
hundreds of contracts saying that they are liable for attorneys
fees, collection fees, on and on and on. He didn't see that there
would be a difference where the large corporation is held liable
for a change.
CHAIRMAN PHILLIPS said he would hold the bill while he checks out
some questions with the Department of Law.
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