Overlapping Sales Territory Disputes in Minnesota

What Decides Who Gets the Customer When Sales Territories Overlap?

Each agreement’s own terms decide what you owe the party to it. A court reads each agreement to find what its parties intended, enforces clear terms as written, and lets the parties’ actual conduct explain terms that are unclear. For goods, under Minn. Stat. § 336.1-303, conduct can also reach a clear term: “a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.”

The Minnesota Supreme Court stated the starting point in Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009). That case was a dispute over a five-year exclusive paint supply agreement, and the court said: “The primary goal of contract interpretation is to ascertain and enforce the intent of the parties.” So the first job is to lay the two agreements side by side and compare how each one describes its territory: counties, ZIP codes, named accounts, product lines, or sales channels.

For an agreement covering the sale of goods, two UCC sections shape what counts as the agreement. Under Minn. Stat. § 336.2-202, a final written term “may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented” in two ways, including “by course of performance, course of dealing, or usage of trade (section 336.1-303).” Under Minn. Stat. § 336.1-303, a course of performance arises when one side performs repeatedly and the other, “with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.” That conduct “is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement.”

For a company with an overlap, that rule has a practical edge. If you let a distributor sell into a neighboring county for years without objection, that history can shape what an unclear territory description means, and, subject to section 336.2-209, it can show a waiver or modification of a term it is inconsistent with. I suggest raising an encroachment in writing when you first learn of it, because silence is the conduct the statute counts.

How Do Minnesota Courts Treat a Territory Clause That Is Silent?

The implied covenant of good faith stops one party from unjustifiably hindering the other’s performance under the contract, but in Minnesota it “does not extend to actions beyond the scope of the underlying contract.” For goods, under Minn. Stat. § 336.1-303, the parties’ course of performance, course of dealing, or usage of trade “may supplement or qualify the terms of the agreement.”

In In re Hennepin County 1986 Recycling Bond Litigation, 540 N.W.2d 494 (Minn. 1995), a dispute over bond agreements decided at the motion-to-dismiss stage, the Minnesota Supreme Court said that “every contract includes an implied covenant of good faith and fair dealing,” which requires that one party not “unjustifiably hinder” the other party’s performance. The court added the limit: “In Minnesota, the implied covenant of good faith and fair dealing does not extend to actions beyond the scope of the underlying contract.” That limit did not defeat the claim there. The court wrote that “the bondholders’ implied covenant claims are based on the underlying bond agreements,” held that “the bondholders properly stated a claim for breach of an implied covenant of good faith and fair dealing,” and affirmed on that issue.

The federal appeals court for Minnesota applied that limit to a distribution network in Watkins Inc. v. Chilkoot Distributing, Inc., 719 F.3d 987 (8th Cir. 2013). That case involved independent distributors’ downline of recruited sales associates, not a geographic territory, and a federal decision applying Minnesota law does not bind Minnesota courts. The court wrote: “If Watkins had no duty under the agreements to preserve Appellants’ downline at all, we may not create a new obligation for Watkins to protect Appellants’ downline in good faith.” My page on the implied covenant of good faith and fair dealing covers the doctrine in more depth.

Goods agreements carry two added duties. Under Minn. Stat. § 336.1-304, “Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.” Minn. Stat. § 336.1-201 defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Under Minn. Stat. § 336.2-306, “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

What Are the Rules for Changing an Independent Sales Rep’s Territory?

When an overlap is fixed by ending or not renewing an independent sales rep’s agreement, the Minnesota Termination of Sales Representatives Act applies if the rep contracts “to solicit wholesale orders” and is paid at least partly by commission. A covered rep can be terminated only for good cause, after written notice and a chance to cure, and is paid commissions through the notice period. Not renewing the agreement without good cause takes advance written notice instead.

The statute, Minn. Stat. § 325E.37 subd. 1, defines a sales representative as “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or in part, by commission.” The definition excludes a person who “is an employee of the principal” and a person who “places orders or purchases for the person’s own account for resale,” so a distributor that buys and resells is outside it. Under subdivision 6, the section also reaches a rep “whose geographical territory specified in the sales representative agreement includes part or all of Minnesota.”

The core rules are these:

1. Termination. Under subdivision 2, a manufacturer, wholesaler, assembler, or importer “may not terminate a sales representative agreement unless the person has good cause.” It must also have given “written notice setting forth the reason(s) for the termination at least 90 days in advance of termination,” and the rep must fail “to correct the reasons stated for termination in the notice within 60 days of receipt of the notice.” Subdivision 1 defines good cause as “a material breach of one or more provisions of a written sales representative agreement governing the relationship with the manufacturer, wholesaler, assembler, or importer, or in absence of a written agreement, failure by the sales representative to substantially comply with the material and reasonable requirements imposed by the manufacturer, wholesaler, assembler, or importer.” Subdivision 2(b) makes notice effective on receipt for listed grounds such as bankruptcy or abandonment of the business.
2. Nonrenewal. Under subdivision 3, “no person may fail to renew a sales representative agreement unless the sales representative has been given written notice of the intention not to renew at least 90 days in advance of the expiration of the agreement.” For an open-ended agreement, the subdivision adds: “For purposes of this subdivision, a sales representative agreement of indefinite duration shall be treated as if it were for a definite duration expiring 180 days after the giving of written notice of intention not to continue the agreement.”
3. Commissions. Under subdivision 4, a commissioned rep whose agreement is terminated “is entitled to be paid for all sales as to which the representative would have been entitled to commissions pursuant to the provisions of the sales representative agreement,” for sales “made prior to the date of termination of the agreement or the end of the notification period, whichever is later, regardless of whether the goods have been actually shipped.”
4. Forum. Under subdivision 5, “The sole remedy for a manufacturer, wholesaler, assembler, or importer who alleges a violation of any provision of this section is to submit the matter to arbitration.” The rep may instead choose court before the arbitration hearing, and the arbitrator may award “reasonable attorneys’ fees and costs to a prevailing sales representative.” Under subdivision 6(b), “To be effective, any demand for arbitration under subdivision 5 must be made in writing and delivered to the principal” within a period the subdivision sets after “the effective date of the termination of the agreement.”

The statute’s text speaks of terminating and failing to renew an agreement; it does not mention reducing a territory. A territory cut that leaves the agreement in place turns first on the agreement’s own amendment and territory terms. When I represented an independent rep after a principal ended the relationship, the principal’s commission figure for the notice period applied a lower rate than the rep’s signed 2019 commission amendment stated. I asked the rep for a list of the rep’s accounts to compare against the principal’s figures. My page on the Minnesota Termination of Sales Representatives Act covers the statute in full.

When Does Adding a Location Violate a Franchisee’s Territory?

Adding a location violates a franchisee’s territory under Minnesota’s franchise rules when the franchise agreement specifically granted an exclusive territory. Without that specific grant, the rule does not apply, and unless an industry statute such as the new motor vehicle dealer rule in section 80E.14 covers the relationship, the franchisee’s protection is whatever the agreement’s own terms provide.

Minn. R. 2860.4400, item C, names one unfair and inequitable practice. Under it, no person may “compete with the franchisee in an exclusive territory or grant competitive franchises in the exclusive territory previously granted to another franchisee if the terms of the franchise agreement provide that an exclusive territory has been specifically granted to a franchisee.” The rule takes its force from Minn. Stat. § 80C.14 subd. 1: “No person, whether by means of a term or condition of a franchise or otherwise, shall engage in any unfair or inequitable practice in contravention of such rules as the commissioner may adopt.” A clause giving up that protection does not work for a franchisee within the act: under Minn. Stat. § 80C.21, a provision purporting “to waive compliance or which has the effect of waiving compliance with any provision of sections 80C.01 to 80C.22 or any rule or order thereunder is void.”

Disclosure frames the dispute before any store opens. A franchisor registering in Minnesota must include, under Minn. Stat. § 80C.04 subd. 1, “a statement whether franchisee or subfranchisors receive an exclusive area and territory, and if so, a map thereof.” The Federal Trade Commission’s franchise rule requires Item 12 of the disclosure document to cover territory. Under 16 C.F.R. § 436.5, a franchisor that grants no exclusive territory must state: “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.” A franchisor that does grant one must disclose “Any other circumstances that permit the franchisor to modify the franchisee’s territorial rights.” My page on franchise market saturation covers how franchisors plan new units around existing ones.

These rules reach only a franchise. One element of a franchise under Minn. Stat. § 80C.01 subd. 4 is an arrangement “for which the franchisee pays, directly or indirectly, a franchise fee” under the act. Subdivision 9 excludes “the purchase of goods or agreement to purchase goods at a bona fide wholesale price” from that fee. A distributor that pays something beyond the wholesale price for the right to sell under your brand may be a franchisee. My page on a distribution deal that is really a franchise covers that test.

Which Minnesota Industries Have Their Own Territory Statutes?

Beer distribution and new motor vehicle dealerships have Minnesota statutes that protect a wholesaler’s or dealer’s area directly, and farm equipment and heavy and utility equipment dealerships have statutes that require good cause before a manufacturer changes a dealer’s competitive circumstances. In those industries, the statute limits what a supplier may do about an overlap, whatever the agreement says.

For beer, Minn. Stat. § 325B.03 provides: “No brewer who designates a sales territory for which any wholesaler shall be primarily responsible shall enter into any agreement with any other beer wholesaler for the purpose of establishing an additional agreement for its brand or brands of beer in the same territory served by a beer wholesaler with that particular brand.” Changing the territory by contract is regulated too: under Minn. Stat. § 325B.04 subd. 1, “no brewer shall amend, cancel, terminate or refuse to continue to renew any agreement” unless it satisfies the statute’s notice and cure requirements, acts in good faith, and has good cause.

For new motor vehicles, Minn. Stat. § 80E.14 subd. 1 applies when a manufacturer seeks to add or relocate a dealership within or into a relevant market area where the line make is then represented. The manufacturer must, in writing, “first notify each new motor vehicle dealer in this line make in the relevant market area.” “The relevant market area is a radius of ten miles around an existing dealership.” If a dealer brings the statute’s court challenge, “the manufacturer shall not establish or relocate the proposed new motor vehicle dealership unless the court has determined that there is good cause for permitting the establishment or relocation of the motor vehicle dealership.” The section lists the factors the court weighs and has its own timing rules, so a manufacturer or dealer in that position should read the current text before acting.

For farm equipment, Minn. Stat. § 325E.062 subd. 1 provides that no farm equipment manufacturer “may terminate, cancel, fail to renew, or substantially change the competitive circumstances of a dealership agreement without good cause.” Minn. Stat. § 325E.0681 subd. 1 applies the same rule to heavy and utility equipment dealers. Each section defines good cause and adds its own written-notice and cure requirements.

What Rules Apply When Ending a Distributor to Fix an Overlap?

When a supplier clears an overlap by ending one distributor, that distributor’s termination and notice terms control the exit, unless a Minnesota statute for the relationship, such as the rep, franchise, beer, motor vehicle, or farm and heavy equipment dealer statutes on this page, adds its own rules. Where the UCC governs, an open-ended goods contract can be ended unless the parties agreed otherwise, but only with reasonable notification.

Under Minn. Stat. § 336.2-309, “Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.” The next subsection adds: “Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.”

I suggest following the agreement’s notice terms exactly, because the Minnesota Supreme Court has held a party to them. In Valspar, the Minnesota Supreme Court found that the supply agreement “clearly and unambiguously states that the nondefaulting party must send written notice of default as a condition precedent to terminating the contract,” and held: “We conclude that oral notice is not sufficient under the contract.” The buyer there had complained about the product and stopped buying, but it never sent the written notice the contract required. If the distributor is a franchisee, the franchise act adds its own rule: under Minn. Stat. § 80C.14 subd. 3, “No person may terminate or cancel a franchise except for good cause,” with written notice and a cure period. The subdivision defines good cause as “failure by the franchisee to substantially comply with the material and reasonable franchise requirements imposed by the franchisor,” and lists examples such as bankruptcy and voluntary abandonment of the franchise business. For nonrenewal, Minn. Stat. § 80C.14 subd. 4 requires, unless the nonrenewal is for good cause and the franchisee failed to cure, written notice “at least 180 days in advance of the expiration of the franchise” and an opportunity “to operate the franchise over a sufficient period of time to enable the franchisee to recover the fair market value of the franchise as a going concern”. “No franchisor may refuse to renew a franchise if the refusal is for the purpose of converting the franchisee’s business premises to an operation that will be owned by the franchisor for its own account,” the subdivision adds. For a franchise to use a refiner’s trademark “in connection with the sale, consignment, or distribution of motor fuel,” a state may not enforce a law on termination or nonrenewal of the franchise “unless such provision of such law or regulation is the same as the applicable provision of this subchapter,” under 15 U.S.C. § 2806(a)(1). A new motor vehicle dealer’s termination falls under Minn. Stat. § 80E.06 subd. 1. My page on Minnesota franchise termination rules covers those steps.

For a goods distributor that none of the relationship statutes on this page covers, the agreement’s remedy terms set the exposure if the other side claims lost profits. Under Minn. Stat. § 336.2-719, “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable,” but “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter.” My page on damages for breach of an exclusivity clause covers how those claims are measured.

Why Can Splitting Territories With a Competitor Violate Antitrust Law?

An agreement between competitors to divide customers or territories is deemed an unreasonable restraint of trade under Minnesota law. In Continental T.V., Inc. v. GTE Sylvania Inc. (1977), the U.S. Supreme Court held that a manufacturer’s location clause for its franchised retailers is judged under the federal rule of reason, which weighs the restraint’s actual effect on competition. The Minnesota list reaches an agreement “between two or more persons in competition,” so a supplier that also sells to its distributors’ customers should check that wording against its own arrangement.

The Minnesota Antitrust Law states its general rule, “A contract, combination, or conspiracy between two or more persons in unreasonable restraint of trade or commerce is unlawful,” in Minn. Stat. § 325D.51. The next provision, Minn. Stat. § 325D.53 subd. 1, says “the following shall be deemed to restrain trade or commerce unreasonably and are unlawful” for the conduct it lists. The list includes an agreement “between two or more persons in competition” for “allocating or dividing customers or markets, functional or geographical, for any commodity or service” as one such practice. The act also reaches agreements made outside Minnesota, applying “whenever any of the foregoing affects the trade or commerce of this state” under Minn. Stat. § 325D.54. So two competing distributors that settle an overlap by agreeing with each other to stay out of each other’s areas take on this risk, even if the supplier never signs.

Federal law runs alongside. Under 15 U.S.C. § 1, “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” In Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), a television maker limited the number of retailers in each area and required each to sell only from its approved location. The Court noted that “A franchise did not constitute an exclusive territory,” and held that “the appropriate decision is to return to the rule of reason that governed vertical restrictions prior to Schwinn.” The Minnesota Supreme Court said in Lorix v. Crompton Corp., 736 N.W.2d 619 (Minn. 2007), a case about who may sue, that “Minnesota antitrust law is generally interpreted consistently with federal antitrust law,” while adding that Minnesota need not follow federal limits on who may sue. My pages on franchise antitrust issues and exclusivity clauses that raise antitrust issues cover the analysis further.

How Should a Territory Clause Be Written to Prevent the Next Overlap?

A territory clause should define the area by a fixed measure, state whether it is exclusive and against whom, list what the supplier reserves, and name who decides a contested account.

I suggest covering these points in every rep, distributor, and franchise agreement, because each one closes a gap that otherwise falls to a court:

1. A fixed boundary. Counties or ZIP codes with an attached map, or a named-account list, avoid the argument over what a region or a metro area means.
2. Exclusivity and its limits. State whether the grant bars only other distributors or the supplier as well, and list any reserved house accounts, national accounts, online sales, or product lines.
3. A tie-breaker. Say who gets credit when a customer buys in one territory and takes delivery in another, and who decides a disputed account.
4. A good-faith standard. Under Minn. Stat. § 336.1-302, “The obligations of good faith, diligence, reasonableness, and care prescribed by the Uniform Commercial Code may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.” A clause naming the sales activity that satisfies the best-efforts duty fits that rule.
5. A complete writing. Section 336.2-202 lets evidence of consistent additional terms explain or supplement a final writing “unless the court finds the record to have been intended also as a complete and exclusive statement of the terms of the agreement,” so an integration clause stating that intent addresses earlier side promises, and a signed-amendment requirement addresses later ones. That requirement has a limit: under Minn. Stat. § 336.2-209(4), “Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver,” an exception Valspar called “narrow” and subject to “the rules and principles of Minnesota law regarding waiver.”

Two Minnesota limits apply regardless of drafting. For a covered sales rep, section 325E.37 subdivision 7 voids a term that includes “an application or choice of law of any other state,” a venue in another state, or a waiver of the section. Under the session laws that added these terms, the choice-of-law and waiver bar “applies to sales representative agreements entered into, renewed, or amended on or after” August 1, 2014 (2014 Minn. Laws ch. 165), and the venue bar applies to agreements “entered into, renewed, or amended after” August 1, 2022 (2022 Minn. Laws ch. 51). For a franchisee within the franchise act, section 80C.21 voids a waiver of the act or its rules, including the exclusive-territory rule.

Next Steps When Two Agreements Claim the Same Territory

The first step is the documents, because every fix depends on what each agreement says. I suggest pulling every agreement that touches the contested area, including amendments and territory maps, and comparing how each defines its area, whether each grant is exclusive, and what each reserves to the supplier. Then identify what kind of relationship each agreement creates: an independent sales rep under section 325E.37, a franchisee under chapter 80C, a beer wholesaler, car dealer, or farm or heavy equipment dealer under its industry statute, or a goods distributor under the UCC. That classification sets which notice, cure, and good-cause rules apply to any fix.

Before changing anyone’s territory, I suggest putting the change in writing and following each agreement’s notice terms exactly, because Valspar shows a court will hold the parties to the notice method they chose. And I suggest settling an overlap between two distributors through each one’s agreement with you, never through an agreement between the distributors themselves, because section 325D.53 treats a market split between competitors as unlawful. My broader material on Minnesota franchise and distribution law covers the relationships on each side.

If your agreements overlap and you would like my analysis of what each one requires and how to change the territories without creating a claim, email [email protected] with a short description of the situation. I start with an intake and conflict check, and I suggest waiting to send the agreements or other confidential documents until that check is complete.