Cycle City, Ltd. v. Harley-Davidson Motor Company, Inc.

Filing 73

ORDER DENYING DEFENDANT HARLEY-DAVIDSON MOTOR COMPANY INC.'S PARTIAL MOTION TO DISMISS THE SECOND AMENDED COMPLAINT (ECF NO. 66 ). Signed by JUDGE HELEN GILLMOR on 5/26/2015. ~ For the foregoing reasons, Plaintiff Cycle City has stated a claim under the Hawaii Franchise Investment Law, Haw. Rev. Stat. § 482E-1, et seq. (Count IV of the Second Amended Complaint), based on the License Agreement. Defendant Harley-Davidson Motor Company's Partial Motion to Dismiss the Second Amended Complaint (ECF No. 66) isDENIED. (ecs, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII

CYCLE CITY, LTD., a Hawaii
company,

)
)
)
Plaintiff,
)
)
vs.
)
)
HARLEY-DAVIDSON MOTOR COMPANY, )
INC., a Wisconsin corporation, )
)
Defendant.
)
)
)

CV. NO. 14-00148 HG-RLP

ORDER DENYING DEFENDANT HARLEY-DAVIDSON MOTOR COMPANY INC.’S
PARTIAL MOTION TO DISMISS THE SECOND AMENDED COMPLAINT (ECF
NO. 66)

Plaintiff Cycle City, Ltd.’s suit arises out of Defendant
Harley-Davidson’s allegedly unlawful failure to renew the
parties’ distributorship agreement for the exclusive
distribution, sale and service of Harley-Davidson motorcycles,
parts, and accessories in Hawaii.

Plaintiff also alleges that

Defendant wrongfully failed to renew a non-exclusive trademark
license agreement between the parties.

Plaintiff alleges

breach of the distributorship agreement and violations of the
Hawaii Motor Vehicle Industry Licensing Law, Haw. Rev. Stat. §
437-1, et seq. and the Hawaii Franchise Investment Law, Haw.
Rev. Stat. § 482E-1, et seq.

In its motion for partial

dismissal of Plaintiff’s Second Amended Complaint, Defendant
Harley-Davidson argues that Plaintiff has failed to state a
claim under the Hawaii Franchise Investment Law.
Defendant Harley-Davidson Motor Company’s Partial Motion
to Dismiss the Second Amended Complaint (ECF No. 66) is
DENIED.

PROCEDURAL HISTORY

On March 26, 2014, Plaintiff Cycle City, Ltd. (“Cycle
City” or “Plaintiff”) filed a Complaint. (ECF No. 1.)
On June 4, 2014, Defendant Harley-Davidson Motor Company,
Inc. (“Harley-Davidson” or “Defendant”) filed a Motion to
Dismiss. (ECF No. 21.)
On June 19, 2014, Plaintiff filed an Opposition. (ECF No.
25.)
On July 2, 2014, Defendant filed a Reply. (ECF No. 27.)
On that the same day, Defendant filed a Motion to
Transfer Case. (ECF No. 28.)
On July 9, 2014, the Court held a hearing on Defendant’s
Motion to Dismiss. (ECF No. 29.)

The Court continued the

hearing on Defendant’s Motion to Dismiss to allow for briefing

2

of the Motion to Transfer Case and set both motions for
hearing on September 22, 2014.
On July 25, 2014, Plaintiff filed an Opposition to
Defendant’s Motion to Transfer Case. (ECF No. 35.)
On August 6, 2014, Defendant filed a Reply to Plaintiff’s
Opposition to Defendant’s Motion to Transfer Case. (ECF No.
37.)
On September 22, 2014, Defendant’s Motions to Transfer
Case and to Dismiss came on for hearing.
On October 17, 2014, the Court entered an Order denying
Defendant’s motion to transfer the case and granting in part
and denying in part Defendant’s motion to dismiss. (ECF No.
48.)

The Court granted Defendant’s motion to dismiss as it

pertained to the License Agreement between the parties.

The

Court held that Cycle City had not sufficiently articulated a
claim for violation of the Hawaii Motor Vehicle Licensing Act
based on the alleged failure to renew the License Agreement.
(ECF No. 48, Oct. 17, 2014 Order at p. 45.) The Court granted
Plaintiff leave to amend “to attempt to state a claim for
violation of the HMVILA based on termination or non-renewal of
the License Agreement and/or to articulate another basis for
its claim that Harley-Davidson breached the License
Agreement.” (Id.)

3

On December 2, 2014, Plaintiff filed an Amended
Complaint. (ECF No. 49.)

Plaintiff’s Amended Complaint added

a claim for violation of the Hawaii Investment Franchise Law.
(ECF No. 49, Amend. Compl. ¶¶ 61-70.)
On December 16, 2014, Defendant filed a Partial Motion to
Dismiss the First Amended Complaint, contending that Plaintiff
had failed to state a claim under the Hawaii Franchise
Investment Law. (ECF No. 50.)
On January 7, 2015, Plaintiff filed an Opposition. (ECF
No. 53.)
On January 26, 2015, Defendant filed a Reply. (ECF No.
54.)
On February 17, 2015, the matter came on for hearing.
At the February 17, 2015 hearing, the parties agreed to
allowing Plaintiff to file a Second Amended Complaint. (ECF
No. 50).

The Court denied Defendant’s Partial Motion to

Dismiss the First Amended Complaint (ECF No. 50) as moot and
granted Plaintiff’s oral request to file a Second Amended
Complaint.

(Id.)

Plaintiff was given until March 27, 2015 to

do so. (Id.)
On March 27, 2015, Plaintiff filed a Second Amended
Complaint. (ECF No. 64.)

Plaintiff’s Second Amended Complaint

includes a claim that Defendant violated the Hawaii Franchise

4

Investment Law by failing to renew the License Agreement. (SAC
¶¶ 61-71.)
On April 10, 2015, Defendant filed a Partial Motion to
Dismiss the Second Amended Complaint, seeking to dismiss
Plaintiff’s claim based on the Hawaii Franchise Investment
Law. (ECF No. 66.)
On April 28, 2015, Plaintiff filed an Opposition. (ECF
No. 71.)
On May 13, 2015, Defendant filed a Reply. (ECF No. 72.)
Pursuant to Local Rule 7.2(d) the Court elected to decide
the matter without a hearing.

BACKGROUND

This case involves a dispute between Harley-Davidson, a
manufacturer of motorcycles and related products and services,
and Cycle City, Harley-Davidson’s exclusive Hawaii distributor
for the past 48 years.
(“SAC”) ¶¶ 2, 6.)

(Second Amended Compl., ECF No. 49,

Since 1966, Plaintiff “Cycle City has

served as the exclusive distributor for the distribution, sale
and service of Harley-Davidson motorcycles, OEM parts,
accessories, MotorClothes® and Officially Licensed Products
through Harley-Davidson dealers and licensees appointed by

5

distributor . . . .” (SAC ¶ 6.)

During this time, Cycle City

contends that it has built an extensive customer base and
dealer network.

(SAC ¶¶ 7, 8.)

Cycle City alleges that it

has “exponentially increased the brand awareness, goodwill,
popularity and the reputation of the Harley-Davidson brand
throughout Hawaii” and that “[a]s a direct result of the
efforts of Cycle City, retail sales of Harley-Davidson
motorcycles and products have surged and represent a
significant amount of all motorcycle sales made in this
state.”

(SAC ¶ 7.)

Cycle City has served as the exclusive distributor under
distributorship agreements. (SAC ¶ 8.)

Cycle City contends

these distributorship agreements were renewed automatically,
with the most recent Distributorship Agreement being entered
into on November 24, 2008. (SAC ¶ 8 and at Exh. A,
hereinafter, “Distributorship Agreement”).)

In addition to

its role as exclusive distributor, Cycle City owns and
operates Harley-Davidson dealerships on Oahu and Maui. (SAC ¶
9.)

The two

other Harley-Davidson dealerships located in the State of
Hawaii are owned by Aloha Auto Group, Inc., an independent
third-party, and are located on the Islands of Kauai (Kauai

6

Harley-Davidson) and Hawaii (Big Island Harley-Davidson).
(Id.)
Cycle City also had a separate License Agreement with
Harley-Davidson to manufacture certain goods bearing HarleyDavidson trademarks. (SAC ¶ 10 and at Exh. B (“Nonexclusive
Trademark License Agreement Between Harley-Davidson Motor
Company, Inc. And Cycle City, Ltd.”), hereinafter “License
Agreement”.)

Under the License Agreement, Cycle City sold

products bearing Harley-Davidson’s trademarks to dealers in
its dealer network and to independent third party retailers.
(SAC ¶ 10.)

According to Cycle City, its ability to

manufacture and sell products under the License Agreement is a
significant form of marketing, advertising, and promotion of
the brand as well as a significant source of income.

(Id.)

Cycle City alleges that, through the course of its
relationship with Harley-Davidson, it “has invested millions
of dollars and countless hours towards the development of the
Harley-Davidson brand and goodwill, the development of the
Harley-Davidson dealer network, and the operation of
Plaintiff’s business in Hawaii.” (SAC ¶ 14.)

According to

Plaintiff, Harley-Davidson now seeks to significantly alter
the parties’ relationship by not renewing the Distributorship
Agreement or the License Agreement.

7

(SAC ¶¶ 16-19.)

According to Harley-Davidson, on July 13, 2013, the
Distributorship Agreement expired and was not renewed. (SAC ¶
25.) Harley-Davidson also claims it did not renew the License
Agreement and it expired by its terms on December 31, 2013.
(SAC ¶ 26; License Agreement, at Amendment No. 1, § 2(b).)
The SAC alleges that Harley-Davidson’s actions in not
renewing the Distributorship and License Agreements are an
attempt to end Cycle City’s role as the distributor in Hawaii
and to limit Cycle City’s role to that of a dealer.
17.)

(SAC ¶

Cycle City contends that, in doing so, Harley-Davidson

aims to recapture for itself the significant benefits now
being realized by Cycle City as the Harley-Davidson Hawaii
distributor for over the past 48 years. (SAC ¶ 15.)
According to the SAC, for several months prior to the
Distribution Agreement’s July 31, 2013 expiration, Cycle City
and Harley-Davidson engaged in negotiations regarding their
ongoing relationship which resulted in an impasse.
17-25.)

(SAC ¶¶

Cycle City maintains that despite termination of the

parties’ written agreements, Harley-Davidson has continued to
sell products to Cycle City, but at “significantly and
unreasonably” increased prices. (SAC ¶ 27.)
Cycle City, Ltd.’s SAC contains four counts:

8

Count I:

violation of Hawaii Motor Vehicle Industry

Licensing Act, Haw. Rev. Stat. § 437-1, et seq. (“HMVILA”) for
failure to renew the Distributorship Agreement;
Count II:

declaratory relief based on Harley-Davidson’s

alleged failure to renew the most recent Distributorship
Agreement;
Count III:
Count IV:

breach of the Distributorship Agreement; and
violation of the Hawaii Franchise Investment

Law, Haw. Rev. Stat. § 482E-1, et seq., for imposing an
unreasonable and arbitrary standard of conduct and for failing
to renew the License Agreement.

STANDARD OF REVIEW

Motion to Dismiss Based on Failure to State a Claim
Federal Rule of Civil Procedure 12(b)(6) allows dismissal
where a complaint fails “to state a claim upon which relief
can be granted.” Salmon Spawning & Recovery Alliance v.
Gutierrez, 545 F.3d 1220, 1225 (9th Cir. 2008).

The complaint

must contain “a short and plain statement of the claim showing
that the pleader is entitled to relief.”

Fed. R. Civ. P.

Rule 8(a)(2). Rule 8 of the Federal Rules of Civil Procedure
“does not require ‘detailed factual allegations,’ but it

9

demands more than an unadorned, the-defendant-unlawfullyharmed-me-accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)(quoting Bell Atlantic Corporation v. Twombly, 550 U.S.
544, 555 (2007)). A pleading must provide “more than labels
and conclusions, and a formulaic recitation of the elements of
a cause of action.” The factual allegations in a pleading
“must be enough to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555.
A complaint survives a motion to dismiss when it
contains sufficient factual matter, accepted as true, to state
a claim for relief that is plausible on its face. Iqbal, 556
U.S. at 678 (quoting Twombly, 550 U.S. at 570). A claim is
facially plausible when the factual content of the complaint
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged. The
plausibility standard does not require probability, but it
requires “more than a sheer possibility that a defendant has
acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 556). A
complaint that pleads facts that are “merely consistent with”
a defendant’s liability “stops short of the line between
possibility and plausibility of ‘entitlement to relief.’” Id.
(quoting Twombly, 550 U.S. at 557).

10

When considering a Rule 12(b)(6) motion to dismiss, the
Court must presume all allegations of material fact to be true
and draw all reasonable inferences in favor of the non-moving
party. Pareto v. F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998).
The Court need not accept as true, however, allegations that
contradict matters properly subject to judicial notice or
allegations contradicting the exhibits attached to the
complaint. Sprewell v. Golden State Warriors, 266 F.3d 979,
988 (9th Cir. 2001); Daniels-Hall v. Nat'l Educ. Ass'n, 629
F.3d 992, 998 (9th Cir. 2010)(documents attached to the
complaint and matters of public record may be considered on a
motion to dismiss).

ANALYSIS
I.

Defendant’s Partial Motion to Dismiss Plaintiff’s Claim
for Violation of the Hawaii Franchise Investment Law
(Count IV)
Defendant Harley-Davidson’s partial motion for dismissal

pertains only to Count IV - Plaintiff’s claim for violation of
the Hawaii Franchise Investment Law, Haw. Rev. Stat. § 482E-1,
et seq. (“HFIL”). (SAC ¶¶ 61-71.)

Defendant moves to dismiss

Plaintiff’s HFIL claim, arguing that because Cycle City is not
a “franchise”, it is not governed by the HFIL.

11

In its HFIL claim, Cycle City alleges that the License
Agreement constitutes a “franchise” as defined by Section
482E-2 of the Hawaii Franchise Investment Law.

(SAC ¶ 62.)

Under the HFIL, the definition of “franchise” requires payment
of a “franchise fee.”

HFIL, Haw. Rev. Stat. § 482E-2.

Cycle

City alleges that the provisions of the License Agreement
pertaining to the payment of royalties satisfies the
definition of “franchise fee.”

(SAC ¶¶ 63-65.)

According to the SAC, Harley-Davidson violated the HFIL
by wrongfully refusing to renew the License Agreement and,
instead, demanding that “Cycle City consent to the ultimate
termination of the distribution model under which the parties
have operated for over 48 years.”

(SAC ¶ 70.)

Cycle City relies on three provisions of the HFIL.

Cycle

City alleges that Harley-Davidson has violated the HFIL by:
(1) not dealing in good faith in violation of Haw. Rev. Stat.
§ 438E-6(1); (2) imposing unreasonable and arbitrary standards
of conduct in violation of § 483E-6(2)(G); and (3) failing to
renew the License Agreement in violation of Haw. Rev. Stat. §
483E-6(2)(H). (SAC ¶¶ 68-69.)
Harley-Davidson moves to dismiss on the grounds that the
SAC does not allege sufficient facts to state a claim that the
License Agreement constitutes a “franchise” as defined by Haw.

12

Rev. Stat. § 482E-2. (ECF No. 68, Motion at 4.)

In

particular, Harley-Davidson contends that Cycle City has not
adequately alleged payment of a “franchise fee”.

(Id.)

Defendant contends that: (1) the provisions in the License
Agreement pertaining to the payment of royalties do not
constitute the payment of franchise fees; and (2) the License
Agreement is not the type of arrangement intended to be
regulated as a franchise under Hawaii law.
A.

(Id.)

The Hawaii Franchise Investment Law
1.

Purpose

The legislature enacted the Hawaii Franchise Investment
Law, Haw. Rev. Stat. § 482E-1, et seq. (“HFIL”) to regulate
the sale of franchises in the State and to protect
franchisees.

Haw. Rev. Stat. § 482E-1.

By enacting the HFIL,

the legislature intended to:
(1) Provide each prospective franchisee with the
information necessary to make an intelligent
decision regarding franchises being offered;
(2) Prohibit the sale of franchises that would
lead
to
fraud
or
a
likelihood
that
the
franchisor's promises would not be fulfilled;
and
(3) Protect the franchisor or subfranchisor
providing
a
better
understanding
of
relationship
between
the
franchisor
subfranchisor and the franchisee with regard
their business relationship.

13

by
the
or
to

Haw. Rev. Stat. § 482E-1(b).
2.

Definitions

The HFIL defines the term “franchise.”

As defined by the

HFIL, the term “franchise”
means an oral or written contract or agreement,
either expressed or implied, in which a person
grants to another person, a license to use a trade
name, service mark, trademark, logotype or related
characteristic
in
which
there
is
a
community
interest in the business of offering, selling, or
distributing goods or services at wholesale or
retail, leasing, or otherwise, and in which the
franchisee
is
required
to
pay,
directly
or
indirectly, a franchise fee.
Haw. Rev. Stat. § 482E-2.
Under the definition of “franchise” the franchisee must
pay a “franchise fee”.
The term “franchise fee”
means any fee or charge that a franchisee or
subfranchisor is required to pay or agrees to pay
for the right to enter into a business or to
continue a business under a franchise agreement,
including, but not limited to, the payment either in
lump sum or by installments of an initial capital
investment fee, any fee or charge based upon the
amount
of
goods
or
products
purchased
by
the
franchisee from the franchisor or subfranchisor, any
fee or charges based upon a percentage of gross or
net sales whether or not referred to as royalty
fees, any payment for goods or services, or any
training fees or training school fees or charges.
Haw. Rev. Stat. § 482E-2 (emphasis added).
Excluded from the definition of “franchise fee” are:

14

(1) the purchase or agreement to purchase goods at a
bona fide wholesale price;
(2) the purchase or agreement to purchase goods by
consignment; if, and only if the proceeds remitted
by the franchisee from any such sale reflect only
the bona fide wholesale price of such goods;
(3) a bona
franchisor;

fide

loan

to

the

franchisee

from

the

(4) the purchase or agreement to purchase goods at a
bona fide retail price subject to a bona fide
commission or compensation plan that in substance
reflects only a bona fide wholesale transaction;
(5) the purchase or agreement to purchase supplies
or fixtures necessary to enter into the business or
to
continue
the
business
under
the
franchise
agreement at their fair market value;
(6) the purchase or lease or agreement to purchase
or lease real property necessary to enter into the
business or to continue the business under the
franchise agreement at the fair market value.

Haw. Rev. Stat. § 482E-2.
The term “‘franchisor’ means a person who grants a
franchise to another person.”

Id.

The term “‘franchisee’

means a person to whom a franchise is offered or granted.”
Id.
3.

Haw. Rev. Stat. § 482E-6 (Relationship Between
Franchisor and Franchisee)

Cycle City alleges violation of the Hawaii Franchise
Investment Law (“HFIL”), Section 482E-6 of the Hawaii Revised
Statutes, in particular Sections 482E-6(1) and 482E-6(2)(G)

15

and (H).

Section 482E-6 sets forth specific rights and

prohibitions to govern the relation between the franchisor and
its franchisees.

Section 482E-6(1) provides that the parties

shall deal with each other in good faith.
482E-6(1).

Haw. Rev. Stat. §

Section 482E-6(2) declares certain actions to be

unfair or deceptive acts or practices or unfair methods of
competition.

Under Section 482E-2(G) it shall be an unfair or

deceptive act or practice or an unfair method of competition
for a franchisor or subfranchisor to “[i]mpose on a franchisee
by contract, rule, or regulation, whether written or oral, any
unreasonable and arbitrary standard of conduct.”
Stat. § 482E-2(G).

Haw. Rev.

Under Section 482E-2(H) it shall be an

unfair or deceptive act or practice or an unfair method of
competition for a franchisor or subfranchisor to “[t]erminate
or refuse to renew a franchise except for good cause, or in
accordance with the current terms and standards established by
the franchisor then equally applicable to all franchisees,
unless and to the extent that the franchisor satisfies the
burden of proving that any classification of or discrimination
between franchisees is reasonable, is based on proper and
justifiable distinctions considering the purposes of this
chapter, and is not arbitrary.”

Haw. Rev. Stat. § 482E-2(H).

16

B.

Plaintiff Has Sufficiently Alleged that the License
Agreement is a Franchise

In order for the License Agreement to qualify as a
franchise, it must satisfy three criteria:
(1)

It must be an agreement expressly or implicitly
granting Cycle City a license to use HarleyDavidson’s trade name, service mark, trademark, or
logotype;

(2)

There must be a community interest between Cycle
City and Harley-Davidson; and

(3)

Cycle City must be required to pay, directly or
indirectly, a franchise fee to Harley-Davidson.

Haw. Rev. Stat. § 482E-2.

Harley-Davidson does not dispute that the License
Agreement satisfies the first criteria.

Harley-Davidson

argues that Cycle City has not sufficiently stated a claim
under the second and third criteria.

Harley-Davidson argues

that Cycle City has not sufficiently alleged payment of a
franchise fee.

Harley-Davidson also argues that the License

Agreement is not the type of agreement that was intended to be
regulated as a franchise.

The latter argument goes to whether

Cycle City has made sufficient factual allegations to satisfy
the “community interest” prong of the franchise definition.

17

The Court will first address the “franchisee fee”
requirement followed by the “community interest” requirement.

1.

Cycle City Has Alleged That It Was Required to
Pay a Franchise Fee

In order to establish the third element of the
“franchise” definition – that Cycle City be required to pay a
franchise fee -

Cycle City points to the royalty payment

provisions in Sections 3.1 and 3.2 of the License Agreement.
(SAC ¶¶ 64-65.)
Section 3.1 of the License Agreement provides:
During the Term and any applicable sell-off
period, Licensee shall pay to Licensor royalties
in the following amounts: Category I; twelve
percent (12%); Category II; fifteen percent
(15%); Category III: ten percent (10%); and
Category IV: ten percent (10%) of Net Sales of
Licenses Articles (“Royalties”). As prescribed
in section 3.3. For purposes of computing Gross
Sales, net Sales and Royalties due, a sale shall
be deemed to take place at the point at which
Licenses Articles are sold by Licensee or any
authorized
Affiliate
of
Licensee
to:
i)
wholesale or retail outlets; (ii) sales people
or sales representatives; (ii) employees; (iv)
ultimate consumers; or (v) any other person or
entity to whom sales of Licensed Articles are
authorized under this Agreement.
(ECF No. 64, SAC at Exh. B, ¶ 3.1.)
Section 3.2 of the License Agreement obligates Cycle City
to pay minimum royalties of $30,000.000 per annum for the

18

three-year (3) duration of the Agreement regardless of the
volume of sales achieved by Cycle City. (Id. ¶ 3.2.)
The payment of royalties falls within the Hawaii
Franchise Investment Law’s (“HFIL”) definition of “franchise
fee”.

Under the HFIL, a “franchise fee” means, in relevant

part, “any fee or charge that a franchisee or subfranchisor is
required to pay or agrees to pay for the right to enter into a
business or to continue a business under a franchise
agreement, including, but not limited to . . . any fee or
charge based upon the amount of goods or products purchased by
the franchisee from the franchisor or subfranchisor, any fee
or charges based upon a percentage of gross or net sales
whether or not referred to as royalty fees, . . .” Haw. Rev.
Stat. § 482E-2 (emphasis added); see Manhattan Bank, N.A. New
York, N.Y. v. Clusiau Sales & Rental, Inc., 308 N.W. 2d 490,
492 (Minn. 1981) (muffler-company which agreed to pay
defendant 8% of its gross sales as royalties and advertising
fees was a franchise within the meaning of the Minnesota
Franchise Act).

Section 3.1 of the License Agreement

contemplates the payment of a percentage of Cycle City’s net
sales to Harley-Davidson.
In arguing that the payment of royalties does not
constitute a franchise fee, Harley-Davidson relies on the
19

exclusions under the “franchise fee” definition.

(ECF No. 68,

Motion at 11.) Harley-Davidson points to the part of the
“franchise fee” definition which excludes from the definition
the purchase or agreement to purchase goods at a bona fide
wholesale price and the purchase or agreement to purchase
goods at a bona fide retail price subject to a bona fide
commission or compensation plan that in substance reflects
only a bona fide wholesale transaction.
482E-2.

Haw. Rev. Stat. §

These exclusions do not apply because the License

Agreement is not an agreement to purchase goods.

Rather,

under the License Agreement, Harley-Davidson granted Cycle
City the non-exclusive right to use Harley-Davidson’s licensed
marks. (ECF No. 64, SAC at Exh. B., License Agreement at 3,
Section ¶ 2.1.)

The parties’ Distributorship Agreement

pertains to the purchase of goods, but the Distributorship
Agreement is a separate agreement with its own provisions
pertaining to the ownership and use of trademarks.

(ECF No.

64, SAC at Exh. A, Distributorship Agreement.)

Further, any factual dispute as to whether Cycle City
paid a direct or indirect franchise fee to Harley-Davidson, is
a question of fact not appropriate for resolution in the
context of a motion to dismss.

See To–Am Equip. Co. v.

20

Mitsubishi Caterpillar Forklift Am., 152 F.3d 658, 663 (7th
Cir. 1998) (stressing “the highly fact-specific nature of the
question whether alleged business expenses are franchise
fees”); JJCO, Inc. v. Isuzu Motors America, Inc., 2009 WL
1444103, at *6 (D. Haw. May 22, 2009) (whether expenses paid
constituted a franchise fee was a question of fact that could
not be determined on summary judgment).
2.

Cycle City Has Alleged a Community Interest
Between It and Harley-Davidson

The second element of the “franchise” definition requires
that a community interest exist between the manufacturer and
the dealer or distributor.

The HFIL defines “community

interest” as “a continuing financial interest between the
franchisor and franchisee in the operation of the franchise
business.” Haw. Rev. Stat. § 482E-2.
In Girl Scouts of Manitou Council, Inc. v. Girl Scouts of
U.S. of America, Inc., 549 F.3d 1079, 1093 (7th Cir. 2008), the
Seventh Circuit Court of Appeals considered a non-exhaustive
list of factors in determining whether a community of interest
existed between a dealer and a grantor such that the plaintiff
was protected under the Washington Fair Dealership Law.
Relevant factors included:
(1) the duration of the business relationship;
(2) the nature and extent of the parties’
contractual arrangement; (3) the proportion of
21

time and revenue the alleged dealer devotes to
the alleged grantor’s products or services; (4)
the percentage of gross profits that the alleged
dealer
derives
from
the
alleged
grantor’s
products or services; (5) the nature and extent
of the alleged grantor’s territorial grant to
the alleged dealer; (6) the nature and extent of
the
alleged
dealer's
uses
of
the
alleged
grantor’s proprietary marks; (7) the nature and
extent of the alleged dealer’s investment in
facilities,
inventory,
and
goodwill
in
furtherance of the alleged dealership; (8) the
personnel devoted by the alleged dealer to the
alleged dealership; (9) the amount spent by the
alleged dealer on advertising or promotions for
the alleged grantor’s products and services; and
(10) the nature and extent of any supplementary
services provided by the alleged dealer to
consumers of the alleged grantor’s products and
services.

Id. at 1093 (citing Ziegler Co. v. Rexnord, Inc. (Ziegler I),
139

2d 593, 407 N.W.2d 873, 879-80 (1987)).1
Cycle City argues that several of these factors indicate

that it has a franchise relationship with Harley-Davidson.
(ECF No. 71, Opposition at 11-12.)

Among these are Cycle

City’s license to use Harley-Davidson’s trademarks and Cycle
City’s payment of royalty fees to Harley-Davidson for the sale

1

The Girl Scouts of Manitou Council Inc. Court applied the
Wisconsin Fair Dealership Law, which contains a definition of
community interest similar to that under the Hawaii Franchise
Investment Law. See Wis. Stat. § 135.02(1) (defining
“community of interest” as “a continuing financial interest
between the grantor and grantee in either the operation of the
dealership business or the marketing of such goods or
services”).

22

of licensed products.

Cycle City also points out that the

License Agreement gave Harley-Davidson the right to approve
all licensed products, packaging and promotional materials.
(SAC, Exh. B, License Agreement, ¶¶ 4.1-4.3.)

Cycle City was

required to obtain Harley-Davidson’s approval before it could
produce any of the licensed products.

(Id. ¶¶ 4.2-4.3.)

The

License Agreement also required Cycle City to limit its sale
of the licensed products to the Hawaii market and to use its
best efforts to advertise, promote, sell and distribute the
licensed products.

(Id. ¶¶ 6.1-6.2.)

Under the

Distributorship Agreement, Cycle City was been obligated to
purchase all new motorcycles exclusively from Harley-Davidson.
(SAC, Exh. A, Distributorship Agreement, ¶ 5.6.)

Based on the

parties’ relationship and the provisions of the License
Agreement, Cycle City concludes that Harley-Davidson exercised
substantial control over its sale and distribution of the
licensed products and that Cycle City made substantial
investments in the manufacture, advertising, sale, and
distribution of such products.

(ECF No. 71, Opposition at

12.)
Cycle City further argues that its substantial financial
investment in maintaining Harley-Davidson inventory and
identifying itself as an authorized dealer and distributor of

23

Harley-Davidson products shows that it was a Harley-Davidson
franchisee.

(ECF No. 71, Opposition at 12); see Cooper

Distrib. Co., Inc. v. Amana Refrigeration, Inc., 63 F. 3d 262,
269-74 (3d Cir. 1995) (evidence concerning aspects of
wholesale distributor’s lengthy relationship with home
appliance manufacturer was sufficient to establish existence
of “license” to use manufacturer’s trade name, trademark,
service mark or related characteristics, as required to
establish existence of franchise under New Jersey Franchise
Practices Act; distributor’s showroom displayed manufacturer’s
sign, its servicemen wore manufacturer’s uniforms, and
distributor was exclusive distributor in four-state territory
for 30 years).
There is no precise line between when a company is simply
a distributor of a manufacturer’s trademarked goods and when
the company is a franchise.

The mere licensing of a

trademarked good, without more, does not give rise to a
franchise relationship.

How much more is required is a matter

of degree and, in many cases such as this one, a question for
the finder of fact.
The facts alleged indicate that there has been a
continuing financial interest between Cycle City and HarleyDavidson in the operation of Cycle City’s business.

24

Cycle

City has sufficiently alleged a community interest between it
and Harley-Davidson to satisfy the second element of the
definition of “franchise” under the HFIL.

CONCLUSION
For the foregoing reasons, Plaintiff Cycle City has
stated a claim under the Hawaii Franchise Investment Law, Haw.
Rev. Stat. § 482E-1, et seq. (Count IV of the Second Amended
Complaint), based on the License Agreement.
Defendant Harley-Davidson Motor Company’s Partial Motion
to Dismiss the Second Amended Complaint (ECF No. 66) is
DENIED.

IT IS SO ORDERED.
DATED: Honolulu, Hawaii, May 26 , 2015.

/s/ Helen Gillmor
Helen Gillmor
United States District Judge

CYCLE CITY LTD. v. HARLEY-DAVIDSON MOTOR COMPANY, INC., Civ.
No. 14-00148 HG-RLP; ORDER DENYING DEFENDANT HARLEY-DAVIDSON
MOTOR COMPANY INC.’S PARTIAL MOTION TO DISMISS THE SECOND
AMENDED COMPLAINT (ECF NO. 66)

25