While the franchisee system of growing a business has many benefits for Franchisees and consumers, Franchisors have extraordinary contractual power over their Franchisees. Through Franchise Agreements, Franchisors can control all aspects of a Franchisee's business. A Franchise Agreement can give a Franchisor control over the products that a Franchisee can sell, the prices they can charge, how and when they advertise and market. Indeed, a through a Franchise Agreement a Franchisor can control almost every single aspect of a Franchisee's business.
Luckily for Franchisees, Washington has some of the most robust protections for Franchisees in the United States. All Franchisees should be well aware of their legal rights when purchasing, or operating, their Franchise in Washington state. Most of these protections are contained in the Franchise Investment Protection Act-RCW 19.100 et. seq. This is commonly called “FIPA” for short. In fact, within FIPA-19.100 et. seq., Washington's legislature enacted what is sometimes called the Franchisee “Bill of Rights” at to protect Franchisor from overreaching and taking unfair of advantage of Franchisees.
FIPA Provides All Franchisees Ten Rights Which Cannot Be Waived
The Franchisee's Bill of Rights is set forth at RCW 19.100.180 and it contains the following ten rights for Franchisees that Franchisors cannot override or force Franchisees to waive.
Preliminarily, the Franchise Investment Protection Act provides at RCW 19.100.180(1) that “(1) The parties shall deal with each other in good faith.”
This is a guiding principle that governs Court's or Arbitrator's interpretation of the Franchisee Bill of Rights. Courts will look at this provision when interpreting each of the 10 “rights” detailed in 19.100.180(2).
FIPA Franchisee Right-#1-Right to Join A Franchise Association
RCW 19.100.180(2)(a) states Franchisors may not “(a) Restrict or inhibit the right of the franchisees to join an association of franchisees.”
What does RCW 19.100.180(2)(a) actually mean for a Washington Franchisee?
Franchisees of a Franchise system are allowed to join together to form associations to vocalize and protect their rights. This includes, the right to collaborate, if need be, on Franchisee lawsuits or necessary legal action. A Franchisor cannot prevent Franchisees from joining Franchisee Associations for the Franchisees' benefit.
FIPA Franchisee Right-#2-Right to Not Have To Purchase From Franchisor Or Mandated Third Parties Without Justification
RCW 19.100.180(2)(b) states Franchisors may not “require a franchisee to purchase or lease goods or services of the franchisor or from approved sources of supply unless and to the extent that the franchisor satisfies the burden of proving that such restrictive purchasing agreements are reasonably necessary for a lawful purpose justified on business grounds, and do not substantially affect competition: PROVIDED, That this provision shall not apply to the initial inventory of the franchise. In determining whether a requirement to purchase or lease goods or services constitutes an unfair or deceptive act or practice or an unfair method of competition the courts shall be guided by the decisions of the courts of the United States interpreting and applying the anti-trust laws of the United States.”
What does RCW 19.100.180(2)(b) actually mean for a Washington Franchisee?
A Franchisor cannot force Franchisees to purchase and/or lease products from a Franchisor or a third party that the Franchisor selects, unless the Franchisor can prove that there is a “reasonably necessary” business reason to force Franchisees to purchase/lease from required vendors. This provision can be interpreted to mean, among other things, that Franchisees can object if the price is too high, the product is of poor quality, or for any other reason that it is not “good faith” to force the Franchisees to purchase from a Franchisor/mandated suppliers. It is also important to note, that the Franchisor has the burden to prove the “reasonable necessity” and business justification. That means the Franchisor has to convince a Court or Arbitrator why it is forcing its Franchisees to purchase from the Franchisor or mandated vendors.
FIPA Franchisee Right-#3-Right to Not To Have Franchisor Discriminate Against Particular Franchisees
RCW 19.100.180(2)(c) states Franchisors may not “(c) Discriminate between franchisees in the charges offered or made for royalties, goods, services, equipment, rentals, advertising services, or in any other business dealing, unless and to the extent that the franchisor satisfies the burden of proving that any classification of or discrimination between franchisees is: (i) Reasonable, (ii) based on franchises granted at materially different times and such discrimination is reasonably related to such difference in time, or is based on other proper and justifiable distinctions considering the purposes of this chapter, and (iii) is not arbitrary. However, nothing in (c) of this subsection precludes negotiation of the terms and conditions of a franchise at the initiative of the franchisees. ”
What does RCW 19.100.180(2)(c) actually mean for a Washington Franchisee?
This provision is especially important if the Franchisor is “playing favorites” between its Franchisees. In real world Franchisor-Franchisee relationships, if a Franchisor does not like a certain Franchisee, for whatever reason, they may try to interfere with that Franchisee and make their business operations more difficult. Or, sometimes, the Franchisor may give their “favorite” Franchisees better deals, opportunities and/or access. However, simply put, the Franchisor cannot favor one Franchisee over another Franchisee and this type Franchisor discrimination is in violation of FIPA. A Franchisor cannot discriminate against, or treat any Franchisee different from any other Franchisee unless the Franchisor can prove that their acts are (i) reasonable (ii) based on the fact that the Franchisees entered the Franchise System at different times and the discrimination is related to that difference and (iii) not arbitrary. Again, it is important to note it is the Franchisor's responsibility to prove all three (3) items. That means the Franchisor has to convince a Court or Arbitrator why it is discriminating amongst and between its Franchisees.
FIPA Franchisee Right-#4-Right to Not To Have To Overpay A Franchisor For Any Product or Service
RCW 19.100.180(2)(d) states Franchisors may not “(d) Sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.”
What does RCW 19.100.180(2)(d) actually mean for a Washington Franchisee?
If a Franchisee is required to purchase or rent a product or service from a Franchisor, the Franchisor must sell or rent this product for a “fair and reasonable” price. While it seems very clear on its face, many Franchisors try to overcharge for certain items, especially “services,” which are really nothing more than a hidden royalty fee. Franchisees should be conscious of everything that they pay a Franchisor for, what the price is, and what the reasonable price would be for the same product or service would be on the open market. If the product or “service” (for instance a “marketing fee” is overpriced), then Franchisees could have legal remedies under this provision of FIPA's Franchisee “Bill of Rights.”
FIPA Franchisee Right-#5-Right to Have Disclosure On Franchisor "Kickbacks”/Rebates
RCW 19.100.180(2)(e) states Franchisors may not “(e) Obtain money, goods, services, anything of value, or any other benefit from any other person with whom the franchisee does business on account of such business unless such benefit is disclosed to the franchisee.”
What does RCW 19.100.180(2)(e) actually mean for a Washington Franchisee?
Many Franchisors get rebates, or a “kickback,” from vendors when Franchisees purchase items from certain vendors. This is a lucrative revenue stream for Franchisors because they get the benefit of the Franchisees purchases. While Washington state technically allows Franchisor rebates, FIPA regulates these kickbacks by making it clear that the Franchisor must disclose all kickbacks it receives from any vendor on account of a Franchisee purchasing or utilizing a certain vendor. The Franchisor must disclose the kickback to the Franchisee. While kickbacks are allowed, this is an important right for Franchisees because many times the Franchisor kickback is the actual reason why a Franchisee is required to purchase from a certain vendor. Thus, Franchisors disclosing these rebates or kickbacks, helps Franchisees understand why they are forced to purchase from certain vendors. And, if the kickbacks that the Franchisor receives, appears to be the only reason to force the Franchisee to purchase from a vendor, then that could be a violation of FIPA Franchisee Right #2
FIPA Franchisee Right-#6-Right to Maintain an Exclusive Territory If Franchise Agreement Provides For An Exclusive Territory
RCW 19.100.180(2)(f) states Franchisors may not “(f) If the franchise provides that the franchisee has an exclusive territory, which exclusive territory shall be specified in the franchise agreement, for the franchisor or subfranchisor to compete with the franchisee in an exclusive territory or to grant competitive franchises in the exclusive territory area previously granted to another franchisee.”
What does RCW 19.100.180(2)(f) actually mean for a Washington Franchisee?
If a Franchise Agreement provides that a Franchisee is granted an exclusive or protected territory, then the Franchisor cannot violate this provision by allowing other Franchisees to operate in the Franchisee's exclusive or protected territory. This also prevents a Franchisor from operating in the Franchisee's exclusive or protected territory.
FIPA Franchisee Right-#7-Right to Decline To Sign a Waiver or Release of FIPA Rights
RCW 19.100.180(2)(g) states that Franchisor may not “(g) Require franchisee to assent to a release, assignment, novation, or waiver which would relieve any person from liability imposed by this chapter, except as otherwise permitted by RCW 19.100.220.”
What does RCW 19.100.180(2)(g) actually mean for a Washington Franchisee?
A Franchisor cannot force a Franchisee to sign away its rights under Washington's Franchise Investment Protection Act – RCW 19.100 et. seq. It is important to understand the exact language used in this provision of FIPA. First, a Franchisor cannot require a Franchisee to “waive” its rights. This means, that a Franchisee cannot be forced to give up any of its rights under FIPA as a condition of signing a Franchise Agreement, or extending the term of a Franchise Agreement. It also contains a prohibition on “releasing” rights. That means if the Franchisor has violated FIPA, while the Franchisee was in business, that means that the Franchisor cannot force the Franchisee to release its claims which fall under FIPA. However, in regard to a “release,” FIPA does contain a set of circumstances where a Franchisee can “release,” its previous claims if all three of the conditions of RCW 19.100.220 are met. If a Franchisee wants to release its rights to file a lawsuit, or arbitration against a Franchisor, or collect damages from a Franchisor for violating the Franchise Investment Protection Act, then the Franchisee can release its ability to file a lawsuit or receive compensation if (i) there was an actual dispute (ii) after a Franchise Agreement has been signed and (iii) the Franchisee is represented by an attorney. If these three conditions of RCW 19.100.220 are not satisfied, then a Court or Arbitrator will not honor the “release” of FIPA Rights and it will be declared invalid.
FIPA Franchisee Right-#8-Right to Protest & Invalidate Unreasonable Franchisor Rules
RCW 19.100.180(2)(h) states a Franchisor may not “(h) Impose on a franchisee by contract, rule, or regulation, whether written or oral, any standard of conduct unless the person so doing can sustain the burden of proving such to be reasonable and necessary. ”
What does RCW 19.100.180(2)(h) actually mean for a Washington Franchisee?
Generally, a Franchisor can ensure uniformity in its Franchise System by setting uniform rules and ways a Franchisee can operate its business. However, these rules must be “reasonable and necessary.” Again, it is important to note that it is the Franchisor's burden to prove that the Franchise rules and regulations are “reasonable and necessary.” For instance, an example that has been used, is that a Franchisor cannot force a Franchisee to keep unreasonable hours (for instance hours where there is not enough business to sustain costs) simply so the Franchisor can receive more money from the gross sales that may occur (while the Franchisee bears the burden of keeping its business open during hours where it is not actually profitable). In short, all Franchisor rules and conditions, whether under the Franchise Agreement, or otherwise, can be subjected to Franchisee review to ensure they are actually “reasonable and necessary.”
FIPA Franchisee Right-#9-Right to Be Compensated For Franchisor's Refusal To Renew A Franchise
RCW 19.100.180(2)(i) states a Franchisor may not “(i) Refuse to renew a franchise without fairly compensating the franchisee for the fair market value, at the time of expiration of the franchise, of the franchisee's inventory, supplies, equipment, and furnishings purchased from the franchisor, and good will, exclusive of personalized materials which have no value to the franchisor, and inventory, supplies, equipment, and furnishings not reasonably required in the conduct of the franchise business: PROVIDED, That compensation need not be made to a franchisee for good will if (i) the franchisee has been given one year's notice of nonrenewal and (ii) the franchisor agrees in writing not to enforce any covenant which restrains the franchisee from competing with the franchisor: PROVIDED FURTHER, That a franchisor may offset against amounts owed to a franchisee under this subsection any amounts owed by such franchisee to the franchisor. ”
What does RCW 19.100.180(2)(i) actually mean for a Washington Franchisee?
Franchisors have the right to have Franchise Agreements only last for a certain period of time. Franchisors also have the right not to renew a Franchisee's right to have a Franchise Agreement with the Franchisor (in its current form or in a new form). However, if a Franchisor refuses to allow a Franchisee to renew its Franchise and/or Franchise Agreement then a Franchisor must compensate a Franchisee due to the fact that the Franchisor is refusing to renew the Franchisee's Franchise. The Franchisor must pay the Franchisee the fair market value for the Franchisee's inventory, supplies, equipment and Franchisee's goodwill. As is obvious, this can be a very expensive proposition for any Franchisor as many Franchisee's businesses are worth hundreds of thousands, if not millions, of dollars. The only way that the Franchisor can refuse to renew a Franchisee, and not have to pay the Franchisee, is if the Franchisor satisfies two (2) conditions. If the Franchisor wishes to refuse to renew a Franchisee, and does not want to pay the Franchisee as the Franchise Investment Protection Act requires, then the Franchisor must provide at least one (1) year advance notice that the Franchisor will not allow the Franchisee to renew and must release and agree not to enforce any noncompetition provisions which restrict the Franchisees ability to compete with the Franchisor.
FIPA Franchisee Right-#10-Right to Not To Have Franchise Agreement Unfairly Terminated Without Opportunity To Cure and Receive Compensation
RCW 19.100.180(2)(j) states a Franchisor may not “(j) Terminate a franchise prior to the expiration of its term except for good cause. Good cause shall include, without limitation, the failure of the franchisee to comply with lawful material provisions of the franchise or other agreement between the franchisor and the franchisee and to cure such default after being given written notice thereof and a reasonable opportunity, which in no event need be more than thirty days, to cure such default, or if such default cannot reasonably be cured within thirty days, the failure of the franchisee to initiate within thirty days substantial and continuing action to cure such default: PROVIDED, That after three willful and material breaches of the same term of the franchise agreement occurring within a twelve-month period, for which the franchisee has been given notice and an opportunity to cure as provided in this subsection, the franchisor may terminate the agreement upon any subsequent willful and material breach of the same term within the twelve-month period without providing notice or opportunity to cure: PROVIDED FURTHER, That a franchisor may terminate a franchise without giving prior notice or opportunity to cure a default if the franchisee: (I) Is adjudicated a bankrupt or insolvent; (ii) makes an assignment for the benefit of creditors or similar disposition of the assets of the franchise business; (iii) voluntarily abandons the franchise business; or (iv) is convicted of or pleads guilty or no contest to a charge of violating any law relating to the franchise business. Upon termination for good cause, the franchisor shall purchase from the franchisee at a fair market value at the time of termination, the franchisee's inventory and supplies, exclusive of (i) personalized materials which have no value to the franchisor; (ii) inventory and supplies not reasonably required in the conduct of the franchise business; and (iii), if the franchisee is to retain control of the premises of the franchise business, any inventory and supplies not purchased from the franchisor or on his or her express requirement: PROVIDED, That a franchisor may offset against amounts owed to a franchisee under this subsection any amounts owed by such franchisee to the franchisor.”
What does RCW 19.100.180(2)(j) actually mean for a Washington Franchisee?
Perhaps the most important Franchisee right, in FIPA's “Bill of Rights” is the prohibition against Unfair/Unjust termination of a Franchise Agreement. Regardless of what any Franchise Agreement states, a Franchisor can only terminate a Franchise Agreement as explicitly set forth in the Franchise Investment Protection Act. First, a termination has to be for “Good Cause.” Good Cause includes a failure to comply with an important provision of the Franchise agreement and failure to cure the noncompliance after Franchisee is provided written warning of noncompliance and a reasonable opportunity to cure the noncompliance. If the Franchisor terminates a Franchise Agreement for “Good Cause” then the Franchisor must purchase the Franchisee's inventory and supplies at fair market value.
Attorney Aric Bomsztyk represents Franchisees enforcing all manner of Franchise Agreements and contracts and dealings between Franchisors and Franchisees. Mr. Bomsztyk represents Franchisees and litigates on their behalf in lawsuits or arbitrations. Mr. Bomsztyk can also draft or advise on Franchise Agreements. Mr. Bomsztyk has and will represent Franchisees in all of Washington, including Seattle, Bellevue (and all of King County), Tacoma (and all of Pierce County) and Everett (and all of Snohomish County). Please contact him at (206) 621-1871 or [email protected] with any questions, he will provide a free consultation.