Franchise Regulation: Overview of Franchisor-Franchisee Relationship and Prohibitions in Washington State
For franchisors conducting business in the State of Washington, as with many "franchise regulation" states, it is critical to evaluate and understand Washington states "franchise relationship prohibitions." The Washington State Franchise Investment Protection Act has established guidelines respecting the types of franchise agreement and franchise relationship provisions in Washington State. Prohibited provisions include, among other things:
Restrictions on Franchise Associations
Restricting or inhibiting the right of the franchisees to join an association of franchisees;
Arbitrary Restrictions on Franchise Purchases
Requiring 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;
Discrimination between Franchisees
Discriminating 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:
- Based on franchises granted at materially different times and such discrimination is considering the purposes of this chapter, and;
- Is not arbitrary.
However, this section precludes negotiation of the terms and conditions of a franchise at the initiative of the franchisees.
Unreasonable Product/Service Charges
Selling, renting, or offering to sell to a franchisee any product or service for more than a fair and reasonable price;
Obtaining 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.
Violation of Exclusive Territory
If the franchise provides that the franchisee has an exclusive territory, which 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 in the exclusive territory area previously granted to another franchisee;
Requiring 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 this section;
Imposing on a franchisee by contract, ruling or regulating, 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;
Refusing 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; and
Termination without "Good Cause"
Terminating 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 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.
Existing Franchisors: For additional state specific franchise information for franchisors in Washington State, contact franchise lawyer Charles N. Internicola at (800) 976-4904.
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