Thursday, May 21, 2009

Insurance Agent Not Protected “Franchisee” Under Washington Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

An insurance agent was not a “franchisee” of an insurance company within the meaning of the Washington Franchise Investment Protection Act because the agent did not pay the company a “franchise fee,” according to the federal district court in Tacoma, Washington.

Thus, the company could not have violated the Franchise Investment Protection Act by committing fraud and breaching the duty of good faith and fair dealing in threatening the agent’s retirement benefits if he did not immediately retire.

The agent filed suit after a representative of the company allegedly improperly threatened his retirement benefits in a meeting to discuss employees’ claims of sexual harassment against the agent. The agent argued that, but for his allegedly forced retirement, he would have worked for an additional seven years.

Franchise Fee

The agent admitted that he did not pay any money to the insurance company for the agency. Instead, he argued that he paid an indirect franchise fee by exclusively selling the company’s insurance and allowing his customers and their information to become trade secrets of the company.

However, case law indicated that indirect franchise fees had been found only in situations when some money had changed hands, such as required purchases of products above the fair market value. Because the agent paid no money to the company—either directly or indirectly—he could not satisfy the Franchise Investment Protection Act’s franchise fee requirement, the court ruled.

Exemption for Insurance

In any event, insurance actions and transactions regulated under the insurance code were expressly exempted from the Franchise Investment Protection Act. Because the action of terminating an insurance agent is generally regulated by the insurance code, the agent’s complaint was specifically exempted from the protections of the Franchise Investment Protection Act.

The decision is Noyes v. State Farm General Insurance Co., CCH Business Franchise Guide ¶14,133.

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