Inventory Requirement, Control of Supplies Might Be “Franchise Fee” Under Washington Law

This posting was written by John W. Arden.

A supplier’s requirement that distributors maintain a particular level of inventory and its control over the supplies sent to the distributors might constitute a “franchise fee” within the Washington Franchise Investment Protection Act, according to the U.S. Court of Appeals in San Francisco.

Summary dismissal of the distributors' franchise law claims (CCH Business Franchise Guide ¶13,338 and ¶13,437)—based on its failure to establish that it paid a “franchise fee”—was reversed, and the claim was remanded to the federal district court in Spokane, Washington.

Mandatory Purchases

Payments for “the mandatory purchase of goods or services” are considered franchise fees under the Washington Franchise Investment Protection Act’s definition of “franchise.” (Wash. Rev. Code §19.100.010 (12)), the appeals court held.

The complaining distributors claimed that their supplier (Pepperidge Farm) effectively required them to purchase goods by mandating inventory levels and controlling pallet shipments “and then requiring [them] to pay for some product that went stale prior to sale.”

While the district court ruled that the distributors were never required to purchase a set quantity of Pepperidge Farm products, the distributors “submitted evidence to support their claim to the contrary,” the appeals court said, finding a genuine dispute of material fact that precluded summary judgment.

Business Opportunity Law

The appellate court upheld the summary dismissal of other claims brought by the distributors—including claims brought under the Washington Business Opportunity Fraud Act and negligent misrepresentation. It was not apparent that a distributorship was a “business opportunity” under the statute, and the distributors offered no counter argument, the court held.

The negligent misrepresentation claim was rejected on the ground that the distribution agreement specifically required the distributor to remove stale Pepperidge Farm products from store shelves and provided that Pepperidge Farm had no obligation to accept stale goods.

Commercially Reasonable Sale

The district court’s finding that Pepperidge Farm’s sale of the distributorship to the complaining distributor was commercially reasonable under the Washington Uniform Commercial Code (CCH Business Franchise Guide ¶14,145) was upheld on appeal.

“Pepperidge Farm undertook efforts in excess of ordinary procedures for marketing a distributorship, easily satisfying the standard for a commercially reasonable sale,” the Ninth Circuit ruled.

The May 14 not-for-publication opinion is Atchley v. Pepperidge Farm Inc., No. 09-35275. Text of the decision will appear in the CCH Business Franchise Guide.