Washington Franchise Law Covers Out-of-State Franchisees

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

The “franchisee bill of rights” provision of the Washington Franchise Investment Protection Act (WFIPA)—requiring franchisors and franchisees to deal with each other in good faith and listing several prohibited acts, practices, and unfair methods of competition—applied to the relationship between a California hotel franchisee and a Washington franchisor, according to the U.S. Court of Appeals in San Francisco.

A ruling (CCH Business Franchise Guide ¶14,367) that the WFIPA did not apply to the termination of the franchise—because the franchisee's hotel operation did not occur "in this state"—was reversed.

The provision at issue (Wash. Rev. Code Section 19.100.180), commonly referred to as the “franchisee bill of rights,” did not contain language limiting its application to the relationship between a franchisor and a franchisee “in this state,” the appellate court noted.

In contrast, several other of the WFIPA’s provisions contained an explicit statement that they applied only to actions “in this state.” Those provisions included requirements that the offer or sale of any franchise “in this state” must be registered in the state and that any franchise broker selling or offering a franchise “in this state” must register with the state.

Originally, the term “in this state” was not defined in WFIPA, the court observed. The statute was amended in 1991 to provide a definition of the term, largely in response to a law professor’s article recommending the clarification. However, that professor did not recommend that the legislature add a territorial limitation to the franchisee bill of rights. He recommended only that the legislature define the limitation where it already existed in the WFIPA. The Washington legislature did no more than what the professor recommended, the court determined.

By its terms, the definition of “in this state” provided by the 1991 amendments applied only to the specific provision making it unlawful to offer or sell a franchise “in this state” if it was unregistered or not exempt (Wash. Rev. Code Section 19.100.020).

The district court erred in concluding that the “overall statutory scheme,” as well as the 1991 amendments, evinced a legislative intent to confine the reach of the WFIPA to only those franchises operating “in this state,” the appellate court held.

As a matter of general principle, if a state law did not have limitations on its geographical scope, courts would apply it to a contract governed by that state’s law, even if parts of the contract were performed outside of the state. The fact that the WFIPA’s provisions relating to sales of franchises contained a territorial limitation did not lead to the conclusion that WFIPA’s bill of rights was similarly limited. Rather, the inclusion of explicit territorial limitations in the sale-related provision, and the failure to include such a limitation in the bill of rights, suggested the opposite conclusion.

The dispute was remanded to the federal district court for consideration of the merits of the franchisee’s WFIPA counterclaim and consideration of the availability of a remedy under the Washington “little FTC Act.”

The Ninth Circuit’s December 7 ruling in Red Lion Hotels Franchising, Inc. v. MAK, LLC, will appear in the CCH Business Franchise Guide.