Distributors Could Have Paid “Franchise Fee” Under Washington Law

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

A genuine issue of material fact existed as to whether two purchasers of geographically exclusive baked goods distributorships paid a “franchise fee” under the meaning of the Washington Franchise Investment Protection Act to a baked goods manufacturer either through a $30 deduction from commissions the purchasers were paid for their participation in the manufacturer’s Pallet Delivery Program (PDP) or through any suspected fee, according to a federal district court in Spokane, Washington.

The issue had been remanded to the district court by the Eighth Circuit, which held that the district court had erred in an earlier ruling (CCH Business Franchise Guide ¶13,338) in granting summary judgment to the manufacturer after finding that the purchasers had not paid a franchise fee.

The purchasers did not argue that they paid a direct franchise fee to the manufacturer. Instead, they contended that the $30 deduction from the commissions they earned in the PDP, representing a portion of the costs the manufacturer incurred to shrink-wrap, palletize, and deliver the products to consumers’ warehouses, was a charge for the “mandatory purchase of goods or services, “available only from the franchisor,” under the meaning of the Washington Act and that none of the statutory exceptions applied.

Because the PDP was a fee-for-services agreement, it did not fall under the Franchise Investment Protection Act’s fair-market-value exception, the court determined. That statutory exception applied only to supplies, fixtures, and real property. Further, the Washington Supreme Court has not recognized a fair-market-value exception for the mandatory purchase of services.

The manufacturer cited to a law review article and two unpublished federal cases to argue that the deduction from commissions was not a franchise fee because it (1) was an ordinary business expense for services rendered and (2) lacked an unrecoverable capital investment. However, the manufacturer identified no binding precedent upon which the court could find that an ordinary business expense for services was exempted from Franchise Investment Protection’s Act’s definition of “franchise fee,” according to the court.

One of the cited cases did find that a payment of more than $6,000 for training was not a franchise fee but rather an ordinary business expense, but that case was unpublished, over 17 years old, and relied on nonbinding precedent from another Circuit. The other cited case similarly failed to persuade the court.

Although at least one Washington court considered an unrecoverable investment as one factor in determining whether a franchise fee was present, it was not a necessary component of a franchise fee. With no binding or persuasive authority on point, a genuine issue of material fact existed.

The decision in Atchley v. Pepperidge Farm, Inc. will appear at CCH Business Franchise Guide ¶ 14,793.