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New Court Decisions - Red Lion Case May Expand Franchise Law

Or then, it may not. 

On December 7, 2011, the United States 9th Circuit Court of Appeals decided Red Lion Hotels Franchising, Inc. v. MAK, LLC, No. 10-34565.  In that case the Court of Appeals reversed the US District Court.  The District Court had found that the "franchisee bill of rights" section of the Washington Franchise Investment Protection Act (FIPA) did not apply because the franchisee was located in California--and notwithstanding that the franchisor was a Washington corporation and the franchise agreement said that Washington law applied. 

The Court of Appeals looked at the purpose of the FIPA, its legislative history and at a discussion of the statute by a respected University of Washington law professor--published in 1973, shortly after the FIPA was originally adopted.  The Court of Appeals concluded that the "franchisee bill of rights" protects franchisees, wherever they may be located, if the franchisor is located in the State of Washington. 

The Court of Appeals went on to conclude that under the FIPA, the franchisee's remedy for a violation of the "franchisee bill of rights" was under the Washington Consumer Protection Act.  The Court sent the case back to the district court to decide whether the franchisee in the case was qualified for a remedy under that act. 

One might ask whether this decision changes anything.  I think very little.  Under Washington law (acknowledged by the Court of Appeals in the Red Lion case) the remedies for violations of the franchisee bill of rights are only the remedies available under the Consumer Protection Act (CPA).  This lack of access to remedies except under the CPA is a major reason that few cases are brought for violation of the "franchisee bill of rights".  It is well known that Washington Courts are somewhat hostile to CPA claims, broadly enforcing the judicially added requirement to prove a "public interest" and narrowly defining who the possible beneficiaries of the CPA remedies are. 

In my view, one franchisee located in California (or Washington for that matter) can never carry the burden of proving a "public interest" under the CPA.  Indeed, the franchisor will argue that the termination was in the public interest because it removed a franchisee that was not complying with their requirements and thus enhanced their ability to compete in the greater marketplace. 

If ever there was a tempest without a teapot, this is it.  I just hope that, in an effort to correct a perceived error by this panel of the Court of Appeals, the full Court of Appeals can avoid narrowing the reach of the FIPA remedies beyond what the District Court did.  If you want to discuss the implications of this case on your situation, you should contact an experienced franchise attorney

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