Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2003

And the saga continues . . .

In Jon K. Morrison, Inc. v. Avis Rent-A-Car Systems, Inc., Bus. Franchise Guide (CCH) ¶ 12,701 (W.D. Wash. Nov. 20, 2003), Jon K. Morrison, Inc. (“plaintiff”) signed an

agency operator’s agreement (“Agreement”) with Avis Rent-A-Car System, Inc. (“defendant”). Five years after signing, defendant informed plaintiff that the parties were amending the Agreement to include a “fleet surcharge,” which would reduce plaintiff’s commissions by twenty cents per vehicle. Notably, the Agreement provided that it “is not granting franchise rights” and that plaintiff “waives any and all rights under franchise law should a court rule that the business is a franchise.”

 

After defendant sent plaintiff notice of its intent to terminate the Agreement, plaintiff filed suit asking, among other things, that the court render the Agreement a franchise and that termination was unjust under the Washington Franchise Investment Protection Act (“FIPA”). After referring to how the statute defines a franchise fee, the court found the definition to “suggest[] that a franchise fee includes ‘fees hidden in the franchisor’s charges for goods or services’” and made note of several cases where Washington courts have found an indirect or “hidden” franchise fee.

 

Nevertheless, the court ultimately found that neither the commission arrangement nor the fleet surcharge was a franchise fee. The commission arrangement was not a franchise fee because the money that plaintiff collected was forwarded to defendant, who received 10% of the gross amount as compensation. Plaintiff never directly paid defendant any money. To render this arrangement a franchise “would convert every commissioned sales person in a clothing store into a franchise where none of the concerns FIPA was intended to address are in play.”

 

The fleet surcharge was not a franchise fee because it was “not an amount paid to the principle in order to continue to do business.” Further, the fleet surcharge was not an amount paid by the franchisee. Instead, it was “simply one factor in the determination of the commission to be paid to the agent.” Because of this, the court did not render the relationship between the parties a franchise because plaintiff never paid a franchise fee.

 

Takeaway: Fleet surcharges and commissions have not been found to satisfy the franchise fee element of the Washington Franchise Investment Protection Act.

 

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