Opinion ID: 1204935
Heading Depth: 1
Heading Rank: 1

Heading: franchise act violation

Text: Both the trial court and Court of Appeals concluded that DeShazer violated RCW 19.100.180(2)(d). [1] That section reads in part: For the purposes of this chapter and without limiting its general application, it shall be an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful and a violation of this chapter for any person to: .... (d) Sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price. (Italics ours.) DeShazer's principal argument is the markup he imposed on the goods the Nelsons purchased did not violate this provision because the markup was actually a franchise fee or royalty. He claims it was thus not an unfair or unreasonable price imposed on goods and services. Stated differently, DeShazer urges us to think of the price of goods as comprising two discrete components: the actual food price and the markup or franchise royalty. [1] DeShazer supports his position by emphasizing two provisions of the Franchise Act. First, he argues the definition of franchise fee in the Act is so broad as to include markups on goods and services. [2] That position is unpersuasive for two reasons. First, the Act excepts from its definition of permissible franchise fees any purchase or agreement to purchase goods at a bona fide wholesale price. [3] That exception applies precisely to the type of agreement at issue here. DeShazer can avoid the exception only by a highly strained reading of the provision, whereby an agreement, by virtue of charging more than the wholesale price, ceases to be an agreement to purchase wholesale goods. We find no support for the argument the Legislature intended to indulge such reasoning. Second, to read the definition of franchise fee to encompass surcharges on wholesale prices would permit franchisors to circumvent the provision of the Act prohibiting the imposition of charges above a fair and reasonable price. Indeed, if DeShazer's argument were to prevail, any price  even an unfair or unreasonable one  could be rendered proper by characterizing it as a franchise fee or royalty arrangement. The second provision on which DeShazer relies is RCW 19.100.180(2)(e). That provision states that it is an unfair practice for a franchisor to [o]btain money, goods, services, anything of value, or any other benefit from any other person with whom the franchisee does business on account of such business unless such benefit is disclosed to the franchisee. (Italics ours.) DeShazer argues that, because a franchisor may receive a benefit from suppliers if it is disclosed, his markup is permissible under the Act because he disclosed it to the Nelsons. [2-6] One commentator, Professor Donald Chisum, has noted the apparent conflict between this section and the fair and reasonable price provision. See Chisum, State Regulation of Franchising: The Washington Experience, 48 Wash. L. Rev. 291, 372-73 (1972-1973). As Chisum observes, if the franchisor may control the source of supply for a franchisee, the franchisor may require the franchisee to purchase supplies through the franchisor or from approved sources. If the franchisor sells the goods, it can charge only a reasonable price under RCW 19.100.180(2)(d). On the other hand, if the franchisee is forced to buy from approved sources, the supplier may charge an unreasonably higher price and split the profits with the franchisor as long as the arrangement is disclosed under RCW 19.100.180(2)(e). Chisum concludes that the two sections should ideally follow consistently either the disclosure theory or the prohibitory theory. Chisum, 48 Wash. L. Rev. at 373. We follow the prohibitory theory in this case because it better comports with the general purpose of the Act, to protect franchisees, and because to do otherwise would vitiate the provision of the Act forbidding franchisors from imposing unfair or unreasonable prices on the costs of goods and services. See RCW 19.100.180(2)(d). Although there is some technical merit to DeShazer's contention that it is anomalous to invalidate the markup when he could have generated the same profit using some other method of charging, we cannot agree with his arguments for three reasons. First, DeShazer's argument about the timing of the Nelsons' knowledge is not clearly supported by the record. DeShazer relies on the trial court's finding of fact 63 that the Nelsons knew all the material terms of the operation before becoming area directors. Clerk's Papers, at 207. However nothing in the Total Requirements Agreement, dated October 1, 1985, indicated that the price of the goods would include a markup. The Nelsons appear to have learned the precise percentage the markup represented, when they received their first bill. The court's finding of fact 24 states: Under the terms of the Total Requirements Agreement, the plaintiffs were required to purchase all product [ sic ] and equipment from NFRCI. There is no statement in the contract of the price for said purchases. In practice, NFRCI required that the Nelsons and other area directors order their pizza ingredients and supplies from a local distributor which made direct deliveries to the area director. The distributor, however, would bill NFRCI and/or DeShazer for the product. NFRCI and DeShazer would then mark up or boost the wholesale price of the product by twenty percent (20%) and require that the area director pay this higher amount. Clerk's Papers, at 195. Moreover, the trial record contains the undisputed testimony of Scott Nelson that he was able to ascertain the percentage the markup represented only upon receipt of his first bill. See Report of Proceedings, at 465. [4] See also, trial court's comment suggesting the Nelsons did not know the markup was 20 percent at the time they signed the contract. Report of Proceedings, at 570. The trial court's finding of fact 63, viewed against this record, persuades us the trial court meant by its finding only that the Nelsons understood the material facts about the operation of the business, not that they were aware there would be a 20 percent markup on the goods they purchased before becoming directors. Clerk's Papers, at 207. Disclosure of a contract's terms, to be meaningful, must occur before contract formation, not after the parties have become contractually bound. See generally Restatement (Second) of Contracts, ch. 3 (1981). Because disclosure, at least as to the precise content of the markup, occurred only after the contract was formed, DeShazer cannot rely on disclosure to insulate himself from the charge of violating the Act. Second, the argument that the same profit could have been generated some other way is not persuasive. One of the purposes of the statute is precisely to structure agreements between franchisor and franchisee so as to maximize disclosure and thus minimize franchisor overreaching. See Chisum, 48 Wash. L. Rev. at 358-59 (One of the primary purposes of the Franchise Act is to curb franchise sales abuses by requiring full and accurate disclosure of material information to the prospective franchisee. See also Morris v. International Yogurt Co., 107 Wn.2d 314, 317, 729 P.2d 33 (1986)). The Washington State Court of Appeals has explained: Franchising has disadvantages for franchisees ... who suffer a lack of material information before purchasing their franchise and of bargaining power after purchasing. Chisum, at 297. See generally C. Rosenfield, Franchising, ch. 1 (1970) (history of franchising and its regulation). The State Legislature enacted FIPA in 1972 in order to correct this maldistribution of information and power. Chisum. Lobdell v. Sugar 'N Spice, Inc., 33 Wn. App. 881, 888, 658 P.2d 1267, review denied, 99 Wn.2d 1016 (1983). Third, DeShazer's interpretations of former RCW 19.100.010(11) and RCW 19.100.180(2)(d) are unavailing because they construe these provisions in a way that renders them incompatible with the other provisions of the Act, and with the Act's fundamental purpose. Thus, reading the definition of franchise fee in former RCW 19.100.010(11) expansively would render meaningless the Legislature's express exception from its definition agreements to purchase goods at a bona fide wholesale price. Likewise, construing the disclosure provisions broadly would effectively nullify the prohibition in RCW 19.100.180(2)(d) against charging more than a fair and reasonable price for goods and services. Statutory provisions are construed in light of one another and in view of the statute's overall purpose. See, e.g., Prince v. Savage, 29 Wn. App. 201, 627 P.2d 996, review denied, 96 Wn.2d 1002 (1981). For the reasons set forth above, we affirm the trial court's conclusion that DeShazer violated the Franchise Act.