State Regulation of Franchising: the Washington Experience Revisited
| Publication year | 2009 |
I. Introduction
Thirty-six years ago, and one year after Washington became the second state in the nation to enact a statute regulating franchise relationships, Professor Donald S. Chisum wrote the seminal article on franchising in Washington,
Yet, Professor Chisum's article is outdated. Since Professor Chisum originally published his article, the Federal Trade Commission (FTC) has promulgated and amended regulations governing the sale of franchises nationally,(fn3) and two different groups have drafted uniform franchise acts.(fn4) In Washington, the legislature significantly amended FIPA in 1991,(fn5) and courts have addressed some of the unresolved issues under the statute.(fn6) As a result of these changes, and the thundering silence that has persisted on a wide variety of FIPA issues,(fn7) the lack of discourse on the state of franchising in Washington since Chisum's article has bred a considerable degree of uncertainty.
This Article assesses the changed state of franchise law in Washington. Part II considers the economic impact of franchising and the need for a review of franchising in Washington. Part III reviews the historical foundation for Washington's current franchise laws, the context in which they were created, and the changes to franchise law that drive our modern understanding of FIPA today. Part IV addresses the current regulatory scheme in Washington, including practical considerations such as franchise registration, disclosure, and state enforcement powers. Finally, Part V addresses civil liability for violations of FIPA's registration, disclosure, and relationship provisions.
II. The Economic Impact of Franchising
As a business model, franchising was nearly unheard of before the 1950s.(fn8) Today, there are more than 900,000 establishments in franchise systems in the United States, creating over 11 million jobs and producing nearly $900 billion in annual output.(fn9) Franchised businesses directly account for 8.1% of all private sector jobs in the U.S., with annual payrolls of approximately $280 billion.(fn10) In 2005, franchised businesses employed 2 million more workers in the U.S. than manufacturers of durable goods,(fn11) which have long been considered a benchmark of U.S. economic stability.(fn12)
Moreover, franchised businesses create jobs and output far beyond their direct contributions to the economy. Studies combining direct and indirect contributions of franchised businesses estimate that franchisees result in more than 21 million jobs nationwide, approximately 15.3% of all private-sector jobs.(fn13) In addition, the studies estimate that franchised businesses support a payroll of over $660 billion and contribute more than $2.3 trillion in annual output, amounting to 11.4% of the entire U.S. economic output in the private sector.(fn14) In total, this amounts to more than one-third of all domestic retail sales.(fn15)
In addition, unlike traditional corporate models, where success and profits inure only to the benefit of upper echelon management and shareholders, the net benefits of franchising can be measured throughout the entire franchise system.(fn16) Profitable franchising systems benefit the franchisee by providing an established brand and system of operation, thereby decreasing the likelihood that the business will fail.(fn17) This creates a wealth of opportunities for innovative and entrepreneurial franchisees to start and own their own business.(fn18) This system of vertical integration also affords small business owners an easy and effective method for growing businesses when capital is not easily accessible.(fn19) Instead of using a traditional corporate model, which would require substantial capital investments, small business owners can turn to franchising and rely on franchisees to put forward investment capital and labor.(fn20)
In 1971, recognizing the important role that franchising would play in the economic future of the state, the Washington legislature enacted FIPA.(fn21) The legislature modeled the statute after state and federal securities laws, imposing regulations upon the advertising and sale of franchises.(fn22) The legislature intended that FIPA be broad in scope, so that it could regulate many aspects of the post-sale relationship between franchisors and franchisees.(fn23) The legislature's enactment of FIPA accurately foreshadowed the emergence of franchising as a force in the state's economy. Although distribution of the economic benefits of franchising is not perfectly uniform across the U.S.,(fn24) the impact of franchising is not segregated geographically,(fn25) and Washington has been a full participant in the trend toward franchising. As of 2005, franchised businesses created or contributed to 14% of all jobs in the state, 11.2% of employer payroll, and 10.4% of output.(fn26) Franchising today represents a crucial element of Washington's economic infrastructure.
Despite the importance of franchising to Washington's economy, there has been relatively little written about FIPA and the role it plays in regulating franchised businesses since Professor Chisum first put his mark on the topic in 1973. The lack of discourse underscores the critical need for a reexamination of franchise laws in Washington, particularly in light of the nearly four decades of evolution that franchising has undergone at both the state and federal levels. The following Part describes the most significant changes in franchise law at the state and national levels over this period.
III. History of Washington Franchising Law
Franchise businesses in the private sector have existed since the early 1800s with varying degrees of success.(fn27) For nearly a century, a variety of businesses engaged in crude product-distribution franchise arrangements created through exclusive distributorships and dealerships.(fn28) But it was not until the 1950s that franchising truly exploded onto the scene for the average American with the invention of the business format franchise concept.(fn29) Early pioneers of the business format franchise included McDonald's and Domino's Pizza, companies that licensed out their business methods and trademarks to independent small business owners who operated the businesses under strict company guidelines.(fn30) The success of the business format franchise in the 1950s was quickly apparent, as more than 90% of the franchise companies in existence in 1970 began their operations after 1954.(fn31)
The overwhelming success of the new system led to the typical excesses that occur in any economic bubble: abuses are lost in the euphoria of a growing economy and booming markets.(fn32) Similar to the economic bubbles that have plagued the U.S. economy over the last decade,(fn33) the franchise boom in the 1960s saw some franchisors abuse their positions of authority to secure enormous profits at the expense of their franchisees.(fn34) These abusive practices ranged from false or misleading promises to outright fraud.(fn35) Franchisee complaints spawned by this abusive behavior led to massive investigations and reforms in the early 1970s at both the state and federal levels.(fn36)
Although franchisee advocates complained loudly of these abusive practices, there was little or no empirical evidence to support their claims of widespread abuses by franchisors.(fn37) Nonetheless, reform advocates gained traction by heavily publicizing the most egregious examples of franchisor misconduct.(fn38) One prominent franchisee advocate was the attorney general of New York, who concluded that many franchisors were "fly-by-night" operations with little or no substance that made misrepresentations and fraudulent claims in order to convince naive citizens to surrender their life savings to purchase worthless franchises.(fn39) Other commentators advocated strenuously for tighter controls over franchising in general, arguing that the imbalance in bargaining power between the large franchisor and its franchisees made abusive practices inevitable.(fn40) The resulting conventional wisdom was that franchisees were incapable of protecting their own interests in the face of the franchisor's institutional advantages.(fn41)
It was in this context that the Washington legislature took up the task of enacting franchise legislation in 1971. Locally, the drive for reform was initiated by the Attorney General's Office as a result of outrage over an incident in 1968 in which a foreign corporation fraudulently induced Washington residents to purchase vending machine franchises.(fn42) The company never delivered the vending machines to any franchisees, and the franchisor's corporate principals were subsequently indicted for their fraudulent behavior.(fn43) Viewed in conjunction with the national investigation into franchise practices, reformers in Washington concluded...
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