Antitrust Law Daily ‘Fair and reasonable price’ between franchisors and franchisees is question of fact
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Friday, September 20, 2019

‘Fair and reasonable price’ between franchisors and franchisees is question of fact

By Gregory Kane, J.D., M.B.A.

Under Washington’s Franchise Investment Protection Act, a "fair and reasonable price" for products or services sold by a franchisor to a franchisee is what prudent parties would consider an appropriate price.

A "fair and reasonable price" under the meaning of the Washington Franchise Investment Protection Act (FIPA) for products or services sold by a franchisor to a franchisee is a question of fact regarding what prudent franchisors and franchisees would consider an appropriate price, the Washington Supreme Court ruled in a unanimous opinion. Furthermore, the fair and reasonable price under the FIPA, which prohibits franchisors from charging more than a fair and reasonable price for any product or service, is not inherently established by the price at which the franchisor obtains the good. Also, a franchisor would not violate the FIPA as a matter of law by selling a product or service to a franchisee for twice the price at which the franchisor obtained it. By so holding, the state’s supreme court answered two questions certified to it by the federal district court in Seattle (Money Mailer, LLC v. Brewer, September 19, 2019, Wiggins, C.).

Background. Money Mailer is a direct marketing company whose franchisees sell local businesses advertisement space in shared envelopes mailed to potential customers in the area. Franchisees, like the plaintiff Wade Brewer, are required to enter into contracts with Money Mailer for services related to printing and inserting advertisements into envelops. In 2015, Money Mailer sued the franchisee alleging breach of franchise agreement and the franchisee counter-sued arguing, among other things, that Money Mailer violated the FIPA by selling him products and services at more than a fair and reasonable price.

The franchisee moved for summary judgment on the FIPA violation and the district court ruled that by selling him printed advertisements at twice the price of Money Mailer’s costs, Money Mailer violated the FIPA as a matter of law and granted the motion. The district court denied Money Mailer’s motion for reconsideration or interlocutory review, but certified two questions to the state supreme court: (1) For purposes of the FIPA prohibition on selling "to a franchisee any product or service for more than a fair and reasonable price," may the franchisee rely on the price at which the franchisor is able to obtain the product or service in the absence of evidence indicating that the price was not a true market price?; and (2) does a franchisor violate the FIPA as a matter of law when it charges the franchisee twice what it pays for a product or service?

Fair and reasonable. Both certified questions involved the meaning of the FIPA’s section 19.100.180(2)(d), which makes it an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful for any person to sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price, the court noted. Lacking an explicit statutory or case law definition for "fair and reasonable price," the court turned to the principles of statutory interpretation.

Both the plain language of the statute and the legislative history showed that "fair and reasonable price" is a question of fact regarding what prudent franchisors and franchisees in similar circumstances would consider an appropriate price, according to the court. Definitions of terms similar to "fair and reasonable price" showed the importance of taking the current market into account. In addition, the legislative history of the statute confirmed the importance of the marketplace in resolving whether a price is fair and reasonable. The legislature intended for the prices to vary based on "fluctuations," presumably those of the market, and did not intend to give franchisors free reign to set any price they chose, the court reasoned.

The price at which a franchisor acquired a product or service is a factor in understanding the market and market forces which inform a fact finder’s decision, but other factors such as peer comparison for franchisors and franchisees in similar markets or employing similar practices, arms-length deals on the open market and value added by the franchisor should also be taken into consideration. A broad understanding of the market and market forces must inform a fact finder determining whether prices are fair and reasonable under the FlPA, the court observed. This includes what the district court relied on—the price at which the franchisor acquired the products or services—but reaches beyond. The prices of competitor franchisors should be taken into account, including whether the prices of all franchisors are the same. So, too, should the statements of profit margin made by the franchisor. The court did not provide and exhaustive, exclusive, or mandatory list of factors, but stated that the taking of multiple factors into account would allow the finder of fact to take complex scenarios into account.

As such, the answer to each of the certified questions was: no; a franchisee may not rely solely on the franchisor’s costs in acquiring the goods or service and a franchisor that charges a 100% mark up on goods or services has not violated FIPA as a matter of law. The facts of the case itself were not decided, merely these questions of law. Whether Money Mailer violated the FlPA remained a question of fact to be determined by the district court.

The case is No. 96304-5.

Attorneys: Brian John Janura (Dorsey & Whitney, LLP) for Money Mailer, LLC. Adam Rosenberg (Williams Kastner & Gibbs PLLC) for Wade G. Brewer.

Companies: Money Mailer, LLC

MainStory: TopStory FranchisingDistribution WashingtonNews

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