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 sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.
One long hot button issue in franchising is charges, profits, and rebates that franchisors receive from franchisee purchases. In addition to being the brand owner, franchisors may also be the supplier of goods or services to franchisees. Franchisors have the right to be paid for service and value tendered. But on the flip side, exorbitant charges can render the franchisee unprofitable and uncompetitive in the market place.
Within ever contract, including franchise agreements and supplier agreements, there is implied a duty of good faith and fair dealing. This can translate into to not charging unreasonable fees. The obligation of good faith and fair dealing is not written in the agreement, but rather is an implied obligation in every agreement. It is assumed.
Washington state’s franchise law has codified into law the obligation of good faith and fair dealing. In pertinent part, the codification is quoted above. The Washington law says it is “unfair or deceptive act or practice or an unfair method of competition……to sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.
A test of what is a fair and reasonable price was challenged in the case of Brewer v. Money Mailer, LLC. The court declined to state a bright line rule about what is an unreasonable price. But did say:
Selling printing services to a franchisee at more than twice what those services cost violates this provision.
ORDER GRANTING IN PART BREWER’S MOTION FOR SUMMARY JUDGMENT – 5
The court’s in its order granting summary judgment solely looked at the franchisor’s actual cost of services and the fee charged franchisees. The court did not, and it is unknown if the parties present evidence regarding of fair market valve or competitor pricing for like services. The court, in hand, disregarded per se the franchisor’s argument that it provided considerable benefit for the fees charged franchisees.
As a matter of law, huge markups in the price of a product or service that a franchisee is required to purchase from the franchisor are simply not permitted.
The take away is when determining fees charged franchisee. Look at the cost. Irrespective of the benefits bestowed or competitor pricing, the fees charged franchisee must be reasonable something less than twice the actual cost.