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Franchise Fees Imposed Through Franchisor Operations Manuals Violate Federal and State Law If Not in FDD (Washington State Opinion)

National franchisors should take note that Washington State released Franchise Act Interpretive Statement No. 9 (the “Statement”) discussing the disclosure of fees to prospective franchisees in the Franchise Disclosure Document (FDD) prior to the inception of the franchisor-franchisee relationship. The question presented was whether a franchisor may impose fees on the franchisee through its operations manual or otherwise, where such fees were not disclosed in the FDD.

It is commonly known in the franchising industry that franchisors generally keep the substantive contents of their operations manuals – to which franchisees are normally bound –  confidential. Some franchisors give their prospective franchisees the opportunity to review the franchise’s operations manual, but usually only after signing a confidentiality agreement, for example. Even when such an opportunity is available, however, not all franchisees are actually aware of it or otherwise elect to forgo their chance to review the manual. Nevertheless, some franchisors list additional fees in their operations manuals that are not disclosed in their respective FDDs.

Federal law states that an FDD must disclose “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens.” 16 CFR 436.5(e). Further, “all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party,” must be disclosed as well. Accordingly, Washington state took the position in its Statement that the imposition of additional fees via an operations manual violates both federal and Washington state law, when such fees are not also disclosed in the FDD.  Such violations may entitle franchisees to a host of legal remedies against a franchisor.

The entirety of Franchise Act Interpretive Statement No. 9 is available here.  For more information about franchising, please contact Keith Kanouse and Kelly Malloy.