RE: Provisions in franchise agreements setting the site of arbitration, mediation, and/or litigation
May a franchisor require a franchisee to arbitrate, mediate, and/or litigate in a state other than Washington in a franchise agreement?
RCW 19.100.180(1) requires that the parties to a franchise agreement deal with each other in good faith. Additionally, RCW 19.100.180(2)(h) renders it an unfair act or practice to impose on a franchisee by contract an unreasonable standard of conduct.
Washington courts have recognized the overwhelmingly stronger bargaining position of franchisors. See, e.g., Coast to Coast Stores (Cent. Org.), Inc. v. Gruschus, 100 Wn.2d 147, 150, 667 P.2d 619, 621 (1983); Rutter v. BX of Tri-Cities, Inc., 60 Wn. App. 743, 747, 806 P.2d 1266, 1268 (1991). Some franchisors have exerted their superior bargaining position to require that all arbitration or mediation between the parties take place in a state other than Washington. Similarly, some franchise agreements require the parties to pursue ligation in a state other than Washington. In most cases, the requirements to arbitrate, mediate, and/or litigate outside of Washington are established by means of unfair and non-negotiable contract clauses. In these cases, the franchisee would be required to pursue its claim(s) at a site which is not the location of the franchise and not the location where the franchise agreement was executed.
The Securities Administrator finds that it is not in good faith, reasonable, or a fair act or practice for a franchisor to set the site of arbitration, mediation, and/or litigation in a state other than Washington by means of an unfair and non-negotiable contract provision. Based on this finding, the Securities Administrator will not register a franchise offering that includes a franchise agreement that sets the site of arbitration or mediation unless the agreement specifies that the site of arbitration or mediation will be: (1) in the state of Washington, (2) as mutually agreed upon at the time of arbitration or mediation, or (3) as determined by the arbitrator or mediator at the time of arbitration or mediation. In addition, if litigation is not precluded by the franchise agreement, the franchise agreement must allow a franchisee to bring an action or proceeding arising out of or in connection with the sale of a franchise, or a violation of the Washington Franchise Investment Protection Act, in Washington.
Adopted January 1, 1991; Updated March 13, 2020
William M. Beatty, Securities Administrator
Prepared by Nathan Quigley, Financial Legal Examiner