Morgan Rothschild (“Rothschild”), sole owner of the Party Princess franchise system, sold a party planning franchise for the territory of Washington and promised the franchisee would achieve certain sales. Prior to the sale, Rothschild told the franchisee that he applied to register the Party Princess FDD in Washington, but the registration was not effective.

The franchisee went ahead with signing the franchise agreement and operated the franchise for several months, but never reached the sales Rothschild promised. The franchisee sued Rothschild for misrepresentation, violation of Washington’s Franchise Investment Protection Act (“FIPA”), and unjust enrichment. A Washington federal court recently granted Rothschild’s motion to compel arbitration of these claims in Colorado, pursuant to the franchise agreement’s arbitration clause. Taylor v. Rothschild, 2019 WL 3067255 (W.D. Wash. July 12, 2019).

The court originally denied Rothschild’s motion because he did not establish an enforceable arbitration agreement. In a renewed motion, the franchisee argued the arbitration provision was void in Washington because the state’s Department of Financial Institutions (“DFI”) issued an interpretive opinion that a franchisor could not require a franchisee to arbitrate outside of Washington. The court disagreed, concluding a DFI interpretive opinion is not a rule or order, and cannot render an otherwise valid arbitration clause void.

A franchise regulatory agency like Washington’s DFI is empowered to make binding rules. But deference by courts to interpretations from the agency is not automatic. The binding power and effect of an agency’s interpretation of a statute or regulation usually depends on context and other factors.

Attorneys who litigate franchise disputes, and intend to rely on agency interpretive opinions, should understand the interplay between the agency’s interpretive opinion and the applicable deference standard of the state or federal court tasked with applying it.

Franchisees should carefully read the dispute resolution provisions of their franchise agreements and understand that they may be required to litigate or arbitrate disputes in an inconvenient forum.