A Lucid Interpretation of “Affiliates” under Washington’s Franchise Act

A Washington state appeals court has clarified the scope of Washington’s Franchise Act in Lucid Group USA, Inc. v. State of Washington, Department of Licensing. There, Lucid Group USA, Inc. (“Lucid Group”), the dealer, wanted to sell cars manufactured by its corporate sibling, Lucid USA, Inc. (“Lucid USA”).

Lucid Group applied to the Department of Licensing (“DOL”) for a new motor vehicle dealer license, but the DOL denied the application. The DOL ruled, and an administrative law judge affirmed, that granting Lucid Group’s application would place Lucid Group at a distinct financial advantage over other dealers because essentially the manufacturer itself (through its affiliated entity) would be competing against them.

Lucid Group challenged the DOL’s decision arguing that the language of the statute only regulates the relationship between manufacturers and their own independent dealers. The court rejected Lucid Group’s argument, reasoning that the Act’s reach is broader in scope. Specifically, when a manufacturer’s affiliate acts like a dealer, and that affiliate is under the control of the manufacturer, the Act prohibits that affiliate from competing with independent dealers. Thus, the Act extends to regulate the relationship between a manufacturer’s affiliate and independent dealers just like it regulates the relationship between manufacturers and independent dealers.

This case highlights the far-reaching scope of competition regulated by Washington’s Franchise Act and is a cautionary tale for businesses who do not properly evaluate whether a subsidiary or franchise falls within the prohibitions of this Act.

Key Takeaways

• Scope of the Franchise Act. Washington’s Franchise Act not only regulates traditional dealer-manufacturer relationships but also the relationships of a manufacturer’s affiliates and dealers of any products—not just the manufacturer’s products. Businesses should carefully consider whether a subsidiary or franchise falls within the ambit of an “affiliated entity” regulated under this Act.  
• No Franchise Agreement Required. A franchise or dealer may fall within the purview of this Act even if there is no formal franchise agreement with its manufacturer.
• Clarified Purpose. The court notes that the Franchise Act seeks to protect dealers, dealerships, consumers, and the public’s interests by maintaining fair competition between all dealers and all manufacturers.  

For additional information on this ruling or other Distribution & Franchise regulations across the country, please contact Peter Loh or another member of Foley’s Distribution and Franchise team.