Not So Fast: Washington Appeals Court Reverses Dismissal of Case Against Building Maintenance and Janitorial Services Franchisor

Background Facts

From 2006-2017, NMC Franchising, LLC sold franchises to individuals operating building-maintenance and janitorial businesses. Under NMC’s model, franchisees paid an initial fee to “access” a purchased monthly volume of revenue tied to client accounts that NMC secured. Franchisees were responsible for their own equipment, staffing, hours, taxes, and legal compliance.

In 2021, the State of Washington sued NMC and its parent company under the Consumer Protection Act (CPA) and the Franchise Investment Protection Act (FIPA), alleging 16 claims of unfair and deceptive practices. Among other things, the State alleged that NMC failed to disclose material facts to prospective franchisees, concealed how much it earned from customer accounts, charged excessive “office support” fees, forced franchisees to sign releases and convert to LLCs, and imposed unconscionable out-of-state arbitration clauses. The trial court granted NMC’s motion for summary judgment, dismissed all claims, and awarded NMC over $3 million in attorneys’ fees.

Trial Court Reversed

The Washington Court of Appeals reversed the trial court on virtually every point. It held that the trial court committed multiple errors of law, including: (1) improperly requiring a “public interest impact” showing that was already established as a matter of law; (2) creating an improper regulatory “safe harbor” by holding that conduct regulated by FIPA could not also violate the CPA; (3) wrongly applying common law fraud standards to CPA and FIPA claims; and (4) incorrectly narrowing FIPA’s disclosure provision to cover only “vendor kickbacks.” The Court remanded 15 of 16 claims for trial, finding genuine issues of material fact, and directed summary judgment in the State’s favor on NMC’s mandatory out-of-state arbitration clause, which was deemed unconscionable. The $3 million fee award was vacated.

Public Interest Impact Analysis

This portion of the holding is worthy of further discussion. Under Washington’s CPA, when the State brings a claim on behalf of injured residents, it must prove three elements: (1) an unfair or deceptive act or practice, (2) occurring in trade or commerce, and (3) a public interest impact. Because the State’s claims arose from services NMC provided — procuring client accounts for franchisees — the court applied the four-factor test from Hangman Ridge Training Stables, Inc. v. Safeco Title Insurance Co., 105 Wn.2d 778 (1986), which considers whether: (1) the acts were committed in the course of the defendant’s business, (2) the defendant advertised to the public, (3) the defendant actively solicited the plaintiff and others, and (4) the parties occupied unequal bargaining positions.

The trial court dismissed all the CPA claims on the grounds that the State had failed to establish the public interest impact element. The Court of Appeals reversed, holding the State had demonstrated a public interest impact as a matter of law. It found the first and fourth Hangman Ridge factors plainly supported the State’s position: NMC did not contest that its alleged acts occurred in the course of its business, and it conceded that the parties occupied unequal bargaining positions when franchisees entered their agreements. The Court further noted that NMC’s franchise system involved “multiple hundreds” of individual purchasers, demonstrating a likelihood that additional plaintiffs had been or would be injured in the same fashion. While NMC argued the second and third factors favored it because it did not advertise to or actively solicit the general public, the Court held that no single factor is dispositive and NMC failed to identify any specific contested fact that would create a triable issue. The Court also rejected the trial court’s requirement that the State prove NMC’s conduct affected a “substantial portion of the public,” holding that no binding authority imposed such a minimum threshold.

Lessons for Franchisors

This decision underscores that franchisor systems operating in Washington face broad exposure under both the CPA and FIPA. The court of appeals rejected the notion that compliance with franchise-specific statutes immunizes a franchisor from separate CPA liability. Franchisors should ensure robust pre-sale disclosures, transparent fee structures, and good-faith dealings with franchisees. Mandatory out-of-state arbitration clauses remain especially vulnerable to challenge, as the Court ruled such provisions unconscionable as a matter of law when imposed on franchisees of limited means.

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