The Franchise Memorandum

In John R. Atchely and Michael Gilroy v. Pepperidge Farm, Inc., 2012 U.S. Dist. LEXIS 30878 (E.D. Wash. March 8, 2012), the United States District Court for the Eastern District of Washington found that a genuine issue of material fact existed as to whether Pepperidge Farm charged plaintiffs a franchise fee under the Washington Franchise Investment Protection Act by deducting from commissions owed to plaintiffs a fee for services related to a pallet delivery program. Under the program, Pepperidge Farm delivered shrink-wrapped pallets of bakery products directly to large purchasers’ warehouses and deducted from those purchasers’ standard commissions up to $35 to cover its cost of shrink-wrapping and delivery. Plaintiffs moved for summary judgment on their claim that the pallet delivery fee was a franchise fee under the Act.

Pepperidge Farm argued that the commission deduction was not a franchise fee because the fee deducted from the commissions was an ordinary business expense designed to recover its costs. On the other hand, plaintiffs argued that the deduction was actually a hidden franchise fee because it was a mandatory purchase of services. In addition, plaintiffs argued that Pepperidge Farm could not claim that the deduction fell under the exemption for the sale of goods at a bona fide wholesale price because the deduction was a charge for services provided and not for products sold. The District Court denied plaintiffs’ motion, finding that a fact issue existed as to whether the deduction was a “mandatory purchase of goods or services,” and thus a “franchise fee.”