Red Lion Hotels decision

On December 7th, the US Court of Appeals for 9th Circuit handed down an opinion in Red Lion Hotels Franchising, Inc. v. MAK, LLC, 2011 WL 6061516 (9th Cir., Dec. 7, 2011). Of particular note is the court’s conclusion that the “franchisee bill of rights” under the Washington Franchise Investment Protection Act (FIPA) applies if the franchisee is located outside the state, if the franchisor is located within the State of Washington.

At the 2011 ABA Forum on Franchising conference, Lee presented the “annual update” review of cases decided in 2010-11 at the ABA Forum along with Stuart Hershman of DLA Piper, and two of the cases highlighted at the session touched on whether FIPA applied to protect non-Washington franchisees. One, an earlier decision of the 9th Circuit, concluded that FIPA did not apply to protect out-of-state franchisees. Taylor v. 1-800-GOT-JUNK?, LLC, 387 F. App’x 727 (9th Cir. 2010). However, the Red Lion panel distinguished and disagreed with the Taylor panel of the same court. Another case in California state court involved the same franchisor, and there the court reached a different conclusion. 1 800-GOT-JUNK?, LLC v. Superior Court, 189 Cal. App. 4th 500 (2010). While both cases were heavily dependent on the facts of the cases (and there were some unusual facts in each), the majority decision in Red Lion takes the analysis much further.

The two-judge majority opinion in Red Lion is peculiar for several reasons. First, it relies heavily on an almost 40-year old law review article and attempts to channel to the rationale of a professor who, as the minority opinion noted, also observed in the same article that FIPA was not meant to cover out-of-state parties. Second, it’s unusual that the question wasn’t simply certified to the Washington Supreme Court, since it involves a rather significant interpretation of state law – and the 9th Circuit realized as much in analyzing the Washington court’s shifting views on whether to allow out-of-state parties to raise claims under the state Consumer Protection Act. Third, the decision ignored the language of the parties’ choice of law clause, which appears to disclaim application of the very law that the franchisee now seeks to apply.

For all of these reasons, as well as the fact that the 2010 9th Circuit decision in Taylor goes in a different direction, it would not be surprising if an en banc review of Red Lion was sought by the franchisor.

So … is this anything?

Certainly Red Lion is a big deal to a franchisor operating in the State of Washington. But it also raises concerns about whether other courts considering the issue in other states will follow the lead of the 9th Circuit in Red Lion.