NY Franchising Developments: Q1 2023
New York City franchises and laws are in the news and in courts. Additionally, NY franchisors and franchisees have the chance in the next month-plus to provide input to the Federal Trade Commission (FTC) on improving franchise agreements and franchisor business practices. As the first quarter of 2023 comes to a close, let’s review some franchising developments affecting New York franchisors and franchisees.
Just Cause Law Impacting NY Franchises
A law limiting the grounds for termination of fast food employees is being debated in the U.S. Court of Appeals for the Second Circuit, in Restaurant Law Center, et al., v. City of New York.
The case stems from an amendment to the Wrongful Discharge Law by the NY City Council in January 2021; the law prohibits restaurant employers from firing hourly wage employees except for just cause or for a bona fide economic reason.
The law only applies to fast food establishments that are part of a chain with 30 or more establishments measured nationally. The statute expressly includes franchises, so long as there are 30 or more restaurants in the system.
NYC restaurants, including franchise owners in chains with more than 30 restaurants, must provide a valid reason — such as unsatisfactory performance, misconduct, or a legitimate economic concern — before firing or reducing the hours of an employee.
The Restaurant Law Center, a public policy organization affiliated with the National Restaurant Association filed suit against the city, contending the law was unconstitutional.
The Southern District of New York upheld the constitutionality of the Wrongful Discharge Law in February 2022, an early win for the City. The plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit and briefs were filed by the parties as recently as October 2022. It remains to be seen whether the law will stand. For now at least, franchise operators should be aware of the employment protocols required by the Wrongful Discharge Law until its fate is fully decided by the courts.
Seafood Franchisor Caught; Serves As Reminder To Register
BK Lobster was a bit red-faced in early 2023 when it was revealed that the Brooklyn-founded seafood restaurant sold multiple franchises in New York without first registering the offering with the New York Department of Law, in violation of state law GBL §683.
In its joint reporting, Brooklyn Paper and THE CITY, a nonpartisan, digital news platform, spoke with BK Lobster’s CEO Rodney Bonds. Bonds said that he hadn’t understood the state’s franchise laws, and that his food business was “in the process” of addressing his franchise violations on the instructions of his attorneys.
Among other risks, selling a franchise without a registration to do so in New York can result in a civil penalty of up to $10,000 per violation and per defendant. Bonds may very well rack up hundreds of thousands of dollars in penalties and legal fees in 2023.This should serve as a reminder that before selling franchises, franchisors should speak with franchise counsel to ensure compliance with applicable federal and state laws.
The FTC Wants To Hear From You
In an effort to curb “concern around unfair and deceptive practices in the franchise industry,” the FTC recently posted a request for information on franchise agreements and franchisor business practices.
The FTC is specifically interested in how franchisors exert control over franchisees and their workers and how franchisors disclose certain aspects and contractual terms of the franchise relationship.
“The FTC hopes to hear from a broad range of stakeholders about how the franchise relationship is working, and how it is not,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “This cross-agency effort will inform our policy and enforcement efforts as we work to ensure a fair marketplace for franchisees.”
Apart from this Request for Information, the FTC is seeking public comment on a proposed rule to ban noncompete clauses for workers in some situations. As part of that proposed rulemaking, the FTC is interested in public comments on the question of whether that proposed rule should also apply to noncompete clauses between franchisors and franchisees. Comments related to the use of noncompete restrictions in franchise agreements should be submitted as part of the noncompete rulemaking through April 19, 2023.
For more relevant information on franchising developments, visit recent Insights installments about trademarks and NY franchising laws.
Contact Lusthaus Law
In addition to the updates listed above, remember that Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.