The goal of many franchisors is to expand their brand beyond their local jurisdiction and perhaps even nationwide. This broader presence can lead to mainstream recognition and the chance for lucrative business opportunities. But selling franchises that will be operated outside of a franchisor’s home state can be complex, as there are different laws and rules to consider.
Let’s discuss some laws that you should be aware of before you seek to expand your franchise system and engage in out-of-state franchise sales.
Franchise Sales and Registration Laws
Franchise sales laws are essentially consumer protection laws that are intended to ensure that franchisees can make informed investment decisions and to prevent deceptive and unfair trade practices in the offer and sale of franchises. Pursuant to these laws, franchisors are required to provide prospective franchisees with a franchise disclosure document (FDD) which will contain 23 items of information about the franchisor, franchise business and investment costs.
As previously discussed, New York is one of several states that require franchisors to register their FDD with the state prior to selling a franchise within the state. These states are commonly referred to as “registration states.” Franchisors must comply with state specific renewal processes and update their franchise registrations at least annually. Some of these registration states also require franchisors to include a state-specific addendum in their FDD.
Other states have what are referred to as “business opportunity laws,” which regulate the sale of business opportunities. Some of these laws require franchisors to file a notice with that state before the franchisor can sell a franchise there. Other states permit a franchisor to sell franchises within that state so long as the franchisor has a federally registered trademark. And still other business opportunity laws permit the franchisor to sell franchises in that state so long as the franchisor complies with the Federal Trade Commission Rule on Franchising. The remaining states do not require either registration or filing of a notice.
These are just some of the laws that apply to the sale of franchises and franchisors should consult with their franchise lawyer before making any strategic moves to expand their geographic footprint.
Franchise Relationship Laws
As mentioned above, franchise sales laws are designed to protect franchisees at the outset of the franchise relationship and to ensure that they can make an informed investment decision.
There are other laws, however, that also impact the franchise relationship. These laws are known as “relationship laws” and they are applicable once a franchisee has entered into the franchise relationship and executed a franchise agreement. In fact, more states have franchise relationship laws than have franchise sales laws and some have both. There are 24 jurisdictions in the U.S., including Puerto Rico and the U.S. Virgin Islands, with relationship laws.
This can make the legal waters more challenging to navigate as well, as these relationship laws operate to trump certain contract terms. Among other aspects of the franchise relationship, these franchise relationship laws may impact a franchisor’s right to:
- Terminate a franchise agreement notwithstanding a franchisee’s breach of the franchise agreement.
- Impose conditions for renewal of the franchise relationship; and
- Restrict venue for disputes.
NY franchisors seeking to expand their brand outside of the state – and those looking to enter the market – would do well to seek legal advice from the outset to ensure they are complying with applicable franchise sales and relationship laws.
You can learn more about NY franchise law, franchise relationships and view a recent webinar featuring Julie Lusthaus.
Contact Lusthaus Law
Whether you are a new franchisor or an existing franchise company looking to expand into more states, Lusthaus Law can help you navigate the complex federal and state rules. Contact us for a consultation today.