Why Franchisors Need To Register With New York State

by | Apr 13, 2023 | Blog, For Franchisors

A local seafood franchisor found himself in hot water for failing to take some basic steps in filing with New York State. As recently discussed it was revealed earlier this year that BK Lobster, a 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 GBS §683.

As one can imagine, this impacted the system of franchisees and damaged the franchisor’s reputation. Here we discuss what happens when a franchisor fails to register its franchise offering with the state and the possible repercussions.

Understanding NY Franchise Law GBS §683

The New York Franchise Sales Act, N.Y. Gen Bus. L.§680, et. seq. (“NY FSA”) regulates the sale of franchises in New York. Section 683, entitled Disclosure Requirements, states as follows:

  1. It shall be unlawful and prohibited for any person to offer to sell or sell in this state any franchise unless and until there shall have been registered with the department of law, prior to such offer or sale, a written statement to be known as an “offering prospectus” concerning the contemplated offer or sale, which shall contain the information and representations set forth in and required by this section…

New York is thus a registration state and following this law may seem like Franchising 101. But some franchisors either make mistakes or do not consult with their NY franchise lawyers before making big moves.

On Fraud and Untrue Statements

Under state franchise sales laws such as the NY FSA, a franchisee or operator can sue a franchisor if they are sold a franchise in violation of those laws. For example, if the franchisor fails to register the franchise offering with the state or to timely provide the franchisee with a franchise disclosure document (“FDD”). Additionally, the NY FSA and other state franchise laws prohibit the making of an untrue statement of material fact in connection with the offering. For example, §687 of the NY FSA addresses fraud and other unlawful practices and states that is unlawful for a person to directly or indirectly:

  • Employ any device, scheme or artifice to defraud.
  • Make untrue statements of material fact or omit to state necessary material facts so as not to mislead a buyer.
  • Engage in any act that would act as deceit.

Thus, if a franchisor fails to register the offering with the NY Department of Law and nonetheless sells a franchise which will be operated in NY, that franchisor may have violated §683. If in connection with the sale, the franchisor makes an untrue statement of a material fact or engages in a course of business which would operate as a fraud on a person, the franchisor may have violated §687.

Private Right of Action and Rescission Damages

Take for example, a franchisor who fails to register the offering and provides the NY prospect with an FDD that contains an Item 19 disclosure, which includes information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets. Assume further that there is no reasonable basis for the information provided in Item 19 of the FDD. If the prospect purchases the franchise under these circumstances, then the franchisor has likely violated §683 and §687 of the NY FSA.

In such event pursuant to §691 of the NY FSA, the franchisee may have a claim for damages and rescission. Rescission as a remedy, is intended to make the franchisee “whole” and place it in the same financial situation it was in prior to buying the franchise. In addition to the initial franchise fee, this may include other initial investment costs as well as the cost of rent, equipment, payroll and other logistics. As you can imagine, these amounts can be quite significant.

Civil remedies are explained in GBS §691: 

“…a person who offers or sells a franchise in violation of … this article is liable to the person purchasing the franchise for damages and, if such violation is willful and material, for rescission, with interest at six percent per year from the date of purchase, and reasonable attorney fees and court costs.”

Furthermore, the attorney general can take action, which is not the situation any franchisor wants.

How To React To Lawsuits Filed for NY FSA Violations

The franchisor should take any lawsuit seriously, and contact their NY franchise lawyer immediately when accused of violating the law.

Franchisors should also note that franchise sales laws require the disclosure of litigation such as claims for violation of the NY FSA. It is standard for franchisors to have litigation disclosures in Item 3 of their FDD. However, those involving failures to comply with franchise sales laws may have particular impact on the decision-making of prospective franchisees considering purchasing a franchise in that system.

NY Franchisors and those franchisors seeking to expand their brand in NY would do well to seek legal advice from the outset to ensure they are complying with applicable franchise sales laws. For more relevant information on franchising developments, visit recent Insights installments about NY franchise laws.

Contact Lusthaus Law

Lusthaus Law’s website is a resource for 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.


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