Establishing and selling franchises are complicated because both federal and state laws apply. Federal law establishes minimum disclosure standards for franchisors, but states may have additional registration and filing requirements which can vary significantly from one state to another. New York law is among the most confusing in the country. As a result, many franchisors do not realize that they are subject to New York law and they fail to comply with the rules. At a minimum, franchisors should know the key points about New York franchise law discussed below. However, it is best to consult a franchise attorney for advice.
When Is a Franchisor Subject to New York Registration Requirements?
After preparing a Franchise Disclosure Document (FDD), franchisors must check various state laws to determine if they have additional legal obligations under state law. Typically, they need to review laws in the states where they want to sell franchises, the franchisor is located, and the franchisee is located.
New York law is complex and applies to more franchisors than is typically the case in other states. A franchisor must comply with New York franchise law if it meets one of these requirements:
- The offer to sell the franchise originated from New York
- The offer to sell is directed to New York and received where directed
- The offer to sell is accepted in New York
- The franchisee is domiciled in New York
- The franchised busines will be operated in New York
As indicated above, New York distinguishes its franchise requirements based in part on where the franchisor is located because a franchisor located in New York that offers or sells franchises from its New York office, must comply with New York law even if the franchisees will not be operating in New York. In addition, the franchisor will have to comply with any applicable laws of the states where the franchisees will be operating franchises.
What Constitutes a Franchise Under New York Law?
Generally, under federal law, a franchise is created when the following three elements are met:
- The franchisor grants the franchisee the right to operate a business using the franchisor’s marks,
- The franchisor provides significant assistance or imposes significant controls on the franchisee’s operations of the business, and
- The franchisee pays a “franchise fee” to the franchisor.
In contrast, New York law only requires that one of the first two elements are met along with the third element. Specifically, the franchisor must grant the franchisee the right to operate a business using the franchisor’s trademark OR grant the franchisee the right to operate under the franchisor’s marketing plan or system. Both are not required as under federal law. However, the franchisee must still pay a “franchise fee” to the franchisor in order to create a franchise.
This has significant implications in that many businesses may license their trademarks to another party without realizing that they could be creating a franchise relationship. Inadvertent franchising can result in significant liability and good legal advice is necessary to avoid this situation.
Best practice is to consult an experienced franchise lawyer if you want to franchise your business or expand your existing franchise into new states. Lusthaus Law can help you navigate the complex federal and state rules to minimize the risks to your business. Contact us for a consultation today.