New York Franchise Law
Buying and Selling A Franchised Business in New York
New York is a Franchise Registration State
New York has enacted certain franchise specific laws that apply to the offer or sale of any franchise opportunity when (i) the offer to sell originates in New York, (ii) the offer to buy occurs in New York, (iii) the buyer is domiciled in New York, or (iv) the franchised business will be located in New York. This body of franchise law is known as the New York State Franchise Act.
The New York State Franchise Act compliments federal requirements and empowers the Office of the New York State Attorney General with the authority to establish procedures for registration and renewal. The Act also establishes certain enforcement mechanisms and establishes a private right of action for certain acts committed by franchisors. There are also New York State Franchise Regulations.
Knowing how to franchise in New York requires an understanding of federal franchise law, along with a familiarity of New York franchise laws and registration requirements. This means developing and maintaining a compliant franchise disclosure document (“FDD”), properly disclosing prospects, and securing New York’s authority to offer franchises in the state. Buying a franchise creates certain rights for franchisees and modifies certain terms when the New York State Franchise Act applies.
It is unlawful “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…”
Franchisors
Franchisors must comply with the New York State Franchise Act and New York State Franchise Regulations. The initial legal threshold is franchise registration. Franchisors must submit an application and gain approval from the Department of Law.
Whats required for a New York franchise Application?
the Franchise Disclosure Document
Franchisors must have a valid franchise disclosure document (“FDD”) prepared in compliance with the federal Franchise Rule and New York State laws and regulations. Every FDD is required to contain 23 specific areas of disclosures. Each is referred to as an Item and is tailored to the franchise system and the franchise relationship. New York requires a state specific addendum, which supersedes any conflicting provisions of the FDD and its contracts. No franchise can be offered in the United States except through disclosure of a FDD.
Franchisor's Costs and Sources of Funds
Franchisors must disclose the costs they incur in launching each franchisee and explain how they pay these expenses. The state wants to ensure the franchisor can meet their pre-opening obligations.
Uniform Franchise Registration Application
New York requires franchisors to complete a standard form application which provides certain key details of the franchisor and includes a certification by the business lead that the disclosure document is in substantially compliance with the law. Meaning, the facts are accurate and there are no material ommissions.
Uniform Franchise Consent to Service of Process
Doing business in New York requires franchisors to avail themselves to service of process in New York State. A standard form is used to empower the New York Secretary of State to receive service.
Franchise Seller Disclosure Form
New York requires a questionnaire to be completed for each franchise seller who will solicit prospects to purchase a franchise in the state. New York also requires certain certifications in its addendum to ensure key business parties have not committed certain acts.
Auditors Consent Letter
Franchise disclosure documents typically include audited financials. New York requires a letter from the auditor expressly consenting to use of the audit in the disclosure document.
The Filing Fee
New York currently charges a $750 filing for the initial franchise application. Registration can be renewed annually. The renewal fee is currently $150.
The Registration and Approval Process
The franchise registration materials are submitted to New York for review and consideration. The quickest way to submit is through the NASAA Electronic Filing Depository. Each application submitted for registration is assigned to a regulator. The regulator will review the disclosure documents, along with the the forms and applications submitted. Often times, regulators will have comments or seek clarity on certain disclosures made in the disclosure document. The registration will not be approved until comments have been addressed. The length of time necessary to complete this process will vary. Approval of the registration is not an endorsement of the franchisor or approval of the franchise offering.
Franchisees
Franchisees benefit from New York laws and regulations designed to level out the unequal bargaining power between franchisor and franchisee.
No Forced Waiver
Franchisors often want to limit potential liability for potential violation of franchise laws and liability for making certain representations by including waivers and questionnaires in the FDD. These attempt to relinquish claims for known and unknown violations. New York franchise laws and regulations protect franchisees by prohibiting the practice of obtaining waivers for liability through the franchise agreement and other contracts between the franchisor and franchisee. New York State also adopted the NASAA’s recent policy against including contract clauses and questionnaires in the franchise agreement. Every New York Addendum will contain the NASAA verbiage prohibiting such practices.
The Right to Renew
Franchisors often establish conditions for renewal of the Franchise Agreement beyond the initial term. In New York, renewal conditions must be consistent with Article 33 of the General Business Law of the State of New York and the regulations issued under the law. Further, these renewals cannot include waivers of liability prohibited by provisions of General Business Law Sections 687(4) and 687(5).
The Right to Terminate
The terms of most franchisors only permit a franchisor to terminate the franchise relationship. New York law allows franchisees to terminate under certain conditions. For instance, termination may be permitted for good cause when a franchisor is notified of a material breach and fails to cure the breach within a reasonable time. This is not to say a franchisee can walk away from the franchise relationship as they please; however, it may provide relief when a franchisor is not living up to their duties.
Questions about Federal Franchise Law?
Federal Franchise Law Applies in All States
Federal Franchise Legal Requirements
The federal Franchise Rule establishes the minimum requirements for franchisors to follow when offering or selling franchises in the United States. Federal laws apply in every state regardless of where the franchisor or franchisee is located. Federal laws prescribe the content of disclosures and establish the minimum rules surrounding the sales process. However, there is no federal franchise registration process or requirement. Thus, the federal government does not review the content of a franchisors disclosure document. Enforcement is largely left to state regulators and franchisees who bring law suits.
Franchise Registration and Disclosure
A franchise opportunity can only be offered through disclosure of a franchise disclosure document (the “FDD”). Thus, the FDD is the primary legal document required by all franchisors. This disclosure document must be prepared before offering franchise opportunities in any state and before the registration process can begin. Each FDD contains 23 separate ares of disclosure known as “Items”. The disclosure includes a standard franchise agreement, along with any other contracts required to be signed by the franchisee to begin operating a franchised business. The federal requirements and content of the disclosure document are more thoroughly explained in our federal law resource guide.
Purpose of the FDD
As a franchisor, maintaining compliance and establishing expectations is essential to building a successful franchise system. The FDD discloses aspects of the business and establishes the ground rules for the franchise relationship. As a prospective buyer, the Items in the FDD are designed to help you make an informed purchasing decision before you sign a franchise agreement. Understanding the contents is essential when conducting due diligence.
What is a Franchise?
These three elements make a franchise a franchise
Right to Operate
The buyer will obtain the right to operate a business that is identified or associated with the seller’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark
Degree of control
The seller will exert or has authority to exert a significant degree of control over the buyer’s method of operation, or provide significant assistance in the buyer’s method of operation
Exchange of money
As a condition of obtaining or commencing operation of the business, the buyer makes a required payment or commits to make a required payment to the seller or its affiliate. In Virginia, this includes any direct or indirect payment of at least $500.
Franchising Occurs When An Oral Or Written Deal Satisfies Each of These Elements
The Role of a Franchise Attorney
helping Franchise Buyers
- Developing and implementing a plan to franchise
- Drafting the franchise disclosure document (the “FDD”)
- Drafting the franchise agreement and all franchise contracts
- Securing franchise registration in across the United States.
- Disclosing prospects and sending franchise agreements
- Managing and resolving franchise disputes
- Providing day-to-day franchise legal support
Helping Franchise Sellers
- Nationwide FDD review
- Nationwide franchise agreement review
- Comprehensive franchise legal review report
- Consultation and legal advice on rights and obligations
- Consultation and negotiation on business legal terms
- Direct dispute resolution
- Day-to-day legal support
