N.Y. CLS Gen. Bus. Law § 684(3)(c) of the New York Franchise Act provides an exemption to franchisors from the general registration requirements of the Act for what is deemed an “isolated franchise sale.” Under this exemption, no franchisor is required to register its FDD/UFOC in New York where:
(1) “The transaction is pursuant to an offer directed by the franchisor to not more than two persons . . .
(2) if the franchisor does not grant the franchisee the right to offer franchises to others,
(3) a commission or other remuneration is not paid directly or indirectly for soliciting a prospective franchisee in this state, and
(4) the franchisor is domiciled in this state or has filed with the department of law its consent to service of process on the form prescribed by the department.” N.Y. CLS Gen. Bus. Law § 684(3)(c).
New York courts have interpreted § 684(3)(c) to mean in essence that the sale of the first franchise unit is exempt from registration if the unit was only offered to a maximum of two people (See BMW Co., Inc. et al. v Workbench Inc. et al. (No. 86 CIV 4200 1988 WL 45594 (S.D.N.Y. April 29, 1988); CCH Business Franchise Guide ¶ 9104, at 18,850).
This exemption is well settled law in New York: “This isolated franchise sale exemption is potentially useful for new U.S. franchisors or foreign franchisors that are new to the United States. It permits them to sell one franchise in New York without having to register a disclosure document with the state.” LJN, Law Journal Newsletters, Franchising Business & Law Alert, Volume 18, Number 4, January 2012, by George J. Eydt.
Further, in a recent New York case, Burgers Bar Five Towns, LLC v. Burger Holdings Corp., 897 N.Y.S. 2d 502 (2d Dep’t 2010), again upheld the existence of the isolated franchise sale exemption under § 684(3)(c) provided the franchisor is able to meet the four prongs of the statute. In reversing a summary judgment that had been entered by the trial court against a franchisor that had failed to register its UFOC/FDD, the appeals court stated that the matter be remanded back to the trial court to determine whether the franchisor indeed met the exemption factors. Further, the appeals court held that even if the exemption was not available, the franchisee had to prove that it sustained damages as a result of the failure to register and that the failure to register was willful.
There is some support for the proposition that not only does § 684(3)(c) exempt a franchisor from the registration requirement of the New York Franchise Act for the isolated franchise sale, the franchisor is also exempted from the disclosure requirements of the Act.
§ 683(8) of the New York Franchise Law provides that: “A franchise which is subject to registration under this article shall not be sold without first providing to the prospective franchisee, a copy of the offering prospectus, together with a copy of all proposed agreements relating to the sale of the franchise.”
No New York Court has yet delved this deeply into the disclosure exemption question. The few Courts that have addressed the issue, BMW Co., supra, The National Survival Game of New York, Inc., supra, and Burgers Bar Five Towns, LLC, supra., have either failed to examine the relationship between the two statutes, or resolved the merits of their cases on other grounds.
Nevertheless, a franchisor faced with a registration and disclosure violation in New York for an isolated franchise sale would be smart to argue that both registration and disclosure are exempted.