In the recent case of JM Vidal, Inc. v. Texdis USA, Inc., 2010 U.S. Dist. LEXIS 93564 (S.D.N.Y. 2010), the New York District Court held that the New York Franchise Sales Act is inapplicable to the sale of franchises by a franchisor based in New York where the franchisee resides outside of New York and the franchised business is based outside of New York. In Vidal, a franchisee located in Washington State brought an action against a franchisor that was incorporated in Delaware and maintained its principal place of business in New York.

The franchisee alleged that the franchisor violated the New York Act by: (i) selling a franchise before it registered the UFOC; (ii) failing to timely deliver the UFOC at or before the initial meeting; and (iii) misrepresenting the estimated future earnings of the franchised unit, among other claims.

The Court dismissed the franchisee’s New York Act claim by holding that the New York Act is inapplicable and unavailable in an action by an out of state franchisee in a claim against a New York-based franchisor. The Court determined that the principal place of business of the franchisee is the essential element in the analysis – so that if the franchisee is not based in New York, then the New York Act is not applicable.

In making this determination, the Court relied on previous New York decisions, including Century Pac, Inc. v. Hilton Hotels Corp., 2004 U.S. Dist. Lexis 6904 (S.D.N.Y. Apr. 21, 2004) and Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F. Supp. 186 (S.D.N.Y. 1984). Vidal stated that “only the franchisee’s domicile matters for the purposes of determining whether the statute applies.”

This case should be reviewed carefully by Maryland franchisors and franchisees, and their lawyers, since the specific jurisdictional language of the New York Franchise Act that was at issue in this case is nearly identical to that contained in the Maryland Franchise Act.