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Isolated Sales Exemption in the New York Franchise Act

Wednesday, March 7th, 2012

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.

“Franchise Fees” and the New York Franchise Law

Wednesday, August 24th, 2011

The New York Franchise Law defines a franchise fee as any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay directly or indirectly for the right to enter into a business under a franchise agreement, or otherwise sell, resell or distribute goods, services, or franchises under such an agreement, including, but not limited to, any such payment for goods or services.  The NY Franchise Law also contains several exclusions to the franchise fee definition, but no exemptions pertain to the purchase/sale of equipment.  Rather, the exemptions to the NY law are nearly identical to the Maryland law.

The dollar threshold for a franchise fee under NY law is $500.

Like Maryland, the scope of the New York Franchise Law franchise fee definition is construed broadly.  For example, a one-time fee or a monthly payment during a four-year period, which was characterized as a lease, was ruled a franchise fee.

New York Franchise Act Inapplicable Where Franchisee Resides Outside New York

Wednesday, January 5th, 2011

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.