Alters the definition of franchise and concerns the sale and operation of franchises

Section two amends the general business law by adding a new section 683-a. This new section generally provides that it will be unlawful for any person to sell or offer to sell in New York a business opportunity unless such person files a notice with the department of law and complies with the Federal Trade Commission disclosure requirements under 16 CFR Part 437. The form of notice will be prescribed by the department of law and cannot require the seller to provide more than the information specified in the legislation. section three amends section 684 of the general business law by adding two new subdivisions 7 and 8. Th7 new subdivision 7 generally provides that the offer or sale of a franchise will be exempt from the registration and disclosure requirements under section 683 of the New York franchise law if the offer or sale is made to a person who is not a New York resident, the franchise will not be operated in New York and the offeror files the required notice with the department of law. The form of notice will be prescribed by the department of law and cannot require the seller to provide more than the information specified in the legislation.

The new subdivision 8 generally provides that the offer or sale of a franchise will be exempt from the registration and disclosure requirements under section 683 of the New York franchise law if the offer is for the grant of master franchise rights to a single subfranchisor and the offeror files the required notice with the department of law. The form of notice will be prescribed by the department of law and cannot require the seller to provide more than the information specified in the legislation.

Section four amends subdivision I of section 694 of the general business law by adding a new paragraph (d). The new paragraph (d)

generally provides that the fee for filing a notice under the foregoing sections is one hundred fifty dollars.

Justification

The current definition of a "franchise" under New York law is uniquely broad. Under current state law, a business arrangement is a franchise if either (1) a party is granted the right to offer, sell or distribute goods or services under a marketing plan or system prescribed by a franchisor and the franchisee is required to pay a franchise fee or (2) a party is granted the right to offer, sell or distribute goods or services substantially associated with the franchisor's advertising, trademark or certain other intellectual property rights designating the franchisor and the franchisee is required to pay a franchise fee. This bifurcated definition sweeps broadly to cover, for example, many licensing arrangements that were never intended to be covered by franchise law.

This uniquely broad definition of a "franchise" requires a wide range of businesses to prepare extensive pre-sale disclosure documents and register their offerings with the state. This added cost of compliance for companies that would not be subject to the franchise laws of any other state or the federal government discourages companies from doing business in New York and from establishing operations in the state. For others, the unexpectedly broad scope of the law acts as a trap for the unwary. It creates uncertainty, making compliance difficult. There is no policy reason for such a broad scope that is not present in the franchise laws of any other state or the federal government.

This legislation maintains the state's registration and disclosure requirements for companies whose franchise offerings in this state are within the scope of the Federal Trade Commission's trade regulation rule on franchising. Multi-state franchisors that are offering franchises in the state would still be required to comply with New York franchise law. The legislation maintains New York's ability to prosecute franchise fraud and it does not change the private right of action by aggrieved franchisees.

Business opportunities typically require far smaller investments than franchises and they are typically not ongoing relationships. Accordingly, this legislation distinguishes business opportunities from franchises. The Federal Trade Commission reports higher levels of fraud among sellers of business opportunities than franchises. As a result, this legislation maintains the state's ability to enforce the anti-fraud provisions of New York law but simplifies compliance by sellers of business opportunities by requiring compliance with Federal Trade Commission disclosure requirements.

The limited exemption for extraterritorial (out-of-state and out-of-country) franchise sales in this legislation removes another barrier to doing business and establishing operations in New York. It also brings New York franchise law into line with the franchise sales laws of other states. It reduces the unnecessarily high cost of compliance especially for sales of franchise rights abroad, which are typically highly negotiated transactions involving sophisticated purchasers unique to the destination country. The single master franchise exemption in this legislation removes an impediment that foreign companies face in appointing master franchisees in New York. There is no policy reason that justifies the cost the foreign master franchisor must bear to prepare a disclosure document for a single, unique, large, highly negotiated transaction with a sophisticated business partner.

At the same time, this legislation does not limit the state's authority to act against companies that violate the anti-fraud provisions of New York franchise law, whether they are New York companies selling franchises extra-territorially or foreign companies granting master franchise rights within the state.

Legislative history

A10963 of 2007-2008.

Fiscal implications

None to the State.

Effective date

This act will take effect immediately.