FTC staff further defines “exclusive territory”

Posted on October 31, 2012 by Tom Pitegoff

The FTC Staff issued FAQ 37 on October 16, 2012.  This is the latest of the FTC’s “frequently asked questions” that clarify various aspects of its trade regulation rule on franchising (the “FTC Rule”).

FAQ 37 further defines the term “exclusive territory”.  This FAQ will change the way that many franchisors describe the franchisee’s territory in Item 12 of their franchise disclosure document (FDD).  Unfortunately, the required change may be more confusing than illuminating.

Many franchisors grant exclusive territories to franchisees but reserve the right to open franchised or company outlets in “non-traditional venues” like airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks.

In FAQ 37, the FTC staff states that sales in non-traditional venues can no longer be characterized as exceptions to the a grant of territorial exclusivity.  Instead, the reservation of rights in non-traditional venues means that the entire territorial grant is non-exclusive. Continue reading →

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How New York can be a center for international franchising

Posted on September 24, 2012 by Tom Pitegoff

New York is an international hub of trade, finance, culture and diplomacy.  New York is also an important site for the resolution of international disputes.

Since 1984, New York law has specifically promoted the designation in international contracts of New York law as the governing law and New York courts as the forum for resolution of international disputes.  The New York State Bar Association endorsed the choice of New York law and forum in its 2011 Task Force report on New York Law in International Matters.

By contrast, New York’s franchise law discourages international franchising in New York.  In both inbound and outbound international franchising, the New York Franchise Act (NYFA) is an obstacle that impedes international business in the state.

With just two changes in the law, though, New York could become more attractive than other states as a center for international franchising. Continue reading →

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The frightening geographic reach of New York franchise law

Posted on August 9, 2012 by Tom Pitegoff

The broad reach of the New York Franchise Act (“NYFA”) to out-of-state franchise sales is an anomaly among state franchise laws.  Rupert Barkoff called it “frightening” in his article in the New York Law Journal on May 1, 2012, because franchisors residing in New York must register their franchise offerings in New York even if none of the franchised units will be located in the state.

The rationale for this broad reach is to maintain New York’s reputation as an international financial center and to protect the state from becoming a home base for fraud.  But by making a few simple changes, New York can change a frightening franchise law that discourages business into one that  actually attracts business while preserving the state’s reputation as a financial center and maintaining its ability to combat fraud. Continue reading →

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The terrifying New York definition of a franchise

Posted on July 15, 2012 by Tom Pitegoff

Licensing is big business.  Brands of perfumes, clothing, footwear, foods and many other items are commonly licensed.  Brand owners license parts of their product lines or create brand extensions through licensing.  But few brand owners know that the New York Franchise Act (“NYFA”) regulates licensors who provide no marketing assistance and impose no requirements other than quality control.

The definition of a “franchise” under the NYFA is extremely broad.  It covers far more business arrangements than anyone would reasonably consider to be a franchise.  This anomaly puts New York franchise law in “left field” as Rupert Barkoff noted in his excellent article published in the New York Law Journal on May 1, 2012.  This is an understatement.  The NYFA is not even in the same ballpark as similar legislation in other jurisdictions.  Barkoff called this anomalous definition of a franchise under the NYFA “terrifying.”

Failure to comply with the NYFA can result in enforcement action by the New York State Attorney General’s Office and private actions by franchisees for rescission, damages, injunctive or declaratory relief, attorneys’ fees, and costs.  Willful violation of the NYFA can lead to punitive damages and criminal liability.

Not only is a simple trademark license agreement a franchise in New York.  Market consulting agreements can also be franchises.  There is also a large “gray” area in which it is not clear whether the arrangement is a franchise.

In short, the NYFA is a trap for the unwary. Most people would not think of consulting with a franchise lawyer before entering into a trademark license agreement or a marketing agreement.  Yet failure to comply with the NYFA can give rise to litigation between contract parties or prosecution by the Attorney General’s office.

The broad definition of a franchise cries out for change in the law. Continue reading →

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Why New York offers a franchise Expo exemption

Posted on May 8, 2012 by Tom Pitegoff

After twenty years in Washington DC, the International Franchise Expo has now moved to New York City.  But New York State’s outdated franchise law is a potential obstacle for exhibitors at the largest franchise expo in the country.  New York State, of course, requires franchisors to register with the Attorney General’s Office before offering or selling franchises.  Registered franchisors will have no problem exhibiting at the show and engaging in discussions with prospective franchisees.  But franchisors that are not registered in New York must clear a regulatory hurdle before they can lawfully exhibit at the Expo.  The reason is the “first personal meeting” requirement under the New York Franchise Act. 

The New York Attorney General’s Office has been working hard to ensure that every exhibitor is either registered or exempt.  And this is happening at the busiest time of year for the franchise examiners.  They’re in the midst of reviewing the annual franchise renewal applications. Continue reading →

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Preparing to franchise your business

Posted on April 29, 2012 by Tom Pitegoff

What are the first steps that you need to take to franchise your business?

Start with the right business

First, consider whether you have the type of business that lends itself to franchising:

  • Does the business have features that clearly distinguish it from the competition? What characteristics will make your franchise system likely to succeed and meet or beat the competition?
  • Does the business need managers in a variety of locations who know and can service their local communities?
  • Can the business be cloned? In other words, can it be described in an operating manual?
  • Can qualified people be trained to run essentially the same business at different locations?
  • Can this be done in a way that allows both the franchisor and the franchisees to be profitable?

Continue reading →

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Are franchise agreements negotiable?

Posted on April 23, 2012 by Tom Pitegoff

The franchise agreement defines the franchise relationship.  Every franchisor who sells franchises in the U.S. has a standard form of franchise agreement.  That form of franchise agreement is one of the exhibits in the franchise disclosure document that the franchisor is required to deliver to prospective franchisees at least 14 days before the franchisee signs an agreement or pays a fee.

Are franchise agreements negotiable?  The short answer is yes.  The fact that it is a form agreement implies that it is not negotiable.  Many franchisors tell prospective franchisees that the franchise agreement is not negotiable.  But few franchisors are willing to resist reasonable requests by prospective franchisees to negotiate.  Of course, there are exceptions.  Some franchisors will not negotiate changes, for example, because they have already negotiated changes in their standard form agreements with their franchisee associations. Continue reading →

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