A Legal Analysis of a Preferred Method of Retail Sales
[Accepted by the Hawaii International Conference on Business, University of Hawaii]
By Mitchell J. Kassoff, Esq.
[1] Mr. Kassoff (franatty@concentric.net) is a Professor of Law and Taxation of Pace University in New York City, is admitted to the Bars of New York and New Jersey and is a lecturer for Continuing Legal Education on the topic “How to Franchise a Business.” He is a past Chairman of the American Bar Association Committee on the Use of Computer Produced Data, is a member of the New York State Bar Association, is a Consultant to the National Conference of State Tax Judges, has previously published articles relating to franchising, taxation and computer law, received his Juris Doctor from the University of Virginia School of Law in 1978 and a B.S. in Public Accounting from SUNY- Albany, Magna Cum Laude, in 1975.
[2] International Franchise Association.
[3] Federal Trade Commission, Franchise and Business Opportunity Program Review 1993 to 2000, June 2001, http://www.ftc.gov/bcp/reports/franchise93-01.pdf.
[4] “Be Your Own Boss and Cut the Risks,” Birmingham Post (09/27/00) p. 24, Philip Williams.
[5] Trade Practices (Industry Codes Franchising) Regulations 1998.
[6] Consolidated Statutes of Ontario Arthur Wishart Act (Franchise Disclosure), 2000, Proclaimed in force July 1, 2000, S.O. 2000, C. 3.
[7] “The Electronic Franchise Agreement [Became] Reality October 1”; Franchising World (10/00) P. 21; Klein, Deven; Koch, David. With the deadline for the pending Electronic Signatures in Global and National Commerce Act (E-SIGN) passing its Oct. 1 implementation date, businesses will now be allowed to complete their contracting process online. E-SIGN legislation makes electronic records and electronic signatures as legally binding as ink signatures.
[8] Bigsmart.Com L.L.C., U.S. District Court, Arizona, March 2001.
[9] Kazmierski v. General Nutrition Companies, Inc., 2000 U.S. Dist. LEXIS 20819 (D. N.J. 2000).
[10] Allegra Network, LLC v. AM Marketing, Inc., U.S. District Court, Eastern District of Michigan, Southern Division. Case No. 00-71455 (July 16, 2001).
[11] 16 CFR Part 436, effective October 21, 1979.
[12] Federal Trade Commission Interpretive Guides to Franchising and Business Opportunity Ventures Trade Regulation Rule, 44 Federal Register 49966 (August 24, 1979).
[13] Statues- Arkansas (Franchise Practices Act, Ark. Code of 1987, Title 4, Chap. 72, §4-72-207), California (Franchise Investment Law, Cal. Corporations Code, Div. 5, Parts 1 to 6, §§31000 to 31516 and Seller Assisted Marketing Plans, Cal. Civ. Code, Div. 3, Part 4, Title 2.7, §§1812.200 to 1812.221), Connecticut (Business Opportunity Investment Act, Conn. Gen’l Stat., Title 36b, Chap. 672c, §§36b-60 to 36b-80), Florida (Franchises and Distributorships, Fla. Stat., 1995, Chap. 817, §817.416 and Sale of Business Opportunities Act, Fla. Stat., 1995, Chap. 817, §817.416), Georgia (Business Opportunity Sales, Code of Ga., Title 10, Chap. 1, Art. 5, Part 3, §§10-1-410 to 10-1-417), Hawaii (Franchise Investment Law, Haw. Rev. Stat., Title 26, Chap. 482E, §§482E-1 to 482E5, 482E8, 482E9, 482E11 and 482E12), Illinois (Franchise Disclosure Act of 1987, Ill Laws of 1987, Chap. 85-551 and Business Opportunity Sales Law of 1995, Ill Laws of 1995, Chap. 815, §§602/5-1 to 602/5-135), Indiana (Ind. Code, Title 23, Art. 2, Chap. 2.5, §§1 to 51 and Business Opportunity Transactions, Ind. Code, Title 24, Art. 5, Chap. 8, §§1 to 21), Iowa (Business Opportunity Promotions Law, Iowa Code, 1995, Title XX, Chap. 523B, §§523B.1 to 523B.13), Kentucky (Sale of Business Opportunities Law, Ky. Rev. Stat. and 1988 Supp., Title XXIX, Chap. 367, §§367.801 to 367.819 and 367.990), Louisiana (Lou. Rev. Stat. of 1950, Title 51, Chap. 21, §§51:1801 to 51:804), Maine (Sale of Business Opportunities Law, Maine Rev. Stat. and 1990 Cum. Pocket Part, Title 32, Chap. 69-B, §§4691 to 4700-B), Maryland (Franchise Registration and Disclosure Law, Code of Md., Title 14, §§14-201 to 14-233 and Business Opportunity Sales Act, Code of Md., Title 14, §§14-101 to 14-129), Michigan (Franchise Investment Law, Mich. Comp. Laws, 1979, Chap 445, §§445.1501 to 445.1545 and Business Opportunities, incorporated into the Consumer Protection Act, Mich. Comp. Laws, 1979, §§445.901 to 445.922), Minnesota (Franchises, Minn. Stat. 1996, Chap. 80C, §§80C.01 to 80C.22), Mississippi (Miss. Code, Title 75, Chap. 24, §75-24-55), Nebraska, Seller-Assisted Marketing Plan Act, Rev. Stat. of Neb. 1943, Chap. 59, Art. 17, §§59-1701 to 59-1761), New Hampshire (Distributorship Disclosure Act, N.H. Rev. Stat., Title XXXI, Chap 339-C, §§339-C:1 to 339-C:9), New York (General Business Law, Art. 33, §§680 to 695), North Carolina (Business Opportunity Sales Law, Gen. Stat. of N.C., Chap. 66, Art. 19, §§66-94 to 66-100), North Dakota (Franchise Investment Law, N.D. Century Code, Title 51, Chap. 51-19, §§51-19-01 to 51-19-17), Ohio (Business Opportunity Purchasers Protection Act, Ohio Code, Title 13, Chap. 1334, §§1334.01 to 1334.15 and 1334.99), Oklahoma (Business Opportunity Sales Act, Ok. Stat., 1991, Chap. 4, §§801 to 828), Oregon (Franchise Transaction, Or. Stat., Title 50, Chap 650, §§650.005 to 650.085), Rhode Island (Franchise Investment Act, Gen’l Laws of R.I., 1956, Title 19, Chap. 28.1, §§19-28.1-1 to 19-28.1-34), South Carolina (Business Opportunity Sales Act, Code of S.C. 1976, Title 39, Chap. 57, §§39-57-10 to 39-57-80), South Dakota (Franchises for Brand-Name Goods and Services, S.D. Cod. Laws and 1971 Pocket Supp., Title 37, Chap. 37-5A, §§37-5A-1 to 37-5A-87 and Business Opportunities, S.D. Cod. Laws and 1989 Pocket Supp., Chap. 37-25A, §§37-25A-1 to 37-25A-54), Tennessee (“Little FTC Act,” Tenn. Code, Title 47, Chap. 18, §§47-18-101 to 47-18-117), Texas (Business Opportunity Act, Tex. Business & Commerce Code, Title 4, Chap. 41, §§41.001 to 41.303), Utah (“Little FTC Act,” Utah Code 1953, 1987 Supp., Title 13, Chap. 11, §§13-11-1 to 13-11-23 and Business Opportunity Disclosure Act, Utah Code 1953, 1989 Cum. Supp., Title 13, Chap. 15, §§13-15-1 to 13-15-6), Virginia (Retail Franchising Act, Va. Code of 1950, Title 13.1, Chap. 8, §§13.1-557 to 13.1-574 and “Little FTC Act,” Va. Code of 1950, 1987 Replacement Vol., Title 59.1, Chap. 17, §§59.1-196 to 59.1-207 and Business Opportunity Sales Act, Va. Code of 1950, Title 59.1, Chap. 21, §§59.1-262 to 59.1-269), Washington (Franchise Investment Protection Act, 1989 Rev. Code of Wash., Title 19, Chap 19.100, §§19.100.010 to 19.100.940 and Business Opportunity Fraud Act, 1989 Rev. Code of Wash., Title 19, Chap 19.110, §§19.110.010 to 19.110.9340), Wisconsin (Franchise Investment Law, Wisc. Stat., 1993-94, Chap 553, §§553.01 to 553.78 and Wisc. Organized Crime Control Act, Wisc. Stat., 1993-94, Chap 946, §§946.82) and Washington, D.C. (“Little FTC Act,” D.C. Code, 1981, Title 28, Chap 39, §§28-3901 to 28-3908).
Regulations- California Administrative Code , Title 10, Chapter 3, Subchapter 2.6, §§310.000 to 310.505; Hawaii Department of Commerce and Consumer Affairs, Title III, Business Registration, Title 16, Chapter 37, Sections 16 to 37-1- 16-37-8; Illinois Administrative Code, Title 14, Subtitle A, Chapter II, Part 200, §§200.100 to 200.901; Iowa Administrative Code, Insurance Division (191), Chapter 55, §§55.1 (523B) to 55.9 (523B); Maryland Code of Regulations, State Law Department, Division of Securities, Title 02, Subtitle 02, Chapter 8, §§02.02.08.01 to 02.02.08.17; Minesota Rules, 1995, Department of Commerce, Chapter 2860, §§2860.0100 to 2860.9930; New York Department of Law, Bureau of Investor Protection and Securities- Codes, Rules and Regulations of the State of New York, Title 13, Chapter VII, §§200.1 to 201.16; Oklahoma Business Opportunity Regulations, Rules 660:25-1-1 to 660:25-1-3, 660:25-3-1, 660:25-3-2, 660:25-5-1 and 660:25-7-1; Oregon Administrative Rules, Department of Consumer and Business Services, Division of Finance and Securities, Chapter 441, Division 325, §§441-325-010 to 441-325-055 and Division 13, §441-13-040; Texas Administrative Code, Title I, Part IV, Chapter 97, §§97.1 to 97.42; Virginia Administrative Code, Title 21, Chapter 110, §§5-110-10 to 5-110-90; Washington Administrative Code, Department of Financial Institutions, Securitites Division, Chapter 460-80, §§460-80-100 to 460-80-910 and Chapter 460-82, §460-82-200 and Wisconsin Administrative Code, Chapters SEC 31 to SEC 36, §§SEC 31.01 to SEC 36.01.
[14] California (Real Estate Licenses, Cal. Business and Professions Code, Div. 4, Part 1, Chap 3, Art. 3, §10177(m)), Maryland (Gasohol and Gasoline Marketing, Code of Md., Title 11, §11-303), New York (Motor Fuels, General Business Law, Art. 11-B, §199-b and Cigarettes, N.Y. Tax Law, Art. 20-A, §§485 to 489), Tennessee (Motor Fuel, Tenn. Code, Title 47, Chap. 25, §§47-25-601 to 47-25-607), Vermont (Service Station Operators and oil companies, Vt. Stat., Title 9, Chap. 109, §4103), Virginia (Motor Vehicles, Va. Code of 1950, Title 46.2, Chap. 15, Art. 7, §§46.2-1566 and 46.2-1567) and Washington, D.C. (Retail Service Stations, D.C. Code, 1981, Title 10, Chap 2, §10-222).
[15] 44 Federal Register 49966 (August 24, 1979).
[16] Australia, Brazil, Canada (Alberta, Ontario and Quebec provinces), China, France, Indonesia, Italy, Korea, Malaysia, Mexico, Romania, Russia, Spain and the European Union.
[17] Federal Trade Commission Interpretive Guides to Franchising and Business Opportunity Ventures Trade Regulation Rule, 44 Federal Register 49966 (August 24, 1979).
[18] e.g. New York- 13 N.Y.C.R.R. §200.4(i)(f).
[19] e.g. N.Y. General Business Law, Art. 33, §685;13 N.Y.C.R.R. 200.6(a).
[20] e.g. N.Y. General Business Law, Art. 33, §685;13 N.Y.C.R.R 200.6(i).
[21] e.g. Minnesota and North Dakota.
[22] 16 C.F.R. Part 436.
[23] 16 C.F.R. Part 436.
[24] e.g. Indiana has required its agent to receive service of process to be listed in Item 1 of the UFOC and Minnesota has required that this information not be included in Item 1 of the UFOC for any sales of franchises to be made in its state for the same franchisor.
[25] e.g. New York- 13 N.Y.C.R.R. §200.4(i)
[26] e.g. New York- 13 N.Y.C.R.R. §200.4(iii)- Franchisor, Its Predecessors and Affiliates; Business Experience; Litigation; Bankruptcy; Initial Franchise Fee; Other Fees; Initial Investment; Restrictions on Sources of Products and Services; Franchisee’s Obligations; Financing; Franchisor’s Obligations; Territory; Trademarks; Patents, Copyrights and Proprietary Information; Obligation to Participate In The Actual Operation of the Franchise Business; Restrictions on What the Franchisee May Sell; Renewal, Termination, Transfer and Dispute Resolution; Public Figures; Earnings Claims; List of Outlets; Financial Statements; Contracts and Receipt.
[27] e.g. New York- 13 N.Y.C.R.R. §200.4(iii).
[28] NASAA guidelines adopted on April 25, 1993.
[29] e.g. New York- 13 N.Y.C.R.R. §200.10.
[30] e.g. Connecticut (Business Opportunity Investment Act, Conn. Gen’l Stat., Title 36b, Chap. 672c, §§36b-61(6)) provided a copy of the trademark or service mark is filed with the state prior to an offer or sale of the franchise in the state.
[31] e.g. New York- net worth of at least $5,000,000 (General Business Law, Art. 33, §684(2)) and an exemption form is filed with the Attorney General prior to offering a franchise for sale.
[32] e.g. New York (General Business Law, Art. 33, §684(3)(c) (with additional conditions).
[33] e.g. New York (General Business Law, Art. 33, §684(3)(d) (with additional conditions).
[34] 16 C.F.R. 436.2 Definitions.
As used in this part, the following definitions shall apply:
(a) The term “franchise” means any continuing commercial relationship created by any arrangement or arrangements whereby:
(1)(i)(A) a person (hereinafter “franchisee”) offers, sells, or distributes to any person other than a “franchisor” (as hereinafter defined), goods, commodities, or services which are:
(1) Identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (hereinafter “franchisor”); or
(2) Indirectly or directly required or advised to meet the quality standards prescribed by another person (hereinafter “franchisor”) where the franchisee operates under a name using the trademark, service mark, trade name, advertising or other commercial symbol designating the franchisor; and
(B)(1) The franchisor exerts or has authority to exert a significant degree of control over the franchisee’s method of operation, including but not limited to, the franchisee’s business organization, promotional activities, management,
marketing plan or business affairs; or
(2) The franchisor gives significant assistance to the franchisee in the latter’s method of operation, including, but not limited to, the franchisee’s business organization, management, marketing plan, promotional activities, or
business affairs; Provided, however, That assistance in the franchisee’s promotional activities shall not, in the absence of assistance in other areas of the franchisee’s method of operation, constitute significant assistance; or
(ii)(A) A person (hereinafter “franchisee”) offers, sells, or distributes to any person other than a “franchisor” (as hereinafter defined), goods, commodities, or services which are:
(1) Supplied by another person (hereinafter “franchisor”), or
(2) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly required to do business by another person (hereinafter “franchisor”); or
(3) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly advised to do business by another person (hereinafter “franchisor”) where such third person is affiliated with the franchisor; and
(B) The franchisor:
(1) Secures for the franchisee retail outlets or accounts for said goods, commodities, or services; or
(2) Secures for the franchisee locations or sites for vending machines, rack displays, or any other product sales display used by the franchisee in the offering, sale, or distribution of said goods, commodities, or services; or
(3) Provides to the franchisee the services of a person able to secure the retail outlets, accounts, sites or locations referred to in paragraphs (a)(1)(ii)(B) (1) and (2) of this section; and
(2) The franchisee is required as a condition of obtaining or commencing the franchise operation to make a payment or a commitment to pay to the franchisor, or to a person affiliated with the franchisor.
(3) Exemptions. (not listed here).
(4) Exclusions. (not listed here).
[35] e.g. New York (General Business Law, Art. 33, §681.-
3. “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, and the franchisee is required to pay, directly or indirectly, a franchise fee, or
(b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee. A franchise under this article shall not include any agreement, contract, or franchise subject to the provisions of article eleven-B of this chapter or section one hundred ninety-nine of this chapter, or any agreement or contract for the sale of motor fuel.
[36] New York (General Business Law, Art. 33, §683.1.
[37] New York (General Business Law, Art. 33, §681(12).
[38] e.g. New York (a minimum of seven days prior to use)- 13 N.Y.C.R.R. §200.09.
[39] e.g. New York (annually)- 13 N.Y.C.R.R. §200.08; Maryland (quarterly)- Code of Md. Regulations, Title 02, Subtitle 02, Chap. 8, §.02.02.08.14.
[40] 16 C.F.R. §436.1(g).
[41] e.g. New York (the earlier of (a) the first personal meeting with the franchisee to discuss the franchise or (b) ten business days before the franchisee signs any binding agreements or pays any money)- 13 N.Y.C.R.R. §204(iii).
[42] California, Illinois, Indiana, Minnesota, North Dakota, Rhode Island, South Dakota and Washington.
[43] B&R Management & Leasing Corporation v. Triarc Restaurant Group, Arby’s, Inc., 269 A.D.2d 804; 703 N.Y.S.2d 635 (App. Div. 4th Dept. February 16, 2000).
[44] HR 3308.
[45] American Franchisee Association
[46] See Walters v. Ramada Franchise Systems, Inc., 2000 Tex. App. LEXIS 5673 (Court of Appeals of Texas, Fifth District, Dallas August 24, 2000) in which a franchisor was denied summary judgment because it retained some control over the franchisee’s operations.