web stats
A Legal Analysis of a Preferred Method of Retail Sales | Mitchell J. Kassoff, Franchise Attorney

A Legal Analysis of a Preferred Method of Retail Sales

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.







(973) 762-1776


There are several methods of conducting a business in the area of retail sales.  They include private ownership of one or more stores, a “chain store” system, public stock ownership of companies to provide capital for expansion and franchising.  This article explores the legal aspects and benefits of conducting a business through the use of franchising.


Franchising constitutes a huge and growing part of the economy of the United States.  More than 300,000 franchised small businesses operating in the United States pump an estimated $1 trillion into the economy each year and provide jobs for some eight million Americans.[2]  It is a popular method of conducting retail sales.  The Federal Trade Commission has stated that only 6% of the 4,512 complaints received by the Federal Trade Commission concerned traditional franchise relationships.  In addition, 74% of the records represented a single complaint against a single company.[3] 


This phenomenon is not limited to the United States.  An example is England where franchising is one of the fastest growing sectors of the economy.  During the last year, the number of franchisees in England has risen by 17 percent to 35,200, with yearly turnover reaching 8.9 billion British pounds.  Approximately 317,000 people are employed in franchising in England with 29.3 percent of all retail trade in being carried out by franchised businesses.[4] 


Internationally, regulation of franchising is proceeding on an accelerated basis.  An example is that of Australia which had a Franchising Code of Conduct enacted in 1998.[5]  This code was amended on June 29, 2001 by regulations that became effective on October 1, 2001.  Another example is the Ontario (Canada) Arthur Wishart Act[6] whose purpose is to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors.


Franchising has entered the Internet era.[7]  This shows that this method of doing business should be investigated by all businesses to ascertain if they can profit from selling their products and services using franchising.  It should be noted that while the Internet is becoming increasingly important in business it does not circumvent usual legal restrictions.  One example of this is a “ponzi” or illegal pyramid scheme.  This occurred when the operators of an Internet shopping mall network falsely claimed through the site that investors could earn substantial income from commissions on products purchased through the Internet.  In reality, this scheme required the investors to recruit other participants.[8]


Franchising also provides the ability of a business to engage in the dual distribution of products.  A United States District Court ruled that a franchisor could sell vitamin products manufactured by the franchisor but marketed under a different brand name than those sold by its franchisees to a competitor of its franchisees.  The franchisees alleged the competitor’s sales of those products interfered with the franchisees’ economic expectancy in being the exclusive seller of the franchisor’s vitamin products within a contractually defined territory.  This ruling was made because the franchisees’ contract gave the franchisees exclusive rights only with respect to a specific brand of products.  The franchise agreement specifically allowed the franchisor to sell other brand products within the franchisees’ territory.[9]


A franchisor can protect its intellectual property using injunctive relief to stop a former franchisee from using its trademarks.  It can also enforce a covenant not to compete by prohibiting a former franchisee from doing business within ten miles of its former location for a period of two years.[10]


Franchising in the United States is governed by both federal law and state law.  Federal law is administered by the Federal Trade Commission.[11]  Filing of documents with the Federal Trade Commission is not required to franchise.[12]  State laws affecting franchising include franchising laws, business opportunity laws and “Little FTC Acts.”[13]  In many cases, filing of documentation of approval by the state is required prior to offering a franchise for sale within a particular state.  There are also statutes specific to certain industries in some states.[14]  In the case of franchising, a state is permitted to enact and enforce laws relating to franchising which act in addition to the provisions of federal law.[15]  In addition, franchising is increasingly being regulated by other countries.[16]


Unlike securities laws, franchise related laws are not designed to be “Blue Sky” laws, but to provide information to prospective franchisees to enable them to determine if they should purchase a particular franchise.[17]  However, some states analyze a franchisor’s financial statements and franchise agreements to make value judgments as to them.  If these documents do not meet the requirements of some state agencies, “Risk Factor” notices[18], escrow requirements[19], bonding requirements[20] or even refusal to register a franchise have been imposed[21].


Originally, franchisors had to used documents drafted according to the requirements of the Federal Trade Commission Disclosure Rule.[22]  This created a situation that required different versions of the franchise disclosure document to comply with different state disclosure requirements.  To allow franchisors to use the same document on a nationwide basis a Uniform Franchise Offering Circular (“UFOC”) was developed (and has been amended) by the Midwest Securities Commissioners Association, and its successor the North American Securities Administrators Association (“NASAA”).  The Federal Trade Commission issued a franchise disclosure rule in 1978 allowing franchisors the option of using the UFOC in lieu of its document.[23]  The UFOC is presently used by most franchisors for this reason.


Although different states have different disclosure requirements, in some cases a franchisor can use one UFOC nationwide through the use of state specific language internally in the UFOC and addendums to the disclosure section and the franchise agreement.  However, in some cases different states require contradictory disclosures that result in the necessity of having some state specific UFOCs.[24]


The UFOC is composed of several elements.  There is generally a federal cover page, a state specific cover page (with different language depending on the state)[25], a Table of Contents (listing the 23 required Items[26] (sections of the UFOC), followed by a list of exhibits in the UFOC), the disclosures for the 23 required Items, financial statements (audited financial statements for the past three fiscal years, with unaudited financial statements that are within 90 days of the filing of the UFOC, if necessary)[27], copies of all agreements that the franchisee must execute and a Receipt page for the UFOC.[28]


To register a franchisor to sell in a state additional documents must be filed.  In New York, franchising is regulated by the office of the New York State Attorney General, Investor Protection and Securities Bureau which requires a facing page, application page, two copies of the UFOC, supplemental information sheet, verification of the application, salesman disclosure forms, consent to service of process, consent to use the franchisor’s financial statements in the UFOC signed by the Certified Public Accountant who prepared them and possibly additional forms depending on specific circumstances.[29]


In certain circumstances, state registration is not necessary.  Some states do not require registration if a franchisor has a federally registered trademark or service mark and provides a UFOC to prospective franchisees[30], or if a franchisor has a certain specified amount of net worth[31], or an offer is made to a maximum of two persons[32] or an offer is made to an existing franchisee.[33]


The Federal Trade Commission has defined what is a “franchise.”[34]  In addition, each state that requires registration has its own definition of what is a “franchise”[35] to determine if registration or regulation is required by that particular state.


To offer to sell a franchise in or from New York a franchisor must first be registered.[36]  This includes the situation when an offer or sale of a franchise is made in New York when an offer to sell is made in New York, or an offer to buy is accepted in New York, or, if the franchisee is domiciled in New York, the franchised business is or will be operated in New York.  An offer to sell is made in New York when the offer either originated from New York or is directed by the offeror to New York and received at the place to which it is directed.  An offer to sell is accepted in New York when acceptance is communicated to the offeror from New York.[37]  Effectively this means that if a franchisor is located in New York it must register in New York to sell franchises either within or without New York State.


If a franchisor wishes to advertise, in many states the advertisement must first be filed with the state.[38]  Also, reports as to sales must be filed in various states.[39]  A UFOC must be given at least five business days prior to the date agreements are to be executed according to the federal rule.[40]  However, many states require that the UFOC be given to the franchisee earlier.[41]


A significant issue in franchising is the venue that litigation will be permitted in the event of a dispute between a franchisor and a franchisee.  This issue is usually addressed in the franchise agreement that usually provides for exclusive venue at the franchisor’s location.  Obviously, if a franchisor is located in New York and a franchisee is located in Texas requiring a franchisee to litigate in New York not only gives the franchisor a huge advantage, but also might even stop a franchisee from commencing litigation in the first place.


When viewing the various state statutes as to franchise law it seems clear the intent of the legislature is to protect the franchisee.  This is apparent as to the forum selection clause.  Some states explicitly state that forum selection clauses may not be or are not enforceable for franchisees located in their states.[42]  In a relatively recent case, a court in New York came to the opposite result and enforced a forum selection clause that required litigation in the franchisor’s home state outside of New York.[43]


There is also a movement on the federal level to protect franchisees.  The Small Business Franchise Act was introduced in 1999.[44]  The legislation would provide franchisees with a right of action in federal court in the event that the corporate franchise violates any provision of the bill.  It was sent to the House Subcommittee on November 17, 1999.  It was tabled during the 106th Congress.  There is bipartisan opposition to the bill in the Congress in that the bill tries to establish a “one size fits all” model to franchising.  It is felt by many that a fixed set of rules simply will not work with the many differences in franchise businesses and systems.  The bill is currently on hold in Congress.


A summary of the Small Business Franchise Act of 1999 is as follows.[45]  The bill prohibits any person, in connection with the advertising, offering, sale, or promotion of any franchise, from: (1) employing a device, scheme, or artifice to defraud; (2) engaging in an act, practice, course of business, or pattern of conduct which operates or is intended to operate as a fraud upon any prospective franchisee; (3) obtaining property, or assisting others in so doing, by negligently making an untrue statement of a material fact or failing to state a material fact; or (4) making any claim or representation which is inconsistent with or contradicts a disclosure document. Requires the franchisor to provide a written statement specifying whether the franchise agreement contains a right of renewal.


(Sec. 4)  Prohibits any franchisor or subfranchisor, in connection with the performance, enforcement, renewal, or termination of any franchise agreement, from: (1) engaging in an act, practice, course of business, or pattern of conduct which operates as a fraud upon any person; (2) hindering, prohibiting, or penalizing the free association of franchisees for any lawful purpose, including the formation of or participation in any trade association made up of franchisees; or (3) discriminating against a franchisee by imposing requirements not imposed on other similarly situated franchisees or otherwise retaliating against any franchisee for membership or participation in a franchisee association.

Prohibits a franchisor from: (1) terminating a franchise agreement prior to its expiration without good cause; or (2) prohibiting a franchisee from engaging in any business at any location after the expiration of a franchise agreement.


(Sec. 5)  Sets forth provisions concerning: (1) minimum standards of conduct (good faith, due care, and limited fiduciary duty) for each party to a franchise agreement; (2) a prohibition against requiring the inclusion of a franchise agreement term or condition which violates this Act or relieves a person from a duty or liability under this Act; (3) a prohibition against a waiver from compliance with this Act; and (4) authorized legal actions by State attorneys general on behalf of State residents for alleged violations.


(Sec. 8)  Authorizes a franchisee to assign a franchise interest to a transferee, provided such transferee satisfies reasonable qualifications applied by the franchisor in determining whether or not a current franchisee is eligible for renewal.  Provides transfer conditions, including 30 days’ prior written notice.  Outlines events that shall not be considered transfers, such as successor management by a surviving heir or incorporation.


(Sec. 9)  Prohibits a franchisor from transferring a franchise interest unless: (1) the franchisor provides 30 days prior notice to all franchisees of such intent; (2) the notice is accompanied by a complete description of the business and financial terms of the proposed transfer; and (3) upon such transfer, the transferee entity has the appropriate business experience and financial means to perform all of the franchisor’s obligations.


(Sec. 10)  Prohibits a franchisor from prohibiting a franchisee from obtaining equipment, fixtures, supplies, goods, or services (goods or services) used in the establishment or operation of the franchised business from sources of the franchisee’s choosing, with the exception that such goods or services must meet reasonable quality standards promulgated or enforced by the franchisor. Requires the franchisor to: (1) provide and continuously update a list of approved vendors for such goods or services; and (2) report at least annually revenues and profits received from the sale of such goods or services to its franchisees.


(Sec. 11)  Prohibits a franchisor from placing one or more new outlets of a franchised business within unreasonable proximity to an existing franchise, with an exception.


(Sec. 12)  Sets forth provisions concerning: (1) legal actions brought by persons injured or damaged by violations; and (2) the right to arbitration, mediation, or other nonjudicial resolution in lieu of a legal action (with a statute of limitations).


Franchising is an excellent way for a business to expand its operations and grow geographically.  Unlike a chain system, the franchisor does not have to provide capital, management and employees for each location.  This allows a franchisor to increase a company’s profits, much more rapidly than if it expanded on its own. 


As a franchisor, the company will have franchisees, people who own their own business, working for it.  Therefore, the company’s franchisees will have every possible incentive to work extremely hard to make their business a success.  A person who owns his own business will have a far greater stake in the business and work much harder than a manager, even a manager who receives a percentage of the profits of the business.


The franchisor will also have the advantage that with each new location it will immediately make money in the form of the initial franchise fee.  The franchisor typically receives $5,000 to $25,000 as an initial franchise fee.  In addition, the franchisor will receive a continuing royalty, usually in the amount of 8% to 10% percent of the gross income of the company’s franchisee.


One disadvantage of franchising is that after a franchisee has learned all there is to know about a business he resents paying a continuing royalty.  In some cases, he will try to find a way to terminate the franchise contract.  In other cases, he might try to cheat the franchisor since he believes in his mind that he is being cheated.


One other disadvantage to franchising is that the franchisor might be named in litigation involving the franchisee.  Typically, this occurs when the franchisee is sued for injuries to its personnel or customers[46] or for various types of alleged discrimination.  At this time, if the franchisor has not detailed how the franchisee has acted in this particular area, franchisors have usually been successful in defending these lawsuits.


In conclusion, franchising is an excellent way for a business to expend.  Due to the many federal and state requirements as to the various laws that affect franchisors, it is advisable that competent legal counsel who is thoroughly familiar with these laws be retained to avoid potentially devastating pitfalls.


[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, §§ to; 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, §.


[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.