Franchise Alchemy

How New York Can Be a Center for International Franchising

New York prides itself on being an international hub of trade, finance, culture and diplomacy. Lawyers know that New York is also an important venue for the resolution of international disputes. Since 1984, New York has specifically promoted designating New York law as the governing law in international contracts and New York courts as the forum for the 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 outbound and inbound international franchising, the New York Franchise Sales Act (NYFSA) impedes international business in the state.

The NYFSA was enacted in 1981 and has never been amended. But with just two changes in the law, New York can break through this impediment and become a magnet for international franchising.

  • Outbound transactions: Make it clear that the NYFSA does not apply when a franchisor in New York enters into one or more agreements granting to franchise buyers abroad the right to own and operate franchises to be located exclusively outside of the United States.
  • Inbound transactions: Allow a franchisor outside the United States to grant master franchise rights in the U.S. to a single New York business to sell franchises without requiring the franchisor outside the United States to prepare detailed franchise disclosures or to register the single franchise offering to a U.S. master franchisee.

Under current New York law, both outbound and inbound international franchise sales require compliance with extensive registration and disclosure requirements.

These changes in New York law need not strip the Department of Law, also known as the Attorney General’s Office, from jurisdiction over outbound and inbound international transactions through the anti-fraud provisions under the NYFSA.

Just to clarify, in an inbound transaction where a foreign franchisor grants master franchise rights to a single New York person, the foreign franchisor would not be required to prepare a detailed franchise disclosure document (FDD) and register as a franchisor with the New York Attorney General’s Office. However, the New York master franchisee would be required to comply with the U.S. federal and state registration and disclosure requirements, which may include disclosures about the foreign franchisor.

A change in the NYFSA to relieve the foreign franchisor from the obligation of preparing an FDD and registering the offering for the single agreement would go a long way toward facilitating international franchising in New York. It would allow the foreign franchisor and the New York franchisee to move quickly to negotiate and sign the master franchise agreement.


Franchise Law Background

The sale of franchises in the U.S. is regulated by federal and state laws. The Federal Trade Commission (FTC), through its trade regulation rule on franchising (FTC Rule), requires franchisors throughout the U.S. to make detailed written disclosures to each franchise buyer before the buyer signs the franchise agreement or makes any payment to the franchisor. These disclosures must be in the prescribed format called a “franchise disclosure document” or FDD.

New York also requires franchisors to prepare an FDD and deliver it to franchise buyers before they purchase the franchise. New York and several other states also require franchisors to register their franchise offerings before they can sell franchises in the state. In New York, franchisors register their franchise offerings with the Attorney General’s Office.

Preparation of the FDD is a detailed and time-consuming process. Among other things, the FDD must include the franchisor’s audited financial statements. Franchise registration in New York entails the Department of Law’s review of the FDD for compliance and possible revisions. This review process commonly takes weeks to complete, following weeks spent preparing the FDD.


Selling Franchises Abroad

The NYFSA appears to apply to a New York franchisor’s franchise sales abroad, unlike the FTC Rule and unlike any other state franchise sales law. Whether a New York franchisor is granting a franchise for a single unit in Canada or development rights for the entire European Union or all of China, the franchise offering must be registered in New York.


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