The definition of a franchise and the factors utilized to evaluate the existence of a franchise have important implications. That is, does the business arrangement providing for the multi-unit expansion of your business qualify as a franchise and thereby subject you to franchise regulations and disclosure requirements? The answer to this question depends on the substance of the business relationship and an evaluation of both federal and state law.
For the New York franchisor (comprised of any business – based in any state – seeking to offer or sell a franchise in the State of New York) the definition of what constitutes a franchise is more expansive that the federal definition.
Under the Federal Franchise Rule, trademarks and trademark licenses are primary and critical components of a franchise system. Without the license of a trademark, under federal law, a franchise does not exist. Under New York law however, the existence of a franchise is not dependent upon the existence of a trademark license. That is, although your business arrangement does not involve a trademark license and therefore does not qualify as a franchise under federal law, you may nevertheless be subject to New York’s franchise regulations and disclosure requirements if your business arrangement is based on a written or oral agreement providing for:
(i) A Proscribed Marketing Plan or System: The offer, sale or distribution of goods or services under a proscribed marketing plan or system; and
(ii) Payment of a Franchise Fee: The direct or indirect payment of a franchise fee. What qualifies as a franchise fee is also expansively defined and may include license fees and other charges associated with the business transaction.
Additionally, New York offers an alternative definition of a franchise replacing the proscribed marketing plan requirement (point (i) above) with a trademark license.
So, under New York law, unlike federal law, although the existence of a trademark license may give rise to a franchise relationship, it is not mandatory. In the State of New York, franchises and franchise relationships are not dependent upon the existence of trademarks and trademark licenses.
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