Failure to Register Your FDD in New York: Factors that Franchisors Need to Know About Recission
Franchisors and "licensors" are frequently faced with private lawsuits and attorney general investigations related to alleged violations of New York's franchise registration laws. These claims, many times, involve an unsuspecting franchisor or licensor with limited activity in New York and an alleged failure to file/register a FDD with the New York Secretary of State. Examples include:
New York's franchise laws and FDD registration requirements are expansive and are not limited to franchisee outlets located within the State of New York. That is, franchisors are required to register a New York FDD not only when selling franchise units located within the state but also if the franchisor engages in "sales activities" from the state of New York - even if the "sold franchise unit" will be located in another state. For the unsuspecting franchisors sales activities that include negotiations that occur within the state of New York or from the state of New York may subject you to New York's FDD registration requirements;
Many times Licensors unknowingly transcend the line from "licensor" to "franchisor." In many instances - based on New York's expansive definition of a franchise - what you believe to be a license may constitute a franchise. When this happens, a complaint by a "licensee" may trigger an investigation by the New York Attorney General.
Enforcing New York's Franchise Regulations
The New York Attorney General (Investor Protection Bureau) is charged with the enforcement of New York's franchise regulations. When it comes to "registration violations" the best course of action (almost always) involves a clear and concise plan by which:
- The facts surrounding alleged "franchise" sales are evaluated
- A determination is made as to whether or not a violation occurred, and;
- Corrective measures (assuming a violation) are immediately employed.
These corrective measures may include notice to the Attorney General Office and issuance of a recission notice.
Although potentially costly, recission notices represent an important "corrective measure" for franchisors. The recission notice, among other things, must offer the franchisee to a refund calculated based upon (a) "consideration paid to the franchisor" (b) plus interest at the rate of six (6%) percent running from the date of the franchisees payment and (c) less income earned by the franchisor.
The New York Attorney General maintains a sample recission form. This form is a good guide for franchisors. If properly prepared and delivered to a franchisee, the recission notice has the benefit of precluding franchisee litigation.
Frequently Asked Questions
- What Do I Need To Do To Apply For A Fractional Franchise Exemption In New York?
- What Remedies are Available upon Termination or Nonrenewal of a Franchise in New York?