What is a franchise?

By: David J. Kaufmann

Mr. Kaufmann is Senior Partner of Kaufmann Gildin Robbins & Oppenheim LLP (New York City); authored the New York Franchise Act while serving as Special Deputy Attorney General of New York; is the Franchise Columnist for the New York Law Journal; serves as an Advisor to the North American Securities Administrators Association ("NASAA") Franchise Project Group; previously served as a Member of the Governing Committee of the American Bar Association Forum on Franchising; is a Past Chair of the New York State Bar Association Franchise, Licensing and Distribution Committee was named "Franchise Lawyer of the Year" by New York Magazine in 2011; was awarded the distinction of "AV Preeminent" by Martindale-Hubbell ("Highest Possible Rating in Both Legal Ability and Ethical Standards"); has been featured in Best Lawyers in America and in The New York Area's Top Lawyers from inception to date; co-authored An Introduction to the Law of Franchising (2007, 2008, 2010), FTC Disclosure Rules for Franchising and Business Opportunities - - Highlights and Analysis (2007), and served as sole author of Franchising: Business and Legal Issues and Franchising in New York; serves as Chair of all Practising Law Institute Programs on Franchising; and, previously served as Special Deputy Attorney General Assigned to the Franchise Section of the New York Attorney General's Office.

The New York Franchise Act is perhaps the nation's toughest franchise law -- and one seminal reason why is that New York's definition of the term "franchise" is the broadest in the nation, subsuming certain licensing, distribution and other arrangements which are not deemed to be "franchises" under any other federal or state franchise law, rule or regulation.

New York considers a "franchise" to exist in either of two circumstances: (i) where a franchisee, in return for a "franchise fee", is granted the right to sell goods or services under a marketing plan or system prescribed in substantial part by the franchisor, or (ii) where a franchisee, in return for a "franchise fee", is granted the right to sell or distribute goods or services substantially associated with the franchisor's trademark, logo, advertising or other commercial symbol .

This definition is in sharp contrast to that utilized by every other jurisdiction regulating the sale of franchises, where all three elements set forth above ‑‑ "trademark", "marketing plan" and "franchise fee" ‑‑ must be present for a franchise to exist. In New York, as noted, either of the first two elements combined with the franchise fee component will suffice. This broadened definition of the term "franchise" thus covers many species of licenses, distributorships and other commercial relationships not previously concerned with franchise regulation. For example, those companies engaged in the business of granting "rack job" distributorships ‑‑ that is, conferring on individuals (in return for a fee) the right to establish and/or maintain and restock product vending outlets at retail locations, and to earn commissions based on sales at those locations -- may be deemed to be "franchisors" in New York.

Counsel must be alert to the very real possibility that a client's licensing activities, distribution methods and/or retail protocols may unwittingly render it a "franchisor" in the eyes of New York law required to comply with the New York Franchise Act's requirements.

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