NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
 
BILL NUMBER: A10076
SPONSOR: Rules (Schimminger)
 
TITLE OF BILL: An act to amend the general business law, in relation
to the New York franchise act
 
PURPOSE OF THE BILL: To improve the New York Franchise Act in order to
make New York State more franchise friendly.
 
SUMMARY OF SPECIFIC PROVISIONS: This legislation would eliminate
provisions of New York franchise law that are preempted by the Amended
FTC Rule and replace them with provisions that are consistent with the
federal requirements. In addition, the legislation would align the scope
of coverage of New York franchise law more closely with the franchise
laws of other states, eliminating traps for the unwary and making New
York State a more welcoming place to do business.
 
JUSTIFICATION:{1} The New York State Bar Association's Business Law
Section has proposed this legislation to amend the New York Franchise
Act (NYFA); (3BL Art. 33, §§ 680-695.
Since its enactment in 1931, the NYFA has been out of step with fran-
chise registration and disclosure laws in other states, a situation that
has led to confusion over the law arid rendered New York less attractive
and less competitive to the franchise community, as compared. to
surrounding states. The statute also has its peculiarities, like its
reference to a "prospectus" rather than an offering circular or a
disclosure document. But more importantly, the statute creates uncer-
tainties and traps for the unwary through unique features such as its
overly broad definition of a franchise and its overly broad application
to international franchise sales.
This bill addresses the following areas, among others, to improve the
NYFA and make New York more franchise friendly: definition of a fran-
chise; timing of disclosure; international scope of current law; adver-
tising franchise offers; franchise resale; broker registration; and,
disclosure document requirements.
These aspects of the current law pose impediments to doing business in
the state, while serving little or no purpose. This bill would amend the
NYFA to make conforming changes so that New York's franchise law more
Closely resembles federal law and the franchise laws of other states.
The changes are explained below:
1) Definition of a Franchise: The NYFA defines a "franchise" too broad-
ly, covering licenses and other arrangements that would not be viewed as
franchises under any other U.S. franchise disclosure law.
The definition of a franchise under most franchise sales laws contains
three elements: a fee, a trademark, and a marketing plan prescribed by
the franchisor.
The NYFA has only two elements. One element is a fee. The other, two-
pronged element is either a trademark or a marketing plan prescribed by
the franchisor. requirement poses an insurmountable problem if the
franchise registration has lapsed, because in that case, the franchisee
cannot possibly have the current FDD. In practice, it appears that the
franchisee disclosure requirement is not enforced. But because it
remains the law, this provision creates uncertainty and risk.
This bill would eliminate the requirement for franchisees to make
disclosures upon resale.
7) Broker Registration: New York and Washington are the only states that
still require the registration of franchise brokers. Other states have
eliminated this requirement, finding it burdensome and unnecessary.
This bill would eliminate the broker registration requirement.
8) Disclosure Content: The NYFA's disclosure requirements have been
almost entirely preempted by the amended FTC Rule, making a large
portion of the statute meaningless. Other states' statutes address this
issue by simply adopting the FTC's disclosure requirements or referring
to the requirements set forth in their regulations. But the NYFA has
listed required disclosures in the statute itself, making them more
difficult to change. Disclosure requirements would conform to the
amended FTC Rule's requirements under this bill.
 
PRIOR LEGISLATIVE HISTORY: New bill.
 
FISCAL IMPLICATIONS: Yet to be determined.
 
EFFECTIVE DATE: This act shall take effect immediately.
{1} The justification for this memorandum is substantively based on the
2009 report of the NYSBA Business Law Section and an article drafted by
one of the principle authors of such report, which appeared in the ABA's
publication, The Franchise Lawyer.