STATE OF NEW YORK
________________________________________________________________________
4880
2015-2016 Regular Sessions
IN ASSEMBLY
February 9, 2015
___________
Introduced by M. of A. SCHIMMINGER -- read once and referred to the
Committee on Economic Development
AN ACT to amend the general business law, in relation to the New York
franchise act
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. Section 680 of the general business law, as added by chap-
2 ter 730 of the laws of 1980, is amended to read as follows:
3 § 680. Legislative findings and declaration of policy. [1. The legis-
4 lature hereby finds and declares that the widespread sale of franchises
5 is a relatively new form of business which has created numerous problems
6 in New York. New York residents have suffered substantial losses where
7 the franchisor or his representative has not provided full and complete
8 information regarding the franchisor-franchisee relationship, the
9 details of the contract between the franchisor and franchisee, the prior
10 business experience of the franchisor, and other factors relevant to the
11 franchise offered for sale.
12 2.] It is hereby determined and declared that the offer and sale of
13 franchises, as defined in this article, is a matter affected with a
14 public interest and subject to the supervision of the state, for the
15 purpose of providing prospective franchisees [and potential franchise
16 investors] with material details of the franchise offering so that they
17 may participate in the franchise system in a manner that may avoid
18 detriment to the public interest and benefit the commerce and industry
19 of the state. Further, it is the intent of this law to prohibit the sale
20 of franchises where such sale would lead to fraud or a likelihood that
21 the franchisor's promises would not be fulfilled.
22 § 2. Section 681 of the general business law, as added by chapter 730
23 of the laws of 1980, and paragraph (b) of subdivision 3 as amended by
24 chapter 87 of the laws of 1981, is amended to read as follows:
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD08344-01-5
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1 § 681. Definitions. 1. "Advertisement" includes any [written or print-
2 ed communication, or any communication by means of recorded telephone
3 messages or spoken on radio, television, or similar communications
4 media, published in connection with an offer or sale of a franchise]
5 printed, broadcast or electronically disseminated mass or multiple
6 communication of any type or nature intended to advertise or promote a
7 franchise offering to prospective franchisees, whether communicated in
8 broadcast media, over the internet, in printed media, by email or other
9 electronic communications or otherwise.
10 2. "Department" means the department of law.
11 3. "Fractional franchise" means a franchise relationship that satis-
12 fies the following criteria when the relationship is created:
13 (a) The franchisee, any of the franchisee's current directors or offi-
14 cers, or any current directors or officers of a parent or affiliate, has
15 more than two years of experience in the same type of business; and
16 (b) The parties have a reasonable basis to anticipate that the sales
17 arising from the relationship will not exceed twenty percent of the
18 franchisee's total dollar volume in sales during the first year of oper-
19 ation.
20 4. (a) "Franchise" means a contract or agreement, either expressed or
21 implied, whether oral or written, between two or more persons by which:
22 [(a) A franchisee is granted the right to engage in the business of
23 offering, selling, or distributing goods or services under a marketing
24 plan or system prescribed in substantial part by a franchisor, and the
25 franchisee is required to pay, directly or indirectly, a franchise fee,
26 or
27 (b) A franchisee is granted the right to engage in the business of
28 offering, selling, or distributing goods or services substantially asso-
29 ciated with the franchisor's trademark, service mark, trade name, logo-
30 type, advertising, or other commercial symbol designating the franchisor
31 or its affiliate, and the franchisee is required to pay, directly or
32 indirectly, a franchise fee.
33 A franchise under this article shall not include any agreement,
34 contract, or franchise subject to the provisions of article eleven-B of
35 this chapter or section one hundred ninety-nine of this chapter, or any
36 agreement or contract for the sale of motor fuel.
37 4. A] (i) A franchisee is granted the right to engage in the business
38 of offering, selling, or distributing goods or services under a market-
39 ing plan or system prescribed in substantial part by a franchisor;
40 (ii) The operation of the franchisee's business pursuant to such plan
41 or system is substantially associated with the franchisor's trademark,
42 service mark, trade name, logotype, advertising or other commercial
43 symbol designating the franchisor or its affiliate; and
44 (iii) As a condition of obtaining or commencing operation of the fran-
45 chise, the franchisee makes a required payment or commits to make a
46 required payment to the franchisor or its affiliate.
47 (b) None of the following constitutes a "required payment" for
48 purposes of item (iii) of paragraph (a) of this subdivision:
49 (i) The purchase or agreement to purchase goods at a bona fide whole-
50 sale price;
51 (ii) The payment of a reasonable service charge to the issuer of a
52 credit card by an establishment accepting or honoring such credit card;
53 (iii) Amounts paid to a trading stamp company by a person issuing
54 trading stamps in connection with the retail sale of merchandise or
55 services;
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1 (iv) The purchase or lease, at fair market value, of real property or
2 agreement to so purchase or lease real property necessary to enter into
3 the business or to continue the business under the franchise agreement;
4 or
5 (v) The purchase of sales demonstration equipment and materials
6 furnished at cost for use in making sales and not for resale.
7 5. A "franchisee" [is] means a person to whom a franchise is granted.
8 [5. A "franchisor" is]
9 6. "Franchise seller" means a person who offers for sale, sells, or
10 arranges for the sale of a franchise. It includes the franchisor and the
11 franchisor's employees, representatives, agents, subfranchisors, and
12 third-party brokers who are involved in franchise sales activities. It
13 does not include existing franchisees who sell only their own outlet and
14 who are otherwise not engaged in franchise sales on behalf of the fran-
15 chisor.
16 7. "Franchisor" means a person who grants a franchise as the party to
17 a contract with a franchisee. Unless otherwise stated, it includes
18 subfranchisors.
19 [6. "Area franchise" means a contract or agreement between a franchi-
20 sor and a subfranchisor whereby the subfranchisor is granted the right,
21 for consideration given in whole or in part for such right, to sell or
22 negotiate the sale of franchises in the name or on behalf of the fran-
23 chisor; unless specifically stated otherwise, "franchise" includes "area
24 franchise".
25 7. "Franchise fee" means any fee or charge that a franchisee or
26 subfranchisor is required to pay or agrees to pay directly or indirectly
27 for the right to enter into a business under a franchise agreement or
28 otherwise sell, resell or distribute goods, services, or franchises
29 under such an agreement, including, but not limited to, any such payment
30 for goods or services. The following are not the payment of a franchise
31 fee:
32 (a) The purchase or agreement to purchase goods at a bona fide whole-
33 sale price;
34 (b) The payment of a reasonable service charge to the issuer of a
35 credit card by an establishment accepting or honoring such credit card;
36 (c) Amounts paid to a trading stamp company by a person issuing trad-
37 ing stamps in connection with the retail sale of merchandise or
38 services;
39 (d) The purchase or lease, at fair market value, of real property or
40 agreement to so purchase or lease real property necessary to enter into
41 the business or to continue the business under the franchise agreement;
42 (e) The payment of a fee which on an annual basis does not exceed five
43 hundred dollars where the payor receives sales materials of an equiv-
44 alent or greater value than his payment;
45 (f) The purchase of sales demonstration equipment and materials
46 furnished at cost for use in making sales and not for resale;
47 (g) A lease, license or other agreement by a retailer permitting the
48 lessee, licensee or beneficiary to offer, sell or distribute goods or
49 services on or about the premises occupied by said retailer.
50 8. "Franchise sales agent" means a person who directly or indirectly
51 engages in the offer or sale of any franchise on behalf of another.
52 Franchisors, subfranchisors, and their employees are not to be consid-
53 ered franchise sales agents.
54 9. "Franchise salesman" means each and every person employed by a
55 franchisor or franchise sales agent for the purpose of representing such
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1 franchisor or franchise sales agent in the offer or sale of any fran-
2 chise.
3 10.] 8. "Fraud," "fraudulent practice," and "deceit" are not limited
4 to common law fraud or deceit, and include:
5 (a) Any deception, concealment, suppression, device, scheme or arti-
6 fice employed by a [franchisor, franchise sales agent, subfranchisor or
7 franchise salesman] franchise seller to obtain any money, promissory
8 note, commitment or property by any false or visionary pretense, repre-
9 sentation or promise;
10 (b) Any material misrepresentation in any registered [prospectus]
11 disclosure document filed under this article; or
12 (c) The omission of any material fact in any registered [prospectus]
13 disclosure document filed under this article.
14 [11.] 9. "Offer" or "offer to sell" includes any attempt to offer to
15 dispose of, or solicitation of an offer to buy, a franchise or interest
16 in a franchise for value. The terms "offer" and "offer to sell" do not
17 include the renewal or extension of an existing franchise where there is
18 no interruption in the operation of the franchised business by the fran-
19 chisee.
20 [12.] 10. (a) An offer or sale of a franchise is made in this state
21 when an offer to sell is made in this state, or an offer to buy is
22 accepted in this state, or, if the franchisee is domiciled in this
23 state, the franchised business is or will be operated in this state.
24 (b) An offer to sell is made in this state when the offer either orig-
25 inated from this state or is directed by the offeror to this state and
26 received at the place to which it is directed. An offer to sell is
27 accepted in this state when acceptance is communicated to the offeror
28 from this state.
29 (c) An offer to sell is not made in this state merely because a
30 publisher circulates or there is circulated on his behalf in this state
31 a bona fide newspaper or other publication of general, regular and paid
32 circulation which has had more than two-thirds of its circulation
33 outside this state during the past twelve months, or a radio or tele-
34 vision program originating outside this state is received in this state.
35 [13.] 11. "Person" means an individual, corporation, limited liability
36 company, limited or general partnership, joint venture, association,
37 company, trust, unincorporated organization or other entity and shall
38 include any other person that has a substantial interest in or effec-
39 tively controls such person, as well as the individual officers, direc-
40 tors, general partners, managing partners, limited liability company
41 managers or managing members, trustees or other individuals in control
42 of the activities of each such person.
43 12. "Prospective franchisee" means any person (including any agent,
44 representative or employee)_ who approaches or is approached by a fran-
45 chise seller to discuss the possible establishment of a franchise
46 relationship.
47 [14.] 13. "Publish" means publicly to issue [or], circulate or dissem-
48 inate by newspaper, mail, radio [or], television, electronic communi-
49 cations (including those achieved through the internet, electronic mail
50 and other forms of electronic or computer communications) or otherwise
51 [to disseminate to the public].
52 [15.] 14. "Sale" or "sell" includes every contract or agreement of
53 sale, contract to sell, or disposition of, a franchise or interest in a
54 franchise for value. "Sale" or "sell" does not include the transfer,
55 sale or assignment of a franchise by an existing franchisee where the
56 franchisor had no significant involvement in arranging for or effectuat-
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1 ing the franchisee's sale, transfer or assignment of its franchise. A
2 franchisor's approval or disapproval of a franchisee sale, transfer or
3 assignment alone is not deemed to be significant involvement. A
4 franchisor's entering into of a substitute franchise agreement with a
5 franchise purchaser, transferee or assignee is not deemed to be signif-
6 icant involvement if such substitute agreement contains terms and condi-
7 tions that do not differ materially from the original franchise agree-
8 ment.
9 [16.] 15. "State" means any state, territory, or possession of the
10 United States, including the District of Columbia and Puerto Rico.
11 [17.] 16. "Subfranchisor" means a franchisee [who has the right to
12 sell or subdivide his franchise to another or others, known as "subfran-
13 chisees," while having and retaining all or part of the franchisor's
14 interest or rights under franchise agreements with such subfranchisee.
15 Under this article and in this situation, the subfranchisee shall be
16 considered the franchisee, and both the principal franchisor and the
17 subfranchisor shall be considered the franchisor] whose franchise
18 includes the right to grant franchises to other persons, meaning to
19 offer and enter into agreements with other persons granting franchise
20 rights to such other persons (known as "subfranchisees"). Under this
21 article, both the principal franchisor and the subfranchisor shall be
22 considered the "franchisor" in instances in which both are involved in
23 offering and selling the subject franchise and both fulfill post-sale
24 obligations to the subject subfranchisee. Under this article, only the
25 subfranchisor shall be considered the "franchisor", to the exclusion of
26 the principal franchisor, if it is the subfranchisor alone which offers
27 and sells franchises to subfranchisees and is entirely responsible for
28 fulfilling all contractual duties and obligations to such franchisees.
29 Under this article, a subfranchisee shall be considered a "franchisee".
30 [18.] 17. In any proceeding under this article, the burden of proving
31 an exemption or an exception from a definition is upon the person claim-
32 ing it.
33 § 3. Section 682 of the general business law, as added by chapter 730
34 of the laws of 1980, is amended to read as follows:
35 § 682. Scope. The disclosure requirements mandated by this article
36 apply to all [written or oral arrangements between a franchisor and
37 franchisee in connection with the offer or sale of a franchise, includ-
38 ing, but not limited to, the franchise offering, the franchise agree-
39 ment, sales of goods or services, leases and mortgages of real or
40 personal property, promises to pay, security interests, pledges, insur-
41 ance, advertising, construction or installation contracts, servicing
42 contracts, and all other arrangements in which the franchisor or
43 subfranchisor has an interest] offers and sales of franchises made in
44 this state, except for those offers and sales that are specifically
45 exempted or excluded by this article.
46 § 4. Section 683 of the general business law, as added by chapter 730
47 of the laws of 1980, subdivision 8 as amended by chapter 193 of the laws
48 of 1982, is amended to read as follows:
49 § 683. [Disclosure] Registration and disclosure requirements. 1. It
50 shall be unlawful and prohibited for any person to offer to sell or sell
51 in this state any franchise unless and until there shall have been
52 registered with the department of law, prior to such offer or sale, a
53 written [statement to be known as an "offering prospectus"] franchise
54 disclosure document concerning the contemplated offer or sale, which
55 shall contain the information and representations set forth in and
56 required by this [section] article and the regulations promulgated under
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1 this article, except as otherwise provided under section six hundred
2 eighty-four of this article. Any uniform disclosure document approved
3 for use by any agency of the federal government or sister state may be
4 utilized and sought to be registered, provided that said uniform disclo-
5 sure documents comply with the provisions of this article.
6 2. [The offering prospectus sought to be registered with the depart-
7 ment of law shall be filed with the department, accompanied by an appli-
8 cation for registration on forms prescribed by the department, and shall
9 contain the following:
10 (a) The name of the franchisor, the name under which the franchisor is
11 doing or intends to do business, and the name of any parent or affil-
12 iated company that will engage in business transactions with franchi-
13 sees.
14 (b) The franchisor's principal business address and the name and
15 address of its agent in this state authorized to receive process.
16 (c) The business form of the franchisor, whether corporate, partner-
17 ship, or otherwise.
18 (d) Such information concerning the identity and business experience
19 of persons affiliated with the franchisor as the department of law may
20 by rule prescribe.
21 (e) A statement as to whether the franchisor and its principals, offi-
22 cers, partners, directors, or any other person identified in the appli-
23 cation for registration:
24 (1) Has been convicted of a felony, or pleaded nolo contendere to a
25 felony charge, or held liable or enjoined in a civil action by a final
26 judgment if such civil action involved fraud, embezzlement, fraudulent
27 conversion or misappropriation of property.
28 (2) Is subject to any currently effective order of the United States
29 securities and exchange commission or the securities administrator of
30 any state denying the registration of or barring, revoking or suspending
31 the registration of such person as a securities broker or dealer, or
32 investment advisor, or securities agent or registered representative, or
33 is subject to any currently effective order of any national securities
34 association or national securities exchange, as defined in the Securi-
35 ties and Exchange Act of 1934, suspending or expelling such person from
36 membership in such association or exchange.
37 (3) Is subject to a currently effective order or ruling of the federal
38 trade commission.
39 (4) Is subject to any currently effective injunctive or restrictive
40 order relating to business activity as a result of an action brought by
41 a public agency or department, including, without limitation, actions
42 affecting a license as a real estate broker or salesman.
43 Such statement shall set forth the court, date of conviction or judg-
44 ment, any penalty imposed or damages assessed, or the date, nature and
45 issuer of such order.
46 (f) The length of time the franchisor: (1) has conducted a business of
47 the type to be operated by the franchisees, (2) has granted franchises
48 for such business, and (3) has granted franchises in other lines of
49 business.
50 (g) The most recent financial statement of the franchisor, together
51 with a statement of any material changes in the financial condition of
52 the franchisor from the date thereof. The department of law may by rule
53 or order prescribe (1) the form and content of financial statements
54 required under this article, (2) the circumstances under which consol-
55 idated financial statements shall be required, and (3) the circumstances
A. 4880 7
1 under which financial statements shall be audited by independent certi-
2 fied public accountants.
3 (h) A statement of the franchise fee charged, the proposed application
4 of the proceeds of such fee by the franchisor, and the formula by which
5 the amount of the fee is determined if the fee is not uniform and the
6 same in all cases.
7 (i) A statement describing any payments or fees other than franchise
8 fees that the franchisee or subfranchisor is required to pay to the
9 franchisor, including royalties and payments of fees which the franchi-
10 sor collects in whole or in part on behalf of a third party or parties.
11 (j) A statement of the conditions under which the franchise agreement
12 may be terminated or renewal refused or repurchased at the option of the
13 franchisor.
14 (k) A statement as to whether, by the terms of the franchise agreement
15 or by other device or practice, the franchisee or subfranchisor is
16 required to purchase from the franchisor or his designee services,
17 supplies, products, fixtures or other goods relating to the establish-
18 ment or operation of the franchise business, together with a description
19 and the terms and conditions thereof.
20 (l) A statement as to whether, by the terms of the franchise agreement
21 or other device or practice, the franchisee is limited in the goods or
22 services offered by him to his customers.
23 (m) A statement of the terms and conditions of any financing arrange-
24 ments when offered directly or indirectly by the franchisor or his agent
25 or affiliate.
26 (n) A statement of any past or present practice or of any intent of
27 the franchisor to sell, assign, or discount to a third party any note,
28 contract, or other obligation of the franchisee or subfranchisor in
29 whole or in part.
30 (o) Any representation of estimated or projected franchisee earnings
31 or income, together with a statement setting forth the data, methods and
32 computations upon which such estimate or projection is based.
33 (p) A statement of any compensation or other benefit given or promised
34 to a public figure arising, in whole or in part, from (1) the use of the
35 public figure in the name or symbol of the franchise, or (2) the
36 endorsement or recommendation of the franchise by the public figure in
37 advertisements.
38 (q) A statement of the total number and location of franchises pres-
39 ently operating and proposed to be sold.
40 (r) A statement as to whether franchisees or subfranchisors receive an
41 exclusive area or territory.
42 (s) A representation that the registered prospectus does not knowingly
43 omit any material fact or contain any untrue statement of a material
44 fact.
45 (t) Other information which the franchisor may desire to present.
46 (u) Other information or such additional disclosures related to the
47 offer or sale of the franchise as the department of law may prescribe by
48 rules or regulations promulgated under section six hundred ninety-four
49 of this article as will afford prospective franchisees an adequate basis
50 upon which to found their judgment.
51 (v) When the person filing the application for registration of an
52 offering prospectus is a subfranchisor, the prospectus shall also
53 include the same information concerning the subfranchisor as is required
54 from the franchisor pursuant to this article.
55 3. Applications for registration of an offering prospectus shall be
56 signed and verified by the franchisor or by the subfranchisor in the
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1 same manner provided in the civil practice law and rules for the verifi-
2 cation of pleadings.
3 4. Every application by a franchisor for registration of an offering
4 prospectus shall be accompanied by a copy of the typical franchise
5 contract or agreement proposed for use or in use in this state, includ-
6 ing all amendments, deletions, variations, and supplements thereto.
7 5. Every application by a franchisor for registration of an offering
8 prospectus shall be accompanied by] The department will not register a
9 franchise disclosure document submitted to the department with an appli-
10 cation for registration unless the franchise disclosure document
11 contains such disclosures as the department may by rule or regulation
12 require, together with such materials, data, records, [or] and other
13 information as the department may by rule or regulation require [in
14 connection with its consideration of the application].
15 [6.] 3. The [offering prospectus] franchise disclosure document shall
16 recite [in bold type of not less than twelve-point] that registration
17 does not [constitute approval, recommendation, or endorsement by] mean
18 that the department [of law] recommends the franchise or has verified
19 the information in the disclosure document. The department may require
20 that the applicant set forth in its [prospectus] franchise disclosure
21 document potentially adverse information [in]. The department may speci-
22 fy designated positions and [in a] type [size] sizes acceptable to the
23 department for the disclosure required by this subdivision.
24 [7.] 4. Unless otherwise provided by regulation issued by the depart-
25 ment, applications to register the [offering prospectus] franchise
26 disclosure document required by subdivision one of this section shall be
27 filed with the department [of law] at its office in the city of New York
28 [prior to the offering of the franchise involved]. No offer, advertise-
29 ment, or sale of [such] a franchise described in the franchise disclo-
30 sure document shall be made in or from the state of New York until the
31 department has issued to the franchisor [or other offeror] a letter
32 stating that the [offering prospectus] franchise disclosure document
33 sought to be registered has been [accepted for filing and filed] regis-
34 tered. The department, not later than thirty days after such filing,
35 shall issue such a letter or, in the alternative, a notification in
36 writing indicating the respect in which the application for registration
37 or the proposed [offering prospectus] franchise disclosure document
38 itself is deficient or otherwise fails to make adequate disclosure. [A
39 refusal to register an offering prospectus, and notification thereof,
40 shall be forthcoming] The department shall deny registration of a fran-
41 chise disclosure document and shall notify the applicant of such denial
42 if the department finds:
43 (a) That there has been a failure to comply with any of the provisions
44 of this article or the rules of the department pertaining thereto.
45 (b) That the offer or sale of the franchise would constitute misrepre-
46 sentation to, or deceit or fraud of, prospective franchisees.
47 (c) That the application for registration of the [offering prospectus
48 or the] proposed [offering prospectus] franchise disclosure document
49 itself is incomplete in any material respect or contains any statement
50 which is, in light of the circumstances under which it was made, false
51 or misleading with respect to any material fact.
52 (d) That the franchisor's method of business includes or would include
53 activities which are illegal where performed.
54 (e) That a person identified in the application who has been convicted
55 of an offense [described in subparagraph one of paragraph (e) of subdi-
56 vision two of this section,] is subject to an administrative order, or
A. 4880 9
1 has had a civil judgment entered against him involving the illegal
2 offering of franchises or securities, and the department determines that
3 the involvement of the person in the sale or management of the franchise
4 creates an unreasonable risk to prospective franchisees.
5 (f) That the franchise offering sought to be registered is the subject
6 of a permanent or temporary injunction entered under any federal or
7 state act applicable to the offering.
8 (g) That the franchisor has failed to pay the [proper] fee required by
9 the department.
10 [8. A franchise which is subject to registration under this article
11 shall not be sold without first providing to the prospective franchisee,
12 a copy of the offering prospectus, together with a copy of all proposed
13 agreements relating to the sale of the franchise at the earlier of (a)
14 the first personal meeting between the franchisor or its agent and the
15 prospective franchisee, (b) at least ten business days prior to the
16 execution of a binding franchise or other agreement, or (c) at least ten
17 days prior to the receipt of any consideration in connection with the
18 sale or proposed sale of a franchise. For the purposes of this chapter,
19 the words: (i) "first personal meeting" shall mean the first face to
20 face meeting between a franchisor or franchisor's agent or any represen-
21 tative or employee thereof and a prospective franchisee which is held
22 for the purpose of discussing the sale or possible sale of a franchise;
23 (ii) "other agreement" shall mean an agreement imposing a binding legal
24 obligation on such prospective franchisee, about which the franchisor,
25 franchise sales agent, or any agent, representative or employee thereof,
26 knows or should know, in connection with the sale or proposed sale of a
27 franchise; and, (iii) "receipt of any consideration" shall mean the
28 payment by a prospective franchisee, about which the franchisor, fran-
29 chise sales agent, or any agent, representative or employee thereof,
30 knows or should know, of any consideration in connection with the sale
31 or proposed sale of a franchise.]
32 5. To enhance the uniform and efficient administration and the effec-
33 tive enforcement of this article, it is the intent of the legislature
34 that the department maintain a risk-based process of reviewing applica-
35 tions for registration of franchise disclosure documents. Under the
36 risk-based review process, the department shall focus on reviewing
37 application information posing significant risk to prospective franchi-
38 sees, with emphasis on risks associated with the franchisor's financial
39 condition, the franchisor's compliance record, and significant deficien-
40 cies with the franchisor's application. When reviewing franchise regis-
41 tration applications under this article, the department shall concen-
42 trate on helping to prevent misappropriation, mismanagement, and
43 misrepresentation in connection with the offer or sale of any franchise
44 subject to this article.
45 6. (a) A franchisor may not sell a franchise subject to registration
46 in this state without delivering to the prospective franchisee a copy of
47 the franchisor's currently registered franchise disclosure document at
48 the earlier of: (i) fourteen calendar days before the prospective fran-
49 chisee signs a binding agreement with the franchisor, or (ii) fourteen
50 calendar days before the prospective franchisee pays any consideration
51 to the franchisor or its affiliate that relates to the proposed fran-
52 chise sale. Such fourteen calendar day period shall commence the day
53 after the disclosure document is received, or deemed received, by the
54 prospective franchisee. The franchisor shall deliver to the prospective
55 franchisee a copy of the franchisor's currently registered franchise
A. 4880 10
1 disclosure document earlier in the sales process upon the prospective
2 franchisee's reasonable request.
3 (b) If the franchise disclosure document has been amended or otherwise
4 revised after the franchisor has furnished it to the prospective fran-
5 chisee, but before the franchise sale, then, except as set forth in
6 paragraph (c) of this subdivision, the franchisor shall furnish to such
7 prospective franchisee a copy of the franchisor's amended or revised
8 disclosure document before the prospective franchisee signs an agreement
9 or makes any payment to the franchisor or its affiliate in connection
10 with the sale of the franchise.
11 (c) If the franchise disclosure document has been amended or otherwise
12 revised after the franchisor has furnished it to the prospective fran-
13 chisee, but before the franchise sale, and such amendment includes a
14 material alteration of the franchise agreement or any related agreement,
15 then the franchisor shall furnish to the prospective franchisee a copy
16 of each such revised agreement at least seven calendar days before the
17 prospective franchisee signs an agreement or makes any payment to the
18 franchisor or its affiliate in connection with the sale of the fran-
19 chise, such seven calendar day period to commence the day after the
20 franchisor furnishes the revised agreement to the prospective franchi-
21 see. Changes to an agreement that arise out of negotiations initiated
22 by the prospective franchisee do not trigger this seven calendar day
23 waiting period.
24 (d) A franchisor will have satisfied its disclosure obligations under
25 this subdivision if the franchisor has: (i) hand delivered, sent by
26 overnight delivery service, faxed, emailed or otherwise delivered to the
27 prospective franchisee the franchisor's latest registered franchise
28 disclosure document by the required date or dates; (ii) furnished to the
29 prospective franchisee directions for accessing the franchisor's latest
30 registered franchise disclosure document on the internet or by other
31 readily accessible electronic means by the required date or dates; or,
32 (iii) sent a paper or tangible electronic copy, including, but not
33 limited to, computer disk or CD-ROM to the address specified by the
34 prospective franchisee by first class United States mail at least three
35 calendar days before the required date or dates.
36 [9.] 7. (a) A franchisor shall promptly notify the department in writ-
37 ing, by an application to amend the registered [offering prospectus]
38 franchise disclosure document, of any material change in the information
39 contained in the [prospectus as originally submitted or amended] disclo-
40 sure document. The department may further define by rule what is a
41 material change for the purpose and circumstances under which an amend-
42 ment of a registered [prospectus] disclosure document shall be mandato-
43 ry.
44 (b) An amendment to a registered [offering prospectus] franchise
45 disclosure document filed after the effective date of the registration
46 of the original [offering prospectus] franchise disclosure document, if
47 the amendment is approved by the department, shall become effective on
48 such date the department may determine, having due regard for the public
49 interest and the protection of franchisees.
50 [10.] 8. (a) Neither the fact that an application for registration of
51 [an offering prospectus] a franchise disclosure document under this
52 article has been filed, nor the fact that such registration has become
53 effective, constitutes a finding by the department that any document
54 filed under this article, including the registered [offering prospectus]
55 franchise disclosure document, is true, complete or not misleading.
56 Neither any such fact nor the fact that an exemption is available for a
A. 4880 11
1 transaction means that the department has passed in any way upon the
2 merits or qualifications of, or recommended or given approval to, any
3 person, franchise, or transaction.
4 (b) It is unlawful to make or cause to be made to any prospective
5 purchaser or offeree a representation inconsistent with paragraph (a) of
6 this subdivision.
7 [11. No offer of a franchise shall be made except by the offering
8 prospectus registered with the department of law pursuant to this
9 section. Any advertisement in whatever form, including periodicals or on
10 radio or television, shall contain a statement that no offer of such
11 franchise is made except by such offering prospectus, and all such
12 advertising shall be consistent with the representations and information
13 required to be set forth in such prospectus as hereinbefore in this
14 section provided.
15 12. In all literature employed in the offer and sale of a franchise
16 and in all advertising in connection therewith, there shall be
17 contained, in easily readable print on the face thereof, a statement
18 that the filing of an application for registration of an offering pros-
19 pectus or the acceptance and filing thereof by the department of law as
20 required by this section does not constitute approval of the offering or
21 the sale of such franchise by the department of law or the attorney
22 general of this state.
23 13. A person shall not offer to sell or sell a franchise in this state
24 on behalf of a franchisor or subfranchisor, except in transactions
25 exempted under this article, unless the franchisor or subfranchisor and
26 the person file a franchise agent's application with the department of
27 law on the form prescribed by the department, and the department issues
28 an order of registration for such person. The department may prescribe
29 rules relating to the qualifications, conduct, and denial, suspension,
30 or revocation or registrations of franchise sales agents.
31 14.] 9. All advertising, marketing and promotion of a franchise offer-
32 ing in whatever form - whether print, broadcast, electronic or otherwise
33 - shall be consistent with the representations and information set forth
34 in the franchise disclosure document.
35 10. (a) Every franchisor [or] and subfranchisor offering franchises
36 for sale in this state shall keep and maintain a complete set of books
37 and records and shall keep and maintain accounts of franchise sales in
38 accordance with generally accepted accounting principles, and shall make
39 and file with the department such reports as the department may by rule
40 prescribe, including an annual report setting forth the franchises sold
41 by it [and the proceeds derived therefrom], and shall furnish to the
42 department such materials relating to the offer or sale of the franchise
43 as it may by rule require. All such records are subject at any time to
44 reasonable periodic, special, or other examinations by a representative
45 of the department, within or without this state, as the department deems
46 necessary or appropriate in the public interest or for the protection of
47 [investors] franchisees.
48 (b) The department may consider the opinions, appraisals, and reports
49 of engineers, appraisers, or other experts which may be presented by an
50 applicant or any interested party, on any question of fact concerning or
51 affecting the franchises proposed to be offered and sold. In lieu of, or
52 in addition to, such opinions, appraisals, and reports, the department
53 may have any or all matters concerning or affecting such franchises
54 investigated, appraised, passed upon, and certified to it by engineers,
55 appraisers, or other experts selected by it. The experts' cost of travel
56 and lodging relating to such investigation, and the costs of experts'
A. 4880 12
1 fees, shall be borne by the applicant and shall be paid before effec-
2 tiveness of its registration, provided that the applicant shall have
3 agreed in writing with the department to bear such costs and fees, or
4 shall have had the opportunity to establish that no good cause exists
5 for such investigation or expenditure, or shall have himself furnished
6 the desired information to the department.
7 (c) If information that the department deems necessary relating to the
8 franchise is requested by the department and is not furnished by the
9 applicant, or the department deems information submitted to be unreli-
10 able or substantially incomplete, the department may investigate any or
11 all matters concerning or affecting such franchise. The costs of all
12 travel and lodging expenses relating to investigations outside of this
13 state shall be borne by the applicant and shall be paid before effec-
14 tiveness of its registration.
15 [15.] 11. The department may by rule require the filing and approval
16 prior to use of any pamphlet, circular, form letter, advertisement, or
17 other sales literature or advertising communication addressed to or
18 intended for distribution to prospective franchisees.
19 § 5. Section 684 of the general business law, as added by chapter 730
20 of the laws of 1980, and subdivision 6 as further amended by section 104
21 of part A of chapter 62 of the laws of 2011, is amended to read as
22 follows:
23 § 684. Exemptions. 1. The department [of law] is hereby authorized and
24 empowered to exempt by rule or regulation any person, franchise, or
25 transaction from any provision of section six hundred eighty-three of
26 this article or from any rule or regulation thereunder if the department
27 finds that such action is not inconsistent with the public interest or
28 the protection of prospective franchisees.
29 2. The department [of law] may, upon application and within its
30 discretion, exempt from the registration and disclosure requirements of
31 section six hundred eighty-three of this article the offer and sale of a
32 franchise if:
33 (a) The franchisor has a net worth on a consolidated basis, according
34 to its most recently audited financial statement, of not less than five
35 million dollars; or the franchisor has a net worth, according to its
36 most [recently audited] recent financial statement, of not less than one
37 million dollars and is at least eighty percent owned by a corporation
38 which has a net worth on a consolidated basis, according to its most
39 recently audited financial statement, of not less than five million
40 dollars; and
41 (b) The franchisor files with the department [of law] an application
42 for an exemption, on forms and in the manner prescribed by the depart-
43 ment, and a consent to service of process on the form required by the
44 department[; and].
45 [(c) The franchisor discloses in writing to each prospective franchi-
46 see, at least seven days prior to the execution by the prospective fran-
47 chisee of any binding franchise or other agreement, or at least seven
48 days prior to the receipt of any consideration, whichever occurs first,
49 the following information:
50 (1) The name of the franchisor, the name under which the franchisor is
51 doing or intends to do business, and the name of any parent or affil-
52 iated company that will engage in business transaction with the franchi-
53 see.
54 (2) The franchisor's principal business address and the name and
55 address of its agent in this state authorized to receive process.
A. 4880 13
1 (3) The business form of the franchisor, whether corporate, partner-
2 ship, or otherwise.
3 (4) Such information concerning the identity and business experience
4 of persons affiliated with the franchisor as the department may by rule
5 prescribe.
6 (5) The business experience of the franchisor, including the length of
7 time the franchisor (i) has conducted a business of the type to be oper-
8 ated by franchisees, (ii) has granted franchises for such business, and
9 (iii) has granted franchises in other lines of business.
10 (6) A copy of the typical franchise contract or agreement proposed for
11 use and in use in this state, including all amendments, deletions, vari-
12 ations, and supplements thereto.
13 (7) A statement of the franchise fee charged, the proposed application
14 of the proceeds of such fee by the franchisor, and the formula by which
15 the amount of the fee is determined if the fee is not uniform and the
16 same in all cases.
17 (8) A statement describing any payments or fees other than franchise
18 fees that the franchisee is required to pay to the franchisor, including
19 royalties and payments or fees which the franchisor collects in whole or
20 in part on behalf of a third party or parties.
21 (9) A statement of the conditions under which the franchise agreement
22 may be terminated or renewal refused, or repurchased at the option of
23 the franchisor.
24 (10) A statement as to whether, by the terms of the agreement or by
25 other device or practice, the franchisee is required to purchase from
26 the franchisor or his designee services, supplies, products, fixtures or
27 other goods relating to the establishment or operation of the franchise
28 business, together with a description and the terms and conditions ther-
29 eof.
30 (11) A statement as to whether, by the terms of the franchise agree-
31 ment or by other device or practice, the franchisee is limited in the
32 goods or services offered by him to his customers.
33 (12) A statement of the terms and conditions of any financing arrange-
34 ments when offered directly or indirectly by the franchisor or his agent
35 or affiliate.
36 (13) A statement of any past or present practice or of any intent of
37 the franchisor to sell, assign, or discount to a third party any note,
38 contract, or other obligation of the franchisee in whole or in part.
39 (14) If any statement of estimated or projected franchisee earnings or
40 income is used, a statement of such estimate or projection and the data,
41 methods and computations upon which such estimate or projection is
42 based.
43 (15) A statement as to whether franchisees receive an exclusive area
44 or territory.
45 (16) Other information related to the offer and sale of the franchise
46 as the department of law may reasonably require.
47 (d) Applications for exemptions shall be signed and verified by the
48 franchisor in the same manner provided in the civil practice law and
49 rules for the verification of pleadings, and shall be filed with the
50 department of law at its office in the city of New York.]
51 Applications for exemptions shall be filed with the department in the
52 manner described in regulations promulgated by the department hereunder
53 under authority vested by section six hundred ninety-four of this arti-
54 cle and shall be filed at the department's office in the city of New
55 York or such other location as the regulations may specify.
A. 4880 14
1 3. There shall be exempted from the registration and disclosure
2 provisions of section six hundred eighty-three of this article the offer
3 and sale of a franchise if:
4 (a) [(i)] The franchisor has a net worth on a consolidated basis,
5 according to its most recent audited financial statement, of not less
6 than fifteen million dollars; or the franchisor has a net worth, accord-
7 ing to its most recent [audited] financial statement, of not less than
8 [three] one million dollars and is at least eighty percent owned by a
9 corporation which has a net worth on a consolidated basis, according to
10 its most recent audited financial statement, of not less than fifteen
11 million dollars[; and].
12 [(ii) The franchisor discloses in writing to each prospective franchi-
13 see, at least seven days prior to the execution by the prospective fran-
14 chisee of any binding franchise or other agreement, or at least seven
15 days prior to the receipt of any consideration, whichever occurs first,
16 such information as is required to be disclosed under subparagraph two
17 of paragraph (c) of subdivision two of this section.]
18 (b) The offer or sale is to a bank, savings institution, trust compa-
19 ny, insurance company, investment company, or other financial institu-
20 tion, association, or institutional buyer, or to a broker-dealer, where
21 the purchaser is acting for itself or in some fiduciary capacity.
22 (c) The transaction is pursuant to an offer directed by the franchisor
23 to not more than two persons, other than persons specified in this
24 subdivision, if [the franchisor does not grant the franchisee the right
25 to offer franchises to others,] a commission or other remuneration is
26 not paid directly or indirectly for soliciting a prospective franchisee
27 in this state, and the franchisor is domiciled in this state or has
28 filed with the department [of law] its consent to service of process on
29 the form prescribed by the department.
30 (d) The offer or sale by a franchisor of a franchise to one of [his]
31 the franchisor's existing franchisees. This exemption shall apply where:
32 (i) the existing franchisee has actively operated a franchise of the
33 selling franchisor for the eighteen months preceding the offer; and
34 (ii) the existing franchisee purchases the franchise in order to oper-
35 ate the business and not for the purpose of resale; and
36 (iii) the franchisor reports the sale to the department [of law on the
37 form required by the department within fifteen days of the sale] in the
38 annual report required by this article.
39 [4. The department of law may, in its discretion, deny or revoke an
40 exemption with respect to a specific franchisor or transaction, or with-
41 draw or further condition any exemption enumerated in this section.
42 5.] (e) The franchise relationship is a fractional franchise.
43 (f) The franchise relationship is a leased department.
44 (g) The franchise is governed by the federal petroleum marketing prac-
45 tices act or any successor thereto, article eleven-B of this chapter, or
46 section one hundred ninety-nine of this chapter.
47 (h)(i) The franchisee's initial investment, excluding any financing
48 received from the franchisor or an affiliate and excluding the cost of
49 unimproved land, totals at least one million dollars, provided that, if
50 the prospective franchisee is an investor group, at least one individual
51 within such group qualifies for the exemption by investing at this
52 threshold level, and (ii) the prospective franchisee signs an acknowl-
53 edgment verifying the grounds for the exemption.
54 (i) The franchisee or its parent or any affiliate is an entity that
55 has been in business for at least five years and has a net worth of at
56 least five million dollars.
A. 4880 15
1 (j) One or more purchasers of at least a fifty percent ownership
2 interest in the franchise, within sixty days of the sale, has been, for
3 at least two years, an officer, director, general partner, individual
4 with management responsibility for the offer and sale of the
5 franchisor's franchises or an administrator of the franchised network,
6 or within sixty days of the sale has been, for at least two years, an
7 owner of at least a twenty-five percent interest in the franchisor.
8 (k) The total required payment by the franchisee to the franchisor
9 during the first six months after commencing operation of the franchise
10 is less than five hundred dollars.
11 (l) The parties contemplate, at the time the franchise agreement is
12 signed, that all franchised locations will be located outside of the
13 United States, its territories and possessions.
14 4. The offer or sale of a franchise by a franchisee for [his] the
15 franchisee's own account [or the offer and sale of an entire area fran-
16 chise owned by a subfranchisor for his own account] is exempted from the
17 registration and disclosure provisions of section six hundred eighty-
18 three of this article if:
19 (a) The sale is an isolated sale and not part of a plan of distrib-
20 ution of franchises; and
21 (b) The sale is not "effected by or through a franchisor[; and]"
22 [(c) The franchisee furnishes to the prospective purchaser, at least
23 one week prior to the execution of any binding contract or purchase
24 agreement, or at least one week prior to the receipt of any consider-
25 ation, whichever occurs first, a copy of the offering prospectus of the
26 franchisor (including amendments, if any) currently registered with the
27 department of law.]
28 A sale is not "effected by or through a franchisor [merely because a]"
29 if the franchisor has [a right to approve or disapprove a different
30 franchisee] no significant involvement with the prospective assignee;
31 will not enter into a new or substitute franchise agreement with the
32 assignee that contains materially different terms and conditions; and,
33 does not otherwise solicit the assignee or participate in the sale of
34 the subject franchise to the assignee. A franchisor's approval or disap-
35 proval of a sale or transfer of an existing franchise, standing alone,
36 is not deemed to be significant involvement.
37 [6.] 5. This article shall not be applicable to any transaction relat-
38 ing to a bank credit card plan. "Bank credit card plan" means a credit
39 card plan in which the issuers of credit cards are only: banks regulated
40 by or under the supervision of the Federal Reserve Board; the Federal
41 Deposit Insurance Corporation; the Controller of the Currency of the
42 United States; or the Superintendent of Financial Services [of this
43 state]; or persons controlling such banks, provided that the assets of
44 such a bank or banks represent a majority of the assets on a consol-
45 idated basis of any holding company system of which such card issuers
46 may be a party; or, persons controlled by such banks.
47 § 6. Section 685 of the general business law, as added by chapter 730
48 of the laws of 1980, is amended to read as follows:
49 § 685. Escrows and impoundments. If the department [of law] finds that
50 the applicant for registration has failed to demonstrate that adequate
51 financial arrangements have been made to fulfill obligations to provide
52 real estate, improvements, equipment, inventory, training, or other
53 items included in the offering, the department may require the escrow or
54 impoundment of franchise fees and other funds paid by the franchisee or
55 subfranchisor until the obligations are fulfilled, or, at the option of
56 the franchisor, the furnishing of a surety bond or the satisfaction of
A. 4880 16
1 any other conditions as provided by rule of the department [of law] if
2 it finds that the requirement is necessary and appropriate to protect
3 prospective franchisees or subfranchisors.
4 § 7. Section 686 of the general business law, as added by chapter 730
5 of the laws of 1980, is amended to read as follows:
6 § 686. Designation of secretary of state as agent for service of proc-
7 ess; service of process. [Any person who shall offer to sell or sell a
8 franchise in this state as a franchisor, subfranchisor or franchise
9 sales agent] A franchise seller shall be deemed to have irrevocably
10 appointed the secretary of state as his or its agent upon whom may be
11 served any summons, complaint, subpoena, subpoena duces tecum, notice,
12 order or other process directed to such person, or any partner, princi-
13 pal[,] officer, [salesman] or director thereof, or his or its successor,
14 administrator or executor, in any action, investigation, or proceeding
15 which arises under this article or a rule hereunder, with the same force
16 and validity as if served personally on such person. Service of such
17 process upon the secretary of state shall be made by personally deliver-
18 ing to and leaving with him or a deputy secretary of state a copy there-
19 of at the office of the department [of state], and such service shall be
20 sufficient provided that notice of such service and a copy of such proc-
21 ess are sent forthwith by the department to such person, by registered
22 or certified mail with return receipt requested, at his or her address
23 as set forth in the application for registration of his [offering pros-
24 pectus] or her franchise disclosure document or in the registered
25 [offering prospectus] franchise disclosure document itself filed with
26 the department [of law] pursuant to this article, or in default of the
27 filing of such application or [prospectus] franchise disclosure
28 document, at the last address known to the department. Service of such
29 process shall be complete upon receipt by the department of a return
30 receipt purporting to be signed by the addressee or a person qualified
31 to receive his or its registered or certified mail, in accordance with
32 the rules and customs of the post office department, or, if acceptance
33 was refused or unclaimed by the addressee or his or its agent, or if the
34 addressee moved without leaving a forwarding address, upon return to the
35 department of the original envelope bearing a notation by the postal
36 authorities that receipt thereof was refused or that such mail was
37 otherwise undeliverable.
38 § 8. Section 687 of the general business law, as added by chapter 730
39 of the laws of 1980, is amended to read as follows:
40 § 687. Fraudulent and unlawful practices. 1. It is unlawful for any
41 person to make any untrue statement of a material fact in any applica-
42 tion, notice, statement, [prospectus] franchise disclosure document or
43 report filed with the department under this article, or wilfully to omit
44 to state in any such application, notice, statement, [prospectus] fran-
45 chise disclosure document or report any material fact which is required
46 to be stated therein, or to fail to notify the department of any materi-
47 al change as required by this article.
48 2. It is unlawful for a person, in connection with the offer, sale or
49 purchase of any franchise, to directly or indirectly:
50 (a) Employ any device, scheme, or artifice to defraud.
51 (b) Make any untrue statement of a material fact or omit to state a
52 material fact necessary in order to make the statements made, in the
53 light of the circumstances under which they were made, not misleading.
54 It is an affirmative defense to one accused of omitting to state such a
55 material fact that said omission was not an intentional act.
A. 4880 17
1 (c) Engage in any act, practice, or course of business [which] that
2 operates or would operate as a fraud or deceit upon any person.
3 (d) Make any claim or representation, orally, visually, or in writing,
4 that contradicts the information required to be disclosed by this
5 section.
6 (e) Misrepresent that any person:
7 (i) purchased a franchise from the franchisor or operated a franchise
8 of the type offered by the franchisor.
9 (ii) can provide an independent and reliable report about the fran-
10 chise or the experiences of any current or former franchisees.
11 (f) Disseminate any financial performance representations to prospec-
12 tive franchisees unless the franchisor has a reasonable basis and writ-
13 ten substantiation for the representation at the time the representation
14 is made, and the representation is included in the franchisor's disclo-
15 sure document. In conjunction with any such financial performance repre-
16 sentation, the franchisor shall also:
17 (i) disclose the information required by this article and the regu-
18 lations promulgated hereunder if the representation relates to the past
19 performance of the franchisor's outlets.
20 (ii) include a clear and conspicuous admonition that a new
21 franchisee's individual financial results may differ from the result
22 stated in the financial performance representation.
23 (g) Fail to make available to prospective franchisees, and to the
24 department upon reasonable request, written substantiation for any
25 financial performance representations made in a franchisor's franchise
26 disclosure document or otherwise.
27 (h) Disclaim or require a prospective franchisee to waive reliance on
28 any representation made in the disclosure document or in its exhibits or
29 amendments, provided, however, that this provision is not intended to
30 prevent a prospective franchisee from voluntarily waiving specific
31 contract terms and conditions set forth in his or her disclosure docu-
32 ment during the course of franchise sale negotiations.
33 (i) Fail to return any funds or deposits in accordance with any condi-
34 tions disclosed in the franchisor's disclosure document, franchise
35 agreement, or any related document.
36 3. It is unlawful for any person to violate any provision of this
37 article, or any rule of the department promulgated hereunder, or any
38 condition to the effectiveness of the registration of [an offering pros-
39 pectus] a franchise disclosure document or of an exemption from the
40 registration provisions of this article.
41 4. Any condition, stipulation, or provision purporting to bind any
42 person acquiring any franchise to waive compliance with any provision of
43 this law, or rule promulgated hereunder, shall be void.
44 5. It is unlawful to require a franchisee to assent to a release,
45 assignment, novation, waiver or estoppel [which] that would relieve a
46 person from any duty or liability imposed by this article.
47 § 9. Subdivision 1 of section 688 of the general business law, as
48 added by chapter 730 of the laws of 1980, is amended to read as follows:
49 1. Whenever it shall appear to the department [of law], either upon
50 complaint or otherwise, that any person has violated any provision of
51 this article, the department:
52 (a) may make such investigations within or outside of this state as it
53 deems necessary to determine whether any person has violated any
54 provision of this article or any rule or regulation hereunder, or to aid
55 in the enforcement of this article or in the prescribing of rules and
56 forms hereunder, and
A. 4880 18
1 (b) may require or permit any person to file a statement in writing,
2 under oath or otherwise as the attorney general determines, as to all
3 the facts and circumstances concerning the matter to be investigated.
4 § 10. Section 689 of the general business law, as added by chapter 730
5 of the laws of 1980, is amended to read as follows:
6 § 689. Action by the department of law. 1. Whenever the department
7 shall believe from evidence satisfactory to it that any person has
8 engaged in or is engaged in or is about to engage in any practice or
9 transaction heretofore referred to as and declared to be an unlawful or
10 a fraudulent practice, it may bring an action in the name and on behalf
11 of the people of the state of New York against such person and any other
12 person theretofore concerned in or in any way participating in such
13 unlawful or fraudulent practice, to enjoin such person or persons from
14 continuing such unlawful and fraudulent practice or engaging therein or
15 doing any act or acts in furtherance thereof or, if the department
16 should believe from such evidence that such person actually has or is
17 engaged in any such unlawful or fraudulent practice, it may include in
18 such action an application to enjoin permanently such person and such
19 other person as may have been or may be concerned with or in any way
20 participating in such unlawful or fraudulent practice, from selling or
21 offering for sale within or from this state as franchisor, franchise
22 [sales agent, franchise salesman] seller, or a principal executive offi-
23 cer or director thereof, any franchise offered or to be offered or sold,
24 or from continuing any such practice. In said action an order or a judg-
25 ment may be entered awarding the relief applied for or so much thereof
26 as the court may deem proper. Upon a showing by the department in its
27 application for a permanent injunction hereunder that the defendant
28 named in the action or an officer thereof has refused to be sworn or to
29 be examined or to answer a material question or to produce a book or
30 paper relevant to the inquiry when duly ordered to do so by the officer
31 or judge duly conducting an inquiry into the subject matter forming the
32 basis of the application for such injunction, such refusal shall be
33 prima facie proof that such defendant is or has engaged in an unlawful
34 or fraudulent practice as set forth in such application and a permanent
35 injunction may issue from the supreme court without further showing by
36 the department. In an action brought under this section the court may
37 award to the plaintiff a sum not in excess of ten thousand dollars for
38 each defendant as an additional allowance.
39 2. Upon a showing by the department, in an application for an injunc-
40 tion, that any person engaged in the offer or sale of a franchise in
41 this state has ever been convicted by a court of competent jurisdiction
42 in any state or county of any felony or of any other criminal offense by
43 any such court, whether or not constituting a felony, involving fran-
44 chises, securities or subdivided land, the supreme court after a hearing
45 may issue a permanent injunction awarding the relief applied for, or so
46 much thereof as the court may deem proper, against such person shown to
47 have been so convicted, in the form and manner provided for in subdivi-
48 sion one of this section in the case of one who actually has or is
49 engaged in any unlawful or fraudulent practice.
50 3. If a franchise is offered or sold within the state of New York by a
51 non-resident person and such non-resident person has not filed pursuant
52 to laws heretofore or hereafter existing the designation of a person
53 upon whom process against him or it may be served or the designation of
54 the secretary of state as such person, pursuant to section thirteen
55 hundred four of the business corporation law or other laws heretofore or
56 hereafter existing, or in lieu thereof, an instrument in writing duly
A. 4880 19
1 acknowledged and filed in the office of the secretary of state designat-
2 ing the secretary of state as the person upon whom may be served any
3 subpoena, subpoena duces tecum or other process directed to such non-re-
4 sident person and issued in any investigation, examination or proceeding
5 pending or about to be instituted under and pursuant to the provisions
6 of this article, the department may serve a notice upon such non-resi-
7 dent person by mailing the same in a securely sealed postpaid wrapper
8 addressed to such non-resident person at its or his last known place of
9 business or residence, and may in such notice require that such non-re-
10 sident person furnish a written statement under oath, as required in
11 said notice, giving the information therein specified relating to the
12 franchise offered, to be offered or sold in the state of New York by
13 such non-resident person or, in the alternative, that such non-resident
14 person shall appear within a reasonable time from the date of mailing
15 such notice at a designated place within this state for examination and
16 shall produce at the time and place of such examination such books and
17 papers of such non-resident person as may be designated in such notice.
18 If such non-resident person shall fail to appear pursuant thereto or
19 to produce the books and papers required thereby to be produced, or
20 shall refuse to submit to examination or to answer any proper question,
21 the proof of such failure or refusal shall constitute prima facie
22 evidence that the offer or sale of a franchise by such non-resident
23 person constitutes a fraudulent practice and may in the discretion of
24 the court be treated as a sufficient basis for a permanent injunction
25 against the continuance of such fraudulent practice.
26 4. In any action brought by the department as provided in this arti-
27 cle, the court at any stage of the proceedings may appoint a receiver of
28 any and all property derived by the defendant or defendants or any of
29 them by means of any such unlawful or fraudulent practice, including
30 also all property with which such property has been commingled if such
31 property cannot be identified in kind because of such commingling,
32 together with any or all books of account and papers relating to the
33 same. The judgment entered in such action may provide that such receiver
34 shall take title to any or all such property and books of account and
35 papers relating to the same and liquidate such property or any part
36 thereof for the benefit of all persons intervening in the said action
37 and establishing an interest in such property. The judgment may also
38 provide that all such property, the title to or interest in which has
39 not been established in such action by intervenors or otherwise by due
40 process to be in a person or persons other than defendant or defendants,
41 shall be returned to the defendant or defendants as their interest may
42 appear. Such receiver shall be subject to all the duties of receivers in
43 civil actions as far as practicable except that such provisions relating
44 to commissions or compensation of receivers shall not be applicable to
45 receivers appointed pursuant to this section, but such commissions or
46 compensations shall be fixed by the court in any amount which it may
47 determine to be just and equitable. In any action brought by the depart-
48 ment as provided in this article the court may grant such other and
49 further relief as may be proper.
50 5. Whenever the department has determined to commence an action under
51 this article, it may present to any justice of the supreme court, before
52 beginning such action, an application in writing for an order directing
53 the person or persons mentioned in the application to appear before the
54 justice of the supreme court or referee designated in such order and
55 answer such questions as may be put to them or to any of them, or to
56 produce such papers, documents and books concerning the alleged unlawful
A. 4880 20
1 or fraudulent practices to which the action which the department has
2 determined to bring relates, and it shall be the duty of the justice of
3 the supreme court to whom such application for the order is made to
4 grant such application. The application for such order may simply show
5 upon information and belief that the testimony of such person or persons
6 is material and necessary. The provisions of the civil practice law and
7 rules, relating to an application for an order for the examination of
8 witnesses before the commencement of an action and the method of
9 proceeding on such examination, shall not apply except as herein
10 prescribed. The order shall be granted by the justice of the supreme
11 court to whom the application has been made with such preliminary
12 injunction or stay as may appear to such justice to be proper and expe-
13 dient and shall specify the time when and place where the witnesses are
14 required to appear. The justice or referee may adjourn such examination
15 from time to time and witnesses must attend accordingly. The testimony
16 of each witness must be subscribed by him and must be filed in the
17 office of the clerk of the county in which such order for examination is
18 filed.
19 6. The order for such examination must be signed by the justice making
20 it, and service of a copy thereof with an endorsement by the department
21 to the effect that the person named therein is required to appear and be
22 examined at the time and place before the justice and referee specified
23 in such endorsement, shall be sufficient notice for the attendance of
24 witnesses. Such endorsement may contain a clause requiring such person
25 to produce at such examination all books, papers and documents in his
26 possession or under his control relating to the subject of such examina-
27 tion. The order shall be served upon the person named in [the] such
28 endorsement [aforesaid] by delivering to and leaving with it or him a
29 certified copy thereof, endorsed as above provided, subject to the
30 payment of witness fees and mileage as and when provided to be paid by
31 paragraph (b) of subdivision four of section six hundred eighty-eight of
32 this article in connection with attendance pursuant to subpoenas author-
33 ized to be issued under [said] such section. Service of such an order
34 may also be served under section six hundred eighty-six of this article
35 in cases falling thereunder.
36 7. The referee appointed as provided in this article possesses all the
37 powers and is subject to all the duties of a referee appointed in a
38 civil action, so far as practicable, and may punish for contempt a
39 witness duly served with the papers as prescribed in this article for
40 non-attendance or refusal to be sworn or to testify or to produce books,
41 papers and documents according to the direction of [the] such endorse-
42 ment [aforesaid] in the same manner and to the same extent as a referee
43 to hear, try and determine an issue of fact or law.
44 8. Any person against whom a permanent injunction has been granted
45 under the provisions of this article may apply to the supreme court at
46 any time upon at least sixty days notice to the department for an order
47 dissolving such injunction or modifying the same upon such terms and
48 conditions as the court deems necessary or desirable. Such application
49 for dissolution or modification of such injunction shall contain a reci-
50 tation of the facts and circumstances which caused the granting of the
51 injunction; the occupation and employment of the person making the
52 application and his financial remuneration therefrom since the time the
53 injunction was granted; his net worth at the time of the application and
54 the source thereof; together with any other facts bearing upon the
55 reasonableness of the application and the character of the applicant as
56 may enable the court to issue an order that will properly dispose of
A. 4880 21
1 such application in the interest of justice. A copy of such application
2 together with copies of any other papers in support thereof shall be
3 served upon the department at least sixty days prior to the return date
4 thereof. In addition thereto the applicant shall file with the court a
5 good and sufficient surety bond in the sum of one thousand dollars guar-
6 anteeing that he will pay all costs and expenses of an investigation by
7 the department of such applicant and the statements and claims alleged
8 in the application together with any further investigation which the
9 department may deem necessary or desirable to determine whether it
10 should consent to the application, oppose the same, or make such other
11 recommendations to the court as in its opinion are desirable to be
12 included in any modification of such injunction. Should it appear in the
13 course of such investigation by the department that said sum is not
14 sufficient, the department may apply to the court by usual notice of
15 motion or order to show cause for an increase in the amount of security
16 or further surety bond necessary to fully pay all of the costs of the
17 investigation and the court may require such further bond as the situ-
18 ation requires to fully pay the costs and expenses of the investigation.
19 Upon the completion of such investigation, the department may file an
20 answer to such application setting forth such facts as are pertinent to
21 the determination by the court of the matter before it and whether said
22 injunction should be dissolved, modified or continued in whole or in
23 part and what conditions, if any, shall be attached to any dissolution
24 or modification of said injunction. After a hearing upon such applica-
25 tion and after any further investigation, proof or testimony which the
26 court may desire has been offered, or at any adjourned dates thereof,
27 the court may make a final order dissolving the permanent injunction or
28 modifying the same upon such terms and conditions as in its opinion are
29 just and desirable, or in its discretion may deny the application. Such
30 order shall contain a direction that the applicant pay to the department
31 the costs and expenses of the investigation in connection with the
32 proceeding, and any judgment entered thereon may be enforced directly
33 against the surety on the bond. The court shall grant no temporary or
34 other relief from the injunction in force pending a final determination
35 of such application. No application under this subdivision shall be
36 entertained:
37 (a) in any case where the applicant has been convicted of a felony or
38 a crime that would be a felony if committed in the state of New York
39 since the issuance of the injunction, nor
40 (b) in any case where the injunction was granted incident to a felony,
41 or the applicant has been convicted at any time of any felony involving
42 franchises which are the subject matter of this article. Nor shall
43 anything contained in this subdivision be construed to deny to or inter-
44 fere with the power of the department to bring any other action or
45 proceeding, civil or criminal, against the applicant at any time.
46 9. The provisions of the civil practice law and rules shall apply to
47 all actions brought under this article except as herein otherwise
48 provided.
49 § 11. Section 691 of the general business law, as added by chapter 730
50 of the laws of 1980, subdivision 4 as amended by chapter 86 of the laws
51 of 1981, is amended to read as follows:
52 § 691. Civil remedies. 1. A person who offers or sells a franchise in
53 violation of section six hundred eighty-three, six hundred eighty-four
54 or six hundred eighty-seven of this article is liable to the person
55 purchasing the franchise [for damages and, if such violation is willful
56 and material,] for rescission, with interest [at six percent per year]
A. 4880 22
1 from the date of purchase, [and] at an annual interest rate set forth in
2 or determined in accordance with rules or regulations promulgated by the
3 department, and if such violation is willful and material, for damages,
4 in each instance along with reasonable attorney fees and court costs.
5 2. A person may not file or maintain suit under this section if the
6 franchisee or such person received a written offer before suit, and at a
7 time when he owned the franchise, to refund the consideration paid
8 together with interest at [six percent per year] an annual rate set
9 forth in or determined in accordance with rules or regulations promul-
10 gated by the department from the date of payment, less the amount of
11 income earned by the franchisee from the franchise, conditioned only
12 upon tender by the person of all items received by him for the consider-
13 ation and not sold, and failed to accept the offer within thirty days of
14 its receipt, provided that the offering documents are submitted to the
15 department for approval at least ten business days prior to submission
16 to the franchisee. The rescission offer shall recite the provisions of
17 this section. If the franchise involves a substantial building or
18 substantial equipment or fixtures and a significant period of time has
19 elapsed since the sale of the franchise to the franchisee, the depart-
20 ment in approving a rescission offer may approve an equitable offer
21 recognizing depreciation, amortization, and other factors which bear
22 upon the value of the franchise being returned to the franchisor. Noth-
23 ing in this subdivision shall prohibit settlement of any dispute arising
24 under or involving claims based on this chapter, with or without
25 approval of the department.
26 3. A person who directly or indirectly controls a person liable under
27 this article, a partner in a firm so liable, a principal executive offi-
28 cer or director of a corporation so liable, a person occupying a similar
29 status or performing similar functions, and an employee of a person so
30 liable, who materially aids in the act of transaction constituting the
31 violation, is also liable jointly and severally with and to the same
32 extent as the controlled person, partnership, corporation or employer.
33 It shall be a defense to any action based upon such liability that the
34 defendant did not know or could not have known by the exercise of due
35 diligence the facts upon which the action is predicated.
36 4. An action shall not be maintained to enforce a liability created
37 under this section unless brought before the expiration of three years
38 after the act or transaction constituting the violation.
39 5. Except as explicitly provided in this article, civil liability in
40 favor of any private party shall not arise against a person by impli-
41 cation from or as a result of the violation of a provision of this arti-
42 cle or a rule, regulation or order hereunder. Nothing in this article
43 shall limit a liability which may exist by virtue of any other statute
44 or under common law if this article were not in effect.
45 § 12. Section 694 of the general business law, as added by chapter 730
46 of the laws of 1980, subdivision 1 as amended by chapter 61 of the laws
47 of 1989, is amended to read as follows:
48 § 694. Administration. [1. The department shall charge and collect the
49 fees fixed by this section.
50 (a) The fee for filing an application for registration of an offering
51 prospectus under subdivision two of section six hundred eighty-three of
52 this article is seven hundred fifty dollars.
53 (b) The fee for filing an amendment to any registered offering pros-
54 pectus filed under subdivision two, nine or thirteen of section six
55 hundred eighty-three of this article is one hundred fifty dollars.
A. 4880 23
1 (c) The fee for filing a franchise agent's application under subdivi-
2 sion thirteen of section six hundred eighty-three of this article is one
3 hundred fifty dollars.
4 2.] The department may from time to time make, amend, and rescind such
5 rules, forms and regulations as are necessary to carry out the
6 provisions of this article, including rules and forms governing applica-
7 tions and reports, and defining any terms, whether or not used in this
8 article, insofar as the definitions are not inconsistent with the
9 provisions of this article.
10 § 13. This act shall take effect immediately.
