Law Group Seeks to Promote Franchising in New York

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On the 25th anniversary of the New York Franchise Act, a state bar association committee has begun a review and potential overhaul of the Act. Committee members see the current law as an impediment to business franchising in New York and seek to bring the New York law more into line with the franchise sales laws of other states.

A New York State Bar Association (NYSBA) committee has begun a review and potential overhaul of the state’s franchise law. What’s their mission? Continue to protect franchise buyers while removing aspects of the law that may impede business franchising in the state.

Franchise sales laws require franchisors to make certain disclosures to prospective franchisees before a franchise is sold. The franchise sales laws are similar to securities laws that require issuers to make certain disclosures to prospective buyers.

New York requires more than presale disclosures. Franchisors in New York must also register their franchise offering through a full review and approval process before they can sell franchises. Several states have similar registration requirements, while other states have filing requirements or do not regulate the sale of franchises at all. The New York Franchise Act (“NYFA”) was enacted in 1980 and became effective January 1, 1981.

Harold Kestenbaum, Chair of the Franchise, Distribution and Licensing Committee of the NYSBA’s Business Law Section, has appointed seven lawyers to a newly-formed New York Franchise Legislation Subcommittee. The Chair of the new subcommittee is Thomas M. Pitegoff, an attorney practicing in White Plains, NY.

According to Mr. Kestenbaum, the NYFA is anomalous in at least two respects. It defines a “franchise” very broadly and it has extraterritorial effect. “The broad scope of the law may discourage companies from doing business in New York,” said Mr. Kestenbaum. “The actual application of the law can be surprising and unpredictable.”

Mr. Kestenbaum has asked the subcommittee to recommend a narrower definition that is more in line with the definition of a “franchise” in the laws of other states that require franchise registration and disclosure.

“While there may have been reason in 1980 for the broad scope of coverage,” said Mr. Pitegoff, “it has become clear to franchise lawyers that the plain language of the statute covers many license and distribution arrangements that would not be considered franchises in other states. Many business people and even lawyers are surprised and shocked when they learn how broad the scope of coverage is. Why would a distributor or licensor choose to be subject to the extensive registration and disclosure requirements imposed on franchisors in New York when the company can avoid these requirements by going to any other state? The broad scope of the New York law creates risk and imposes a degree of uncertainty that may discourage business.”

In addition, unlike the franchise sales laws of other states, the New York law has extraterritorial effect. “A franchisor based in New York must register the offering in the state even if the prospective franchisees are located outside the state,” said Mr. Pitegoff. According to Mr. Pitegoff, this feature of the New York law may also discourage companies from establishing their offices in the state. “For example,” said Mr. Pitegoff, “a company may want to test its franchising plans by offering a franchise in another state before registering in New York. A company that is based in New York would not be able to postpone registration.”

The subcommittee will also review proposed changes in the Federal Trade Commission’s Trade Regulation Rule on Franchising (the “FTC Rule”), which are expected to become effective sometime in 2006 following a ten-year review. The FTC Rule regulates franchise sales throughout the U.S.A. The subcommittee will determine whether the proposed revisions to the rule require or suggest changes in the NYFA.

In the course of its study, the subcommittee will seek comments from franchise lawyers and other lawyers around the U.S.A. and around the world, as well as the business community. Comments may be sent to nyfa@pitlaw.com.

The target date for completion of the subcommittee’s review of the NYFA is the first half of 2006. The law will then have been in effect for 25 years.

“Tom Pitegoff came to me with the idea of forming this subcommittee,” said Mr. Kestenbaum. “I asked him to chair the subcommittee because of his demonstrated leadership in the field, as a past member of the Governing Board of the American Bar Association’s Forum on Franchising and as the author of law journal articles on the scope and coverage of the franchise laws around the U.S.”

Mr. Kestenbaum, counsel to the law firm of Farrel Fritz PC in Uniondale, NY (http://www.farrellfritz.com), limits his practice to the representation of franchisors. Mr. Pitegoff, of Pitegoff Law Office in White Plains, NY (http://www.pitlaw.com), represents both franchisors and franchisees.

The seven members of the subcommittee are:

Thomas C. Bailey

Phillips Lytle LLP

Buffalo, NY

Cory J. Covert

Hauppauge, NY

Harold L. Kestenbaum

Farrel Fritz PC

Uniondale, NY

David J. Kaufmann

Kaufmann, Feiner, Yamin, Gildin & Robbins

New York, NY

Thomas M. Pitegoff (Chair)

Pitegoff Law Office

White Plains, NY

Lee J. Plave

DLA Piper Rudnick Gray Cary US LLP

Washington, DC

Richard L. Rosen

Richard L. Rosen Law Firm, PLLC

New York, NY

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