USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
chisor has a federally registered trade mark for its brand or not). 1.3 Definition of a Franchise Agreement One must consider both the US federal law defini - tion of franchising (applicable to franchising anywhere in the United States, its territories and possessions), and the definition of franchising under the law of each state that has a franchise statute (applicable in cer - tain instances where particular states have adopted their own franchise registration or disclosure laws). In large part these definitions overlap, but there are nuances from state to state that can sometimes make an important difference. The FTC Franchise Rule (16 CFR Parts 436 and 437) is the federal law defining franchising. The following is the exact language from the FTC Franchise Rule defining a franchise, in Section 436.1 (h). • Franchise means any continuing commercial rela - tionship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (a) the franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the fran - chisor’s trademark; (b) the franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or pro - vide significant assistance in the franchisee’s method of operation; and (c) as a condition of obtaining or commenc - ing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affili - ate. Note that the FTC Franchise Rule does not entirely pre-empt individual state franchise registration/disclo - sure statutes. Instead, with a few notable exceptions, the FTC Franchise Rule generally governs side-by- side with the franchise registration/disclosure laws of the 14 Franchise Registration States. Accordingly, a
franchisor must consider both the federal and appli - cable state requirements when offering or selling a franchise in a Franchise Registration State. The analy - sis is particularly important because each state may have its own definition of a franchise and its own rules of when a franchise is considered to be sold “in” that state – a concept that some states define in a very broad manner that can capture transactions involving parties or activities outside the state. Most notably, New York is one of those states with a different and broader definition, in the New York State Franchise Sales Act, which states the following. • “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which: (a) a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a fran - chisor, and the franchisee is required to pay, directly or indirectly, a franchise fee; or (b) a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other com - mercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee. Note that it does not matter whether the arrange - ment is called a licence agreement or anything else; if the elements of the franchise definition (trade mark licence, marketing plan/control/assistance, and pay - ment of a fee for the franchise) (and note that in New York, only two elements are needed) are met, then the contracts, and the party granting the franchise, are subject to franchise law requirements.
2. Franchise Disclosure 2.1 Mandatory Disclosure
In the United States, franchisors are generally required under federal law – and in many jurisdictions under applicable state law – to prepare a comprehensive pre-sale FDD (discussed in 1.2 Franchise Regulation )
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