New York's Expansive Definition of a "Franchise": Trademarks Not Required
The definition of a franchise and the factors utilized to evaluate the existence of a franchise have important implications. That is, does the business arrangement providing for the multi-unit expansion of your business qualify as a franchise and thereby subject you to franchise regulations and disclosure requirements? The answer to this question depends on the "substance" of the business relationship and an evaluation of both federal and state law.
For the "New York franchisor" (comprised of any business - based in any state - seeking to offer or sell a franchise in the State of New York) the definition of what constitutes a "franchise" is more expansive that the federal definition. Under the Federal Franchise Rule "trademarks" and "trademark licenses" are primary and critical components of a franchise system. Without the license of a trademark, under federal law, a "franchise" does not exist. Under New York law however, the existence of a franchise is not dependent upon the existence of a trademark license. That is, although your "business arrangement" does not involve a trademark license and therefore does not qualify as a "franchise" under federal law, you may nevertheless be subject to New York's franchise regulations and disclosure requirements if your "business arrangement" is based on a written or oral agreement providing for:
- (i) A Proscribed Marketing Plan or System: The offer, sale or distribution of goods or services under a proscribed marketing plan or system; and
- (ii) Payment of a Franchise Fee: The direct or indirect payment of a "franchise fee". What qualifies as a "franchise fee" is also expansively defined and may include license fees and other charges associated with the business transaction.
Additionally, New York offers an alternative definition of a franchise replacing the "proscribed marketing plan" requirement (point (i) , above) with a "trademark license".
So, under New York law, unlike federal law, although the existence of a "trademark license" may give rise to a "franchise relationship" it is not mandatory. In the State of New York franchises and franchise relationships are not dependent upon the existence of trademarks and trademark licenses.
As a lay person looking at the law surrounding franchising, it appears that federal law would premempt state law under the provisions of The Supremecy Clause. But, apparently the FTC Rule hasn't completely occupied the field and state governments do have some power to enact laws that apply to franchisors who do business in their states, as in this instance, above.
Does the New York law encourage many small intrastate businesses to franchise who could then avoid the expense of the patent on the trademark? Or, does it mean that many businesses who are now operating as distributorships would be defined as franchises under New York law?
But, apparently, while the States do have some rights under the FTC Rule to give greater protection to both franchisors and franchisees under state statutes, this doesn't apply to the main thrust of the FTC Rule which is to deny a "private right of action" for any violation of the federal Rule or the state Little FTC Statutes.
Is my interpretation correct?
As a lay person looking at the law surrounding franchising, it appears that federal law would premempt state law under the provisions of The Supremecy Clause. But, apparently the FTC Rule hasn't completely occupied the field and state governments do have some power to enact laws that apply to franchisors who do business in their states, as in this instance, above.
Does the New York law encourage many small intrastate businesses to franchise who could then avoid the expense of the patent on the trademark? Or, does it mean that many businesses who are now operating as distributorships would be defined as franchises under New York law?
But, apparently, while the States do have some rights under the FTC Rule to give greater protection to both franchisors and franchisees under state statutes, this doesn't apply to the main thrust of the FTC Rule which is to deny a "private right of action" for any violation of the federal Rule or the state Little FTC Statutes.
Is my interpretation correct?