The declaration of policy accompanying the New York Franchise Sales Act, N.Y. Gen. Bus. L. § 680 et seq., (NYFSA) states that “it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor’s promises would not be fulfilled.” The NYFSA provides franchisees with the right to sue a franchisor that has, among other things, sold them a franchise that was not properly registered with the State of New York, provided them with a Franchise Disclosure Document (FDD) that fails to comply with the requirements of the NYFSA, employed any device, scheme or artifice to defraud or made an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
The NYFSA exists, among other reasons, to require franchisors to provide franchisee prospects with a fully compliant FDD explaining all of the material terms of the franchise offering and to prevent franchisors from making false or misleading statements, or omitting material facts, in the offer and sale of a franchise. The provisions of the NYFSA apply both to franchisors that sell franchises from New York State and to any out-of-state franchisors that sell franchises to residents of New York or that are intended to be operated in New York.
The NYFSA provides, among other things, that a franchisee to whom a franchisor has sold a franchise in violation of the statute is liable to the franchisee for damages. If the violation is willful and material, the franchisee may be entitled to rescission (including the return of monies paid by the franchisee to the franchisor) with interest and reasonable attorneys fees and court costs. In addition, the NYFSA provides that a person who directly or indirectly controls the franchisor, such as an executive officer or director of the franchisor, and any employee of the franchisor that materially aided the act of transaction constituting the violation, may also be liable to the franchisee. Moreover, although the provision is rarely enforced, the NYFSA further provides that a knowing violation of the NYFSA is a criminal offense punishable by up to a year in prison. The NYFSA provides for a three-year statute of limitations, which means that a law suit seeking relief pursuant to the NYFSA must be brought within three years of “the act or transaction constituting the violation.” In most cases, that will mean within three years of the date the franchise agreement was signed.
What does this mean for franchisees in New York? It means that if you have signed a franchise agreement with a franchisor in the last three years and believe that the franchisor failed to provide you with a compliant FDD, made misrepresentations to get you to purchase the franchise or failed to disclose to you material information concerning the franchise being sold, you may have a cause of action under the NYFSA against your franchisor, the franchisor’s officers or directors and the individual or individuals that made the misrepresentation or material omission. You may be entitled to recover damages, and if the violation was willful, rescind the contract, obtain the return of the monies you paid to the franchisor and recover your attorney fees and court costs.
New York has a strong public policy against fraud, misrepresentation or material omissions in that sale of franchises. The NYFSA exists to protect New York franchisees from predation by franchisors who engage in unscrupulous sales tactics to get franchisees to enter into franchise agreements or who make promises in order to sell franchises and fail to keep them. If you believe you have been the victim of such tactics, you should speak with a lawyer concerning your rights under the NYFSA, and other applicable laws, to determine whether you may be entitled to recover damages, rescind your franchise agreement or obtain other forms of relief.