Most companies licensing the use of their trademarks would not think that a simple license agreement, which provides nothing more than use of the trademark in exchange for a fee, would for legal purposes be treated as a franchise agreement. But if the trademark licensor is in New York then what it thought was a simple trademark license agreement relationship is likely really a franchise arrangement.
This is just another quirk of New York law where the State has gone too far, and some may say off the rails. Another example of this overreaching in New York is that when conducting a securities offering under federal Rule 506, there is no Rule 506(b) notice filing in New York (a topic for another blog post).
New York puts business owners in the strange position of having these overreaching laws and regulations on the books, but then not, or only selectively, enforcing them.
As to franchise arrangements, under the prevailing federal authority and the law of most states, a franchise arrangement exists where all three of the following are present:
- A license of a trademark;
- Consideration paid for the license, and;
- Either substantial assistance or control over the licensee by the licensor.
New York, being the difficult place that it is, decided that the somewhat clear test that the federal government and most states use is just not good enough for the Empire State (a recurring theme), so the Legislature passed a statute which makes any arrangment with both of the following a franchise arrangement:
- A license of a trademark, and
- Either consideration paid (by the licensee to the licensor) OR substantial assistance/control (exerted or given by the licensor).
That’s right. Any trademark license done in New York, assuming the licensor gets paid for it, is a franchise arrangement. Any franchise arrangement requires that the licensor/franchisor to receive prior registration clearance from the New York Attorney General’s Office, Investor Protection Bureau, which is the same department that reviews the securities registrations. The registration requires a lengthy and in depth Franchise Disclosure Document, proposed Franchise Agreement and other documents to be provided, including audited financials. That’s not all, New York requires that the licensor/franchisor be registered (i.e. that the application be approved) prior to the earlier of the following:
- The first in person meeting regarding the franchise arrangement, or
- Ten (10) days prior to the execution of the Franchise Agreement.
The second element of ten days prior to signing is fine and makes sense, but the first is out of left field. Many meetings are conducted at the beginning of relationships where the parties have a common goal but are not sure how to accomplish it. Will it be a joint venture, a parent-subsidiary relationship, will the one party be employed by the other, or will it be a trademark license agreement? Not only that, but does it matter if the meeting is in person or over Skype? Apparently it does to the State of New York.
There are other issues with New York’s Franchise Act, including when the licensor/franchisor is doing business in other states as well as internationally. New York’s law usually applies in more situations that one would expect.
In any event, you probably think there are tons of license agreements done in New York without registration as a franchise, so really “who cares?” Actually that sentiment is the common reaction, but the reality is that while the New York State Attorney General’s Office is too busy to look into each and every license agreement, what you have to watch out for is if you are a licensor of your trademark (which is not registered as a franchisor in New York) and a dispute arises between yourself and the licensee, if the licensee makes a couple of calls to the right individuals at the Attorney General’s office, the licensor may be under a microscope very shortly thereafter.
Really, as an attorney I do have to caution and say that if you are doing a license agreement in New York, make sure you discuss whether it would actually be a franchise agreement in hiding.