Franchisor-Franchisee Disputes

Mr. Pu has handled numerous law suits between a franchisor and franchisee, and is listed on the website of the American Franchisee Association. His experience in this area includes law suits involving Dunkin' Donuts, Carvel, Medicine Shoppe, Baskin Robbins, Bennigan's, Twin Donuts, Togo's Eateries. He's intimately familiar with the New York Franchise Sales Act, which provides special protections for franchisees and people considering buying a franchise.

As with all problems involving a potential law suit, you want to get a franchise lawyer in New York who handles law suits over franchises. You don't want a franchise attorney who handles business deals involving franchises, such as franchising a good business opportunity or purchasing a franchise.

The New York Franchise Sales Act. The New York Franchise Sales Act (the "NYFSA") is based on the securities laws. Like those laws, the NYFSA prohibits fraud in the sale of franchises, and permits the recovery of attorneys fees.

A common fact pattern involves the franchisor using inflated income projections to sell its franchises. Those projections must have a basis in fact. So, if the franchisor merely pulls the number out of the air, its statement may constitute an act of fraud in violation of the NYFSA.

In addition, the NYSFA also has an interesting provision that bars conduct "which would operate as a fraud". That means that the franchisee doesn't have to be deceived in order to have a claim. The provision seems to permit law suits over what's called "constructive fraud"-- i.e., conduct which involves no deception, but has the same result as if deception were used.

For example, suppose the franchisor permits the franchisee to develop demand for the franchisor's product. Then, once the demand is established, the franchisor terminates the franchise agreement. That effectively deprives the franchisee of the fruits of his labor, without any deception being involved. The NYFSA would appear to bar that kind of conduct if it's tied to the purchase or sale of a franchise opportunity.

And significantly, the NYSFA permits the recovery of attorneys fees. It can't be over emphasized that the economics of a lawsuit often determines the outcome. So if the franchisee knows that he has a chance of being reimbursed for his attorneys fees, he can litigate longer and harder. By the same token, the franchisor will know that he may have to pay for the franchisee's attorneys fees. That significantly increases the franchisor's exposure, and may tip the scales in favor of the franchisee.

Franchise Termination Laws. Some states have franchise termination laws that protect franchisees when their franchises are being terminated. Take, for example, a situation where the franchisee creates demand for the franchisor's product, only to have his franchise agreement terminated. Under those circumstances, some states require the franchisor to pay the franchisee for his effort.

New York doesn't have such a law. But if the franchisor or franchisee has a tie to a state that does, that's states laws may govern the lawsuit.

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