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When Can the New York Franchise Sales Act Be Used to Dispute a Termination?

In 1981, a New York insurance company, William J. Hofmann Agency (“Hofmann”), entered into an Agency Agreement (“Agreement”) with an insurance underwriter, Kemper. Both parties hoped the arrangement would prove mutually profitable, but those expectations were dashed when one party prospered and the other faced bleak profits. Hofmann enjoyed substantial growth in its volume of business while Kemper experienced high loss ratios.  This imbalance led to a rift between the business partners and Kemper sought to exercise his termination rights under the Agreement in order to sever the unprofitable relationship.

To preserve its revenue stream, Hofmann tried to mend the relationship woes.    But when those efforts failed, Hofmann claimed fraud under the New York Franchise Sales Act (the “Franchise Sales Act”) in order to dispute the alleged illegal termination, New York Franchise Sales Act, N.Y. Gen. Bus. Law § 680 et seq. (McKinney).

The Franchise Sales Act was enacted to combat abuses accompanying the growth of the franchising industry. See A.J. Temple Marble & Tile, Inc. v. Union Carbide Marble Care, Inc., 663 N.E.2d 890, 892 (1996). The Act requires that franchises comply with comprehensive disclosure and registration requirements. Id. In addition, it spells out an expansive antifraud provision as well as civil remedies specific to franchisors. Id.

However, before a business entity may recover under the Act, the business must be an actual franchise. Id. Also, any such claim must be brought within a three-year statute of limitations, which begins to run on the date the parties enter into the franchise agreement.  See N.Y. Gen. Bus. Law § 691(4) (McKinney); see also Zaro Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276, 287 (S.D.N.Y. 1991).

In the lawsuit involving these parties, Keeney v. Kemper National Insurance Co., the insurance company contended that because it made premium payments to Kemper, a franchise relationship had resulted. Keeney v. Kemper National Insurance Co., 960 F. Supp. 617 (E.D.N.Y. 1997). . However, the court dismissed the cause of action on the grounds that the Agreement was a “‘garden variety’ commercial contract,” not a franchise agreement under the Act as a matter of law.  Id.

The lesson here is that if a business entity seeks relief under the New York Franchise Sales Act, that entity must first ensure it is an actual franchise.

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