Following years of study and deliberation, the North American Securities Administrators Association (NASAA) Franchise Project Group—the quasigovernmental body of federal and state franchise officials which coordinates franchise regulatory activity, initiatives and policy nationwide—recommended to NASAA a new series of Franchise Disclosure Document (FDD) "state cover pages," which NASAA voted to adopt on May 19, 2019. (Full disclosure: This author serves, and has served for over 20 years, as an Advisor to the NASAA Franchise Project Group.)

Each of the 14 states featuring franchise registration/disclosure statutes (California; Hawaii; Illinois; Indiana; Maryland; Michigan; Minnesota; New York; North Dakota; Rhode Island; South Dakota; Virginia; Washington; and Wisconsin) will in one fashion or another adopt these new FDD state cover pages mandate. This will be accomplished by NASAA adopting revisions to the Instructions to the NASAA Guidelines governing the preparation of a Franchise Disclosure Document.

On and after Jan. 1, 2020, only the new NASAA FDD state cover pages may be used in connection either with initial, renewal or amendment FDD registration filings. The instructions for preparing these new state cover pages and a sample of how they should appear can be found at https://s30730.pcdn.co/wp-content/uploads/2019/06/New-Frachise-State-Cover-Sheets-Instructions.pdf.

As always, the state cover pages must appear immediately following the FDD's front cover, the "Federal Trade Commission cover page." The very first FDD state cover page is now titled "How to Use This Franchise Disclosure Document" and features a series of questions (such as "How much can I earn?" and "How much will I need to invest"?) and responses thereto directing the reader to the particular FDD items addressing these issues.

Next comes a second state FDD cover page titled "What You Need to Know About Franchising Generally" (italics in original). It attempts to impart to prospective franchisees various risks and pitfalls that they may encounter, such as the requirement that they may have to pay royalties and other fees even if they are losing money; that business models can change; operating restrictions be imposed; that renewal generally takes the form of signing a new agreement with different terms and conditions; and, that a covenant not to compete may preclude a franchisee from operating a similar business after its franchise ends. This page also highlights that certain states require FDD registration.

Finally, the third new FDD state cover page, titled "Special Risks to Consider About This Franchise" (italics in original), advances the franchise system-specific risk factors which have been required to be disclosed all along, as may be mandated by state franchise officials.

Additionally, the table identifying the states in which an FDD has been registered has been moved from the front of the FDD to its very end (right before FDD Item 23, the receipt page).

There are quite specific instructions for preparing these new FDD state cover pages available at the link identified above, and we urge readers to review them, since failure to comply therewith will prompt unnecessary delay in the franchise regulating states' consideration of post-Jan. 1, 2020 applications for initial, amendment or renewal FDD registrations.

Case Law Developments

Distributor vs. Employee. In Franze & Schrufer v. Bimbo Foods Bakeries Distribution, 2019 WL 2866168, 170 Lab. Cas. P 36,720 (S.D.N.Y. July 2, 2019), the U.S. District Court for the Southern District of New York was asked in this putative class action to adjudicate whether delivery drivers of baked goods for defendant Bimbo Foods Bakeries (and its subsidiaries, including Freihofer Baking Company) were employees as opposed to independent contractor distributors.

The court granted defendant Bimbo Foods' motion for summary judgment, finding that: (1) defendant Bimbo did not exercise control over plaintiffs' business activities sufficient to render them "employees"; (2) the plaintiff delivery drivers enjoyed independent opportunities for profit and loss; (3) the plaintiff delivery drivers possessed a high degree of skill and independent initiative which was not imparted by defendant Bimbo but rather was independently possessed; (4) the plaintiff delivery drivers could elect to work as much or as little as they desired and could sell their distributorships at any time; and (5) the service rendered by the plaintiff delivery drivers, while an essential part of defendant's distribution chain, was not Bimbo's primary business model—the manufacture and sale of bakery products.

"In sum," held the court, "based on the totality of circumstances, the Court finds that the economic reality of the relationship between Plaintiffs and Bimbo is that Plaintiffs were independent contractors."

Can a New York Franchise Act Cause of Action Be Assigned? In Bruno Magli IP Holdings, LP v. DMODA NY, 2019 WL 1315887 (S.D.N.Y. 2019), the U.S. District Court for the Southern District of New York was asked to determine whether a cause of action arising from an alleged violation of the New York Franchise Act (entry into a "License Agreement" claimed to be a "franchise") could be assigned, in this case from the entity which entered into the subject agreement to its affiliate.

According to defendant-counter plaintiff DMODA, fashion shoe manufacturer Bruno Magli granted a License Agreement to DMODA granting it a non-exclusive license to sell Bruno Magli products at retail stores in the United States. DMODA claimed that the License Agreement created a franchise relationship and that Bruno Magli violated the New York Franchise Act by not registering or furnishing a Franchise Disclosure Document prior to entering into the License Agreement. DMODA assigned the entire License Agreement to an affiliate. In view of this assignment, Bruno Magli moved to dismiss DMODA's cause of action on the ground that the affiliate-assignee of the License Agreement was not the original putative "franchisee" and that a New York Franchise Act cause of action could not be assigned to it.

Disagreeing, the court held that "there is nothing under New York law … that, at this stage, disallows assignment of these claims" and denied Bruno Magli's motion to dismiss.

David J. Kaufmann is senior partner of Kaufmann, Gildin & Robbins. He authored the New York Franchise Act while serving as Special Deputy Attorney General of New York, and also serves as an Advisor to the North American Securities Administrators Association (NASAA) Franchise Project Group (the coordinating body of federal and state franchise regulators).