If you are dissatisfied with your franchise purchase, you are not alone. While some franchisees are able to find success, many franchises fail—and a significant percentage do so within the first two years of ownership. In this scenario, what options do you have available? Can you rescind your franchise agreement? New York franchise attorney Jeffrey M. Goldstein explains.
When Do Franchisees in New York Have the Right to Rescind?
As a general rule, franchisees do not have a right of rescission. Franchise agreements are binding, and once you sign, you remain bound until either (i) the term expires or (ii) your franchisor terminates your franchise for cause. Franchisees’ contractual rights are usually very limited, and if a franchisee is unable to find success, this will usually lead to default (i.e., due to non-payment of royalties) and termination. Even when franchisees have claims against their franchisors, they must typically pursue their claims in mediation or arbitration (under the “mandatory ADR” clauses in their franchise agreements), and they are usually limited to recovering their actual damages.
However, there are exceptions.
The New York Franchise Sales Act (NYFSA) gives franchisees the right to rescind their franchise agreements in limited circumstances. Under the NYFSA, franchisors are required to register before offering franchises for sale in the state, and they must timely provide all prospective franchisees with a compliant Franchise Disclosure Document (FDD) before entering into a franchise agreement. The NYFSA also prohibits franchisors from making false or misleading statements (or omissions) during the franchise sales process, and it applies to all franchisors that sell franchises in New York, regardless of where their headquarters are located.
In most cases, NYFSA violations will provide franchisees with grounds to pursue a claim for damages. However, the NYFSA provides franchisees with a right of rescission in cases involving willful and material violations. When rescission is warranted, franchisees are also entitled to the return of monies paid to the franchisor and recovery of their attorneys’ fees and costs.
Franchisees have three years from the date of “the act or transaction constituting the violation” to seek rescission under the NYFSA. Typically, this means that franchisees must file their claims within three years of signing their franchise agreement.
What are some examples of violations that can provide grounds for rescission under the NYFSA? Keeping in mind that a franchisee must be able to successfully allege that a violation is willful and material in order to seek rescission, some potential examples include:
- Omitting required disclosures from the FDD
- Making false or misleading statements in the FDD
- Providing false or misleading information outside of the FDD
- Entering into a franchise agreement too soon after delivering the FDD
- Selling a franchise without registering in New York
While franchisees have up to three years to seek rescission under the NYFSA, if you think you may have grounds to seek rescission, you should speak with a New York franchise attorney as soon as possible. When your franchise is struggling, unnecessary delays can lead to unnecessary costs—and they can increase your risks of facing default and termination (if you are not facing default and termination already). An experienced New York franchise attorney will be able to thoroughly assess your rights under the NYFSA and work to secure all appropriate remedies (including rescission, if warranted) on your behalf.
Alternatives to Seeking Rescission of Your Franchise Agreement in Court
Regardless of whether you have grounds to seek rescission under the NYFSA, you may have other options as well. Along with assessing your rights under the NYFSA, an experienced New York franchise attorney will also be able to assess your alternatives and help ensure that you make an informed decision about your next steps.
For example, one option may be to negotiate an exit with your franchisor. If your franchisor has violated the NYFSA or the terms of your franchise agreement, it probably knows this is the case. Likewise, if you are dissatisfied with your franchise, there is a good chance that your franchisor is dissatisfied as well. This means that you may have leverage to negotiate a settlement that allows you to exit the system—and that allows both of you to avoid the costs of mediation, arbitration or litigation.
You may have other negotiating points as well. For example, if your franchise is struggling, your franchisor may want to reopen your territory and resell your location to someone else. When negotiating, however, you do not want to overemphasize your lack of success, and you do not want to make it appear as though installing a new franchisee is all it will take for your franchisor to start generating revenue from your location. You will want to tactfully raise any issues with your franchisor’s system and performance as well, and you will want to make it clear that you believe you have grounds to pursue legal action and are prepared to do so if necessary.
Relatedly, while you are seeking an exit, it is important that you remain in compliance with your franchise agreement to the fullest extent possible. This is a scenario in which two wrongs do not make a right. Violating your franchise agreement could give your franchisor rights (and leverage) it doesn’t currently have, and this, in turn, could limit the options you have available. With this in mind, if you are struggling to pay your royalties and marketing fund contributions as they come due, you will want to discuss your options with an attorney right away.
Schedule an Appointment with New York Franchise Attorney Jeffrey M. Goldstein
If you need to know more about your legal rights and options as a franchisee in New York, we encourage you to contact us promptly. New York franchise attorney Jeffrey M. Goldstein can explain everything you need to know and help you make informed decisions about your next steps. To schedule an appointment with Mr. Goldstein, please call 202-293-3947 or request a free consultation online today.
