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The Franchise Memorandum

New York Federal Court Finds Local Advertising Requirement Does Not Constitute Franchise Fee

In Nature’s Plus Nordic A/S v. Natural Organics, Inc., 2013 U.S. Dist. LEXIS 159157 (E.D.N.Y. Nov. 6, 2013), the United States District Court for the Eastern District of New York found that the local advertising requirement in a distributorship agreement did not constitute a “franchise fee” under the New York Franchise Sales Act (“NYSA”). In the case, Natural Organics, Inc. terminated a distributorship agreement when the distributor, Nature’s Plus, failed to meet the agreement’s minimum local advertising requirement and minimum gross sales requirement. Nature’s Plus sued, claiming wrongful termination and alleging violations of the NYSA. The only payments required under the distributorship agreement were payments due to Natural Organics for products sold at wholesale prices. The minimum advertising requirement was not payable to Natural Organics. Nature’s Plus argued that the minimum advertising requirement constituted a franchise fee, triggering the applicability of the NYSA.

The court found that a local advertising requirement may constitute a franchise fee under section §681(3) of the NYSA if the fee is paid “for the right to enter into the business,” even if the local advertising requirement is not payable to the alleged franchisor. In this case, however, because the distributorship agreement expressly stated that the advertising requirement was made as partial consideration for certain product discounts, the advertising payments were not made for the right to enter into a business and did not constitute “franchise fees” under the NYSA. With respect to the distributor’s wrongful termination claims, the court found that Natural Organics wrongfully terminated the distributorship agreement because, as a matter of law, Nature’s Plus substantially complied with the minimum gross sales requirement by achieving 99.5% of the gross sales required under the contract. The court did determine that genuine issues of material fact remained as to whether Nature’s Plus met its minimum advertising requirement.

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