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05 February 2019
Relationship with the European Union
Structuring the franchise business
Choice of law
Competition and antitrust law
Other laws affecting franchising
Franchisors expanding to the United Kingdom need a thorough knowledge of any UK rules and regulations which may affect them, particularly in a post-Brexit Britain.
For any successful international business, expansion into the United Kingdom offers exciting new business opportunities and growth potential. The United Kingdom is also often chosen as a base from which to establish a launch pad for further expansion across the European Union.
Brexit may erode some of these benefits, but many of the attractions of the UK market will endure whether the United Kingdom remains inside or outside of the European Union.
A common misunderstanding is that the United Kingdom is a single legal system. There are certain fields of legislative competence devolved to the local parliaments, but there are substantive fields of law which apply across the United Kingdom.
Another common misunderstanding is that the European Union is a fully harmonised legal system. The European Union is a union of 28 (possibly soon to be 27) different member states that share common political, economic and social objectives. However, significant differences remain between individual member states that prove challenging to businesses entering the EU market.
Therefore, while a legally compliant English law franchise agreement will, by its very nature, incorporate a number of EU legal principles, if it is to be used in other member states it should still be reviewed for its compliance with the mandatory local laws of the relevant member state.
The disparity between the legal systems of member states applies to franchising. Some member states have franchise-specific legislation requiring, for example, franchisors to register with the authorities or to issue a pre-contractual disclosure document to prospective franchisees. Some member states treat franchisees as akin to commercial agents or consumers.
Some member states, such as Germany, have a codified duty of good faith, which applies to all elements of the franchise relationship. This can affect a franchisor's contractual discretion and its ability to take unilateral decisions on behalf of the network.
By comparison, the United Kingdom is a very straightforward jurisdiction:
As such, English law remains an attractive choice of law for international franchisors wishing to do business in the United Kingdom and the wider European Union.
The British Franchise Association (BFA) is a trade association which promotes ethical franchising in the United Kingdom. The BFA's code of ethics, which is not legally binding but which its members must abide by, provides a benchmark for good industry practice relating to issues such as pre-contractual disclosure, advertising, recruitment, online selling, the exercise of fairness throughout the franchise relationship and dispute resolution.
International franchisors which join the BFA will need to adapt their franchise agreements to ensure that they comply with the code of ethics.
Businesses launching in the United Kingdom may intend to operate corporately owned outlets as well as franchised outlets or provide on-the-ground support to its franchise network, in which case a launch may or may not be best achieved through the creation of a new vehicle or the acquisition of an already established local business. Foreign ownership and investment in the United Kingdom is subject to very few regulations.
There are no general restrictions on the foreign ownership of UK assets or companies. All new companies must register with Companies House (the registrar for companies in the United Kingdom) and will be subject to official requirements, such as the filing of annual accounts.
UK employment contracts are subject to a number of statutory protections for employees – many of which are derived from EU law. Critical employee considerations include the impact of local tax regimes on employee stock options, works council establishment, talent availability and transferring employment rights for employees acquired in a business sale context.
An important consideration for an international franchisor is which law should govern its franchise agreement for the United Kingdom, and in which venue it will choose to resolve disputes.
The United Kingdom is a signatory to the New York Convention on the Enforceability of Foreign Arbitration Awards and has a number of bilateral treaties with other countries which recognise judgments passed by foreign courts.
Understandably, international franchisors prefer to elect the law of their home country in their franchise agreements. This approach is likely to work in the United Kingdom, but it is important to check and take advice on the impact of mandatory English law on the franchise agreement.
For international franchisors which are using the United Kingdom as a launch pad for further expansion into the European Union and further afield, or which use multi-tier structures (eg, master franchising), electing English law to govern the franchise agreement (or at least the sub-franchise agreement, in the case of master franchising) is a sensible decision.
For international franchisors which are based in common law jurisdictions, English law will feel familiar. In addition, a franchise will be much more attractive to a prospective UK or European franchisee if it is subject to English law and the venue for resolving disputes is in the United Kingdom (as opposed to a non-European choice of law and venue for disputes).
Each member state has its own IP regime, as well as being subject to EU law and international treaties. Trademark and design rights for the United Kingdom can be registered through the UK Intellectual Property Office or alternatively, until Brexit takes effect, an application for an EU trademark to provide protection in all member states.
If the franchisor already has marks registered in other jurisdictions which are party to the Madrid Protocol, it may be possible to add the United Kingdom to the international registration by application to the World Intellectual Property Organisation.
Competition law affects franchise agreements both in the United Kingdom (where the regulator is the Competition and Markets Authority) and between member states (in which case it is the European Commission). Unlike the 'rule of reason' approach in the United States, competition law does disadvantage franchise systems against corporately owned businesses.
This is a complex area of law, and penalties for breaches can be severe (including unenforceability of agreements or fines expressed as a percentage of global turnover), which is why specialist franchise lawyers should be consulted.
Some of the key issues include retail price maintenance, restrictions on 'passive sales' outside of a contractual territory, bans on online selling and exclusive supply and other non-compete obligations.
Regulations on 'pyramid selling' schemes do not expressly exempt franchise agreements, so it is important to ensure that the franchise comes within one of the general exemption criteria.
The United Kingdom has one of the strictest anti-corruption regimes in the world (even in comparison to the US Foreign Corrupt Practices Act).
Provided that the franchisor-franchisee relationship is structured correctly, the risk of franchisees being deemed to be employees of the franchisor, or the risk of joint employer liability for franchisors (which is on the rise in the United States, Canada and Australia) is very low.
The European Union has the strictest data protection regime in the world. The EU General Data Protection Regulation came into force in May 2018 and applies to every business – whether located in the European Union or not – that offers goods and services to EU citizens or that monitors EU citizens' behaviour.
The outcome of Brexit is still unclear. Assuming that there is some form of Brexit, for international franchisors which are operating across the European Union and the United Kingdom, Brexit is likely to impact the following key areas.
Franchisors will most likely have to obtain separate UK and EU trademark protections.
Choice of law
English law agreements will most likely be enforceable in the European Union, but arbitration may be a safer bet in the short term.
Competition and antitrust law and data protection
In the short term, it is unlikely that there will be a divergence between the United Kingdom and European Union.
Extra flexibility should be built into supply terms to take account of the 'known unknowns' of tariffs, additional regulations and currency flows.
It is extremely important that franchisors looking to do business in the United Kingdom invest properly in taking legal advice from a lawyer specialising in franchising to ensure that their business operations and franchisee agreements are legally compliant.
Understanding the risks and issues and managing those risks through effective structuring and enforceable legal contracts will enable international franchisors to reap the rewards of doing business in one of Europe's largest and most dynamic markets.
For further information on this topic please contact Gordon Drakes at Fieldfisher by telephone (+44 20 7861 4000) or email (firstname.lastname@example.org). The Fieldfisher website can be accessed at www.fieldfisher.com.
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