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Australia

A recent prosecution by an Australian workplace safety regulator has highlighted the increasing responsibilities which franchisors operating in Australia may have under occupational health and safety legislation. In the case, the way in which the franchisor conducted its own business gave rise to a duty to employees of the franchisee.

The English Privy Council recently concluded that a franchisee was in fundamental breach of the franchise agreement and that the franchisor was therefore within its rights to terminate that agreement. The court found that strong action can be taken after a fundamental breach by the franchisee, even where a dispute exists on other issues.

Compliance is an important factor in the success of a franchise system. Legal compliance is often overlooked, and may be just as important as systems compliance in terms of penalties and damage to brand image. The Australian Standard on Compliance Programme establishes the structural and operational elements of a successful compliance programme.

There is considerable uncertainty about what constitutes unconscionable conduct. Recent case law suggests that the scope of the unconscionable conduct provisions found in the Trade Practices Act may be narrower than previously thought and franchisors must tread carefully in commercial dealings.

On December 21 2001 new national privacy laws applying to private sector organizations came into effect in Australia. These new laws regulate the way that businesses collect and handle personal information and will affect the way in which most franchisors and franchisees operate in Australia.

The Trade Practices Act regulates the franchising sector in Australia and is critical to the structure and operation of franchise systems. Executives of franchise companies can no longer rely on having a superficial understanding of the act. Compliance programmes are essential and must extend beyond the Franchising Code of Conduct to the pricing, supply and conduct aspects of the act.

Brazil

While in the past the Brazilian courts have ruled that franchising activities are not subject to services tax (known as ISS), recent amendments to the ISS regulations have expressly included franchising as a taxable activity. The changes will hit Brazilian master franchisors particularly hard, as they must now pay ISS both as importers of services and as providers of services.

Although the new Civil Code does not mention franchise agreements expressly, certain provisions may substantially affect franchise businesses. One provision offers first-time franchisees a way out of the franchise contract without triggering penalties for early termination. However, the courts must apply this provision carefully.

Canada

The Quebec Superior Court recently rejected a motion for a provisional injunction to prevent a former franchisee from operating another restaurant from the same premises where it had previously operated the franchised restaurant. The case will now go to trial on the merits; the court's analysis of the non-compete provision and the obligation to de-identify will be of great interest in the Canadian franchising community.

In Bertico Inc v Dunkin' Brands Canada Ltd the Quebec Superior Court ordered Dunkin' Brands Canada Ltd, the franchisor, to pay more than C$16 million in damages (the full amount of the claim) to 21 former franchisees for repeatedly failing to protect and enhance the Dunkin' Donuts brand in Quebec over the course of a decade. This landmark decision may be seen to impose a burdensome obligation on franchisors.

The Quebec Court of Appeal decision in Réal Martineau v Canadian Tire Corporation Ltd has surprised many in the Quebec franchising community. The court did not, as many had expected, intervene to protect the dealer from a seemingly abusive clause which permitted the supplier to build new stores in the same geographic area as the store operated by the dealer.

TA & K Enterprises Inc v Suncor Energy Products Inc concerned the application of the exemption in the Arthur Wishart Act whereby a franchisor is not required to deliver a disclosure document in circumstances if the franchise agreement is not valid for more than one year and does not involve the payment of a non-refundable franchise fee. The decision has now been confirmed on appeal.

A recent decision may have significant implications for franchisors whose franchisees become insolvent, as the Alberta Court of Appeal ruled that pursuant to the Bankruptcy and Insolvency Act of Canada, a franchise agreement may be assigned by a trustee in bankruptcy.

In a recent case the Ontario Superior Court of Justice offered further interpretation of the disclosure exemptions outlined in Section 5(7) of the Arthur Wishart Act. Adding to previous decisions on this matter, this latest judgment provides new insight into the transfer of franchises, as well as the events that may trigger a disclosure requirement on the part of franchisors.

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China

The new Regulation on Commercial Franchises represents a significant step towards an effective and efficient regulatory regime, and will greatly benefit both franchisors and franchisees in China. However, it is by no means a perfect document and much remains to be clarified by Chinese officials, through Ministry of Commerce implementation guidelines and otherwise.

Denmark

In a recent case Danish company Bestseller attempted to obtain the competition authorities' approval of its franchise agreements. The eventual High Court judgment has led to uncertainty as to how and to what extent it is possible to establish adequate, up-to-date and necessary reporting and monitoring systems within franchising systems without legal repercussions.

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Ecuador

In Ecuador, a franchise for the production of processed foods, medicine, cosmetics and certain other items must be registered with the Ministry of Public Health. The ministry may cancel such a registration if the franchisee fails to obey the law or if consumers are injured. The specifics are discussed in this update.

Ecuador has a well-developed legal regime governing transfers of technology. This update looks at some of the requirements for licensing agreements and also highlights contract terms that will make an agreement null and void.

Egypt

The legislature has introduced limitations on the terms of franchise agreements. These limitations are in favour of franchisees in order to protect importers of technology and know-how. However, franchisors can take steps to protect themselves against such limitations and minimise the risks and exposure arising from them.

Germany

Overview
Including: Legislative Framework; The Civil Code; The Commercial Code; The Standard Contracts Act; The Consumer Credit Act; The Act against Restraints of Competition

The Federal Court of Justice recently held that that the expiry of a main copyright licence agreement does not lead to the expiry of the related sub-licences. The question is whether and to what extent this also applies to master franchising. Under a master franchising system, the franchisor concludes a master franchise agreement with a master franchisee, which is given the right to grant sub-franchises.

A contractual non-compete clause in a franchise agreement was at the centre of a case before the Dusseldorf Higher Regional Court. Its decision concerns the prerequisites for a franchisee's claim to information where it has reasonable suspicion of its franchisor having breached a contractually agreed non-compete obligation, and the right to claim damages from the franchisor.

The Dusseldorf Higher Regional Court recently ruled that a contractual duty of protection against competition on the part of the franchisor can arise only if the financial survival of the franchisee is at sustained risk due to competing activity. The court explicitly left open the question of whether the franchisor has a contractual obligation to protect against competition over and above the contractual provisions in principle.

Whether supplier rebates received by a franchisor are passed on to franchisees is a subject of practical importance in franchising. The Federal Court of Justice had previously ruled that a franchisor is not obliged by law to pass on these benefits to franchisees, except in cases where such an obligation has a contractual basis within the franchise agreement. The Dusseldorf Higher Regional Court recently confirmed this.

Contractual penalties are of great significance, especially in franchising. This is because losses arising from causes such as a breach of a non-compete provision or a confidentiality obligation relating to know-how are very difficult to quantify. The Erfurt District Court recently considered a contractual penalty clause and set strict criteria for its validity, in line with previous case law. In order for the clause to be valid, the court required penalties to be limited in cases of multiple breaches of the prohibition on competition.

The Dusseldorf District Court recently dismissed a breach of good faith claim. While the ruling did not concern a franchise system, its reasoning may be extended to similar situations within franchise systems. The judgment is therefore significant for franchise systems, especially since there are few rulings on the topic of imminent competition protection.

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Greece

In Greece, there is no case law concerning a franchisor's post-contractual obligations towards its franchisees. Consequently, it is unclear how franchisees should dispose of any remaining stock after the termination of a franchise agreement. The existence of remaining stock may cause problems for both franchisees and franchisors and result in damage. In a recent case the Court of Athens ruled on such an issue for the first time.

Ireland

A recent High Court decision highlights the necessity for both parties to a franchise agreement to adhere to its terms and to continue to abide by their respective obligations, notwithstanding that the franchisor's policy regarding the future development of the franchise network may have changed.

Italy

Overview
Including: Economic Framework; Legal Regime; Competition Law; Proposed Legislation.

From the first contact onwards, franchisors should maintain the utmost transparency when advertising their networks to prospective franchisees, in particular with regard to the cost of joining their networks. As one case shows, an advertisement that does not provide fully detailed information may constitute a breach of the Law on Misleading Advertising, even if the information is provided at a later stage.

The debate regarding exclusivity in franchise agreements – in particular, whether exclusivity should be considered an essential element of this type of contract – raged on for many years before Law 129/2004 entered into force. This law provides that if exclusivity is granted, it must be expressly agreed and indicated in the franchise agreement.

Franchisors often wish to purchase a branch (ie, a point of sale) that was previously managed by a franchisee under a franchise agreement, and franchise agreements frequently provide for a pre-emption right or a right of first refusal in the franchisor's favour. However, the question of whether such an acquisition constitutes a concentration in competition law terms is not as clear as it might appear.

A recent decision confirmed that under the terms of a franchise agreement, a franchisor had the option to repurchase the franchisee's point of sale furnishings and equipment on termination of the agreement. However, the provision did not require the franchisor to do so. If a franchisor wishes to exercise such an option, the franchisee will incur civil liability if it fails to fulfil its obligation to sell at the agreed price.

Article 2497 of the Civil Code - on the power of direction and coordination in respect of a company - applies to franchising. However, direction and coordination on a contractual basis do not automatically arise because a franchisor appears to be the stronger party or because, as is usual in franchise agreements, the franchisee must accept certain obligations and give certain undertakings.

Some forms of contract are presented as franchise agreements even if they have few or no characteristics in common with franchising. This is the case of multi-level marketing, which may be operated with intent to defraud. Prospective franchisees must review the terms of an arrangement to ensure that they are entering into a genuine franchising relationship, not a fraudulent scheme.

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Japan

In preparing a franchise agreement, a franchisor must carefully consider whether the extent of restrictions in the relevant non-compete clause is reasonable in proportion to the need to protect its commercial rights or know-how. A liquidated damages clause serves as an added layer of protection in the event of the franchisee's violation of the non-compete clause.

When a franchisor considers entering the Japanese market, one of its first concerns is whether any disclosure obligations govern the proposed franchise in Japan. Voluntary and proper disclosure of franchise-related information reduces the likelihood of disputes with franchisees and is advantageous for franchisors in defending lawsuits brought against them by franchisees.

Franchisors usually include a non-compete clause in their franchise agreements to prevent a franchisee from misappropriating trade secrets and know-how or exploiting its customers or markets. However, franchisors should be aware of the key case law on the issue in order to ensure that such clauses are not deemed an excessive restraint of their franchisees' rights.

Around 200 individual owners of franchised convenience stores have formed what has been described as Japan's first nationwide union of franchisees. Its attempt to begin collective bargaining with a leading franchisor has so far been unsuccessful and it appears to face major barriers to recognition as a 'labour union' under the Labour Union Act. However, the union has highlighted the problems that many of its members face.

The Fair Trade Commission has issued a cease and desist order against Japan's largest convenience store franchisor on the grounds of abuse of dominant position. It found that the franchise agreement gave franchisees sole discretion to set product prices, but that the franchisor's employees who supervised the management of the convenience stores had violated the Anti-monopoly Act.

Japan's largest convenience store franchisor has announced that it is being investigated by the Fair Trade Commission for potential violations of the Anti-monopoly Act. The question of the extent to which a franchisor can prohibit franchisees from discounting perishable foods could prompt closer scrutiny of other restrictions in franchising agreements.

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Mexico

Article 142 of the Industrial Property Law - the primary law governing franchising - has been substantially revised. It now not only provides the broad parameters for disclosure and possible registration of franchise agreements, but also includes relationship law elements that were previously not part of the law. It also attempts to limit the franchisor's right to terminate the agreement without good cause.

Netherlands

The relevant laws and regulations do not clearly define ‘independent business operators’ or ‘independent agents’ meaning that franchisees are sometimes classed differently for tax and social benefit purposes. However, a working party has recently published recommendations that should help to solve this confusion.

New Zealand

The Privy Council recently rejected a couple's claim for unlawful termination of their franchise agreements. The franchisees had made certain inflammatory remarks to other franchisees about representations made by the franchisor. The court compared a franchise operation to a joint venture, and stated that all parties should adhere to "norms of general behaviour".

A recent case involving a dispute between franchisor and franchisee highlights the need for franchisors to take care in their dealings with franchisees, both in drafting the franchise agreement and in taking the proper steps before termination of the agreement.

Many overseas franchising systems are coming into New Zealand at present. This is because New Zealand is a good place in which to establish a franchise: the number of systems operating in the country has grown at a rate of over 20% during the last year.

The 2001 survey conducted by the Franchise Association of New Zealand has confirmed that the climate for franchising in New Zealand is very positive. This update discusses some of the survey's highlights.

In several recent cases franchisors have been found liable under the Fair Trading Act because they misrepresented financial information regarding the franchise to prospective franchisees. Meanwhile, the Privy Council is set to examine the relational aspects of franchise agreements.

After a submission by the Franchise Association, the Commerce Select Committee has announced that controversial provisions in the Commerce Amendment Act will be dropped.

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Russia

Overview
Including: No pre-franchise disclosure requirements; Minimum content of franchise agreement; Registration; Franchisor liability; Restrictions on termination rights; First refusal rights; Policing trademarks; Resale price maintenance, non-compete provisions and refusal to deal; No registration deadlines; Exclusive licence not equivalent to exclusive use; Choice of law.

Significant amendments to the Civil Code were recently published for consideration by the State Duma. Among other things, the draft amendments will make the registration of franchise agreements easier, while giving parties to franchise agreements greater legal protection during negotiations and with respect to payment obligations.

Russia's highest commercial court, the Supreme Arbitrazh Court, recently ruled that where a franchisor with a Russian-registered trademark grants a franchisee an exclusive licence to use that trademark within a defined territory, the exclusive licence does not, by itself, prohibit the franchisor from also using its trademark in that territory.

A number of business-friendly amendments to the Civil Code will come into force shortly, improving the franchising framework in Russia and simplifying market entry for non-Russian companies. However, despite these positive changes, two significant restrictions will remain in effect.

The Russian State Duma recently gave preliminary approval to a number of business-friendly amendments to the Civil Code regarding franchise agreements. These amendments, which will almost certainly become law, will align Russia more closely with the West with respect to franchise law and will simplify market entry for non-Russian companies intending to conduct franchise operations in Russia.

Although all franchise agreements in Russia must be registered, franchisors and franchisees can commence operations without registration and register their agreement with retroactive effect, sometimes years later. However, deferring registration can have serious disadvantages for a franchisor.

Spain

A draft green paper by the Commission on Industry, Tourism and Commerce provides that Parliament will review the draft Distribution Agreements Act, which will regulate the relationships between agents involved in the distribution sector. The act will apply to and protect any party involved in the commercial distribution sector and will regulate all types of distribution agreement, including franchising.

The government has recently modified the rules applicable to the Franchisors' Registry. The government aims to promote the registry as a tool to obtain accurate and updated information. It also aims to clarify the definition of 'franchise' and differentiate franchising activities from other commercial activities that are often confused with franchising.

Royal Decree 378/2003 on block exemptions, specific authorizations and the Competition Registry entered into force in April 2003. Among other things, the law authorizes certain agreements between two or more companies operating at different levels of the production or distribution chain that relate to the conditions under which the parties may purchase, sell or resell certain goods or services.

The franchising legislation has been criticized for, among other things, failing to enforce the obligations imposed on franchisors. Therefore, the government has proposed an amendment to the legislation. However, franchising experts believe that the proposal does not resolve any fundamental practical problems and creates even more confusion.

Most franchisors seek to protect their control over their business to the fullest extent possible and include numerous supervisory mechanisms in their contractual agreements with franchisees. When expanding their networks in Spain, franchisors must pay attention to domestic legislation, particularly if the franchisee is unable to negotiate the conditions of the agreement.

Spanish law requires franchisors and master franchisees to disclose certain pre-contractual information to potential franchisees. However, the parties to a master franchise agreement may be reluctant to provide sensitive information to parties who are not bound by any contract. Solutions to this problem include confidentiality agreements and the granting of indemnities.

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Sweden

Overview
Including: Disclosure requirements; Statutory rules and legislation; Applicable antitrust law.

A cornerstone of many franchise systems is that the franchisor supplies products to the franchisee, which in turn sells them to its customers. Cases involving suppliers and wholesalers thus have a bearing on franchise systems and on the agreements governing such systems. An appellate court has decided a dispute between a supplier and a wholesaler that is of interest to franchisors which sell products to franchisees.

Most franchisors enter into agreements where the franchisee is a legal entity in which the owner cannot be personally liable for debts. Franchisors demand that franchisee owners sign a personal guarantee in which each owner personally guarantees that the franchisee will meet all of its obligations under the franchise agreement. An appellate court recently had the opportunity to scrutinise such personal guarantees.

There is no specific law in Sweden that governs the rights and obligations of parties to franchise agreements. Consequently, judges must make decisions based on the wording of individual franchise agreements and on general contract and commercial principles. A 2009 Supreme Court ruling regarding a distribution contract in which a judge considered laws and precedents outside Sweden could have a bearing on franchise disputes.

Since 2006 a disclosure law in Sweden has set out six points of which a franchisor must timely inform a potential franchisee, in writing, before the signing of a franchise agreement. The sixth point says that the franchisor must inform the franchisee that the franchise agreement contains an arbitration clause and point out the implications of such a clause.

The Law on the Duty of a Franchisor to Provide Information regulates the information that a franchisor or master franchisee must disclose, within a reasonable timeframe, before a potential franchisee or a sub-franchisee signs a franchise agreement. This update describes the provisions of the law and their implications for franchises.

Switzerland

The Federal Competition Commission has issued a new draft notice on the competition law treatment of vertical agreements which takes into account the latest amendments to the Competition Act. While this attempt at clarification is welcome, it is hoped that further changes to the draft will be made to take account of the impact on franchise relationships.

No specific franchising law or government agency regulates the offer or sale of franchises in Switzerland. However, parties are bound by the general principles of Swiss law, particularly the concept of a pre-contractual relationship of trust that commits a party to act with care and provide pre-contractual disclosure.

The revised Cartel Law contains a number of novelties directly affecting franchising. Article 5 of the law states that the elimination of effective competition is also presumed in the case of agreements in distribution contracts with regard to the allocation of territories, insofar as passive sales are excluded, and minimum and fixed resale prices.

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Ukraine

The Civil Code states that a party to a contract may seek its annulment if it was entered into without the party's volition or on the basis of fundamental error or fraud. Could these provisions be applied to a franchise agreement? Two articles of the code would support a Ukrainian franchisee's claim for annulment and might prove persuasive before a foreign court.

The dismantling of the Soviet Union required each former republic to develop sets of laws regulating franchise relationships. Ukraine has implemented one of the most business-friendly franchising frameworks, with no requirement to register agreements with the Patent Office or other state registration body.

Although the courts have ruled on only one franchising case in 2008, the dispute and the court's approach to it provide useful indicators for the industry, clarifying which documents are likely to be accepted by a court as proof of performance of a franchise agreement.

The Civil Code has a chapter devoted to franchise agreements, often termed 'commercial concession agreements'. However, certain provisions may prove problematic: the code does not require a franchisor to disclose pre-contractual information on the franchise, while a franchisor is required to assume joint and several liability for the franchisee’s sale of goods and services.

United Kingdom

A recent decision of the Court of Appeal recognizes that the courts should protect a franchisor's goodwill following termination if a proportionate restrictive covenant is in place. This provides the franchisor with the necessary time and breathing space to locate the right franchisee to take over the territory. Furthermore, it prevents the territory from becoming tainted by the existence of a former franchisee.

The British Franchise Association occasionally issues practical advice and guidance on best practice in the form of technical bulletins and guidelines. Over the last 15 months it has issued three new technical bulletins which are of general interest, covering minimum performance clauses, gagging clauses and the disclosure of kickbacks.

Dealing with faulty goods is a key risk management and cost issue in franchise systems that involve the supply of products to consumers. Consumers' statutory rights are the subject of a consultation exercise by the Law Commission. The consultation is part of an exercise to harmonize consumer rights across Europe being conducted by the European Commission.

Should the relationship between a franchisor and franchisee break down, it is not unusual for a failing franchisee to allege that the franchisor mis-sold the franchise by understating the risks of the business. A recent case considered the issue of how far a non-reliance clause in a franchise agreement protects the franchisor in this situation.

Restrictive covenants are an important tool for franchisors to protect their business interests once a franchise is terminated. However, as these clauses are anti-competitive, the courts are careful to give due weight to the position of the franchisee. In particular, the courts are careful not to construe narrowly the terms of restrictive covenants, which are often not open to negotiation.

The recent franchising case of Jani King v Pula Enterprises Limited considered the issue of implied terms in a franchise agreement and the limits on franchisors’ obligations to be reasonable. One of the terms to have been breached was an implied relationship of trust and confidence. The High Court held that no such term was implied in the contract.

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USA

In preparation for the upcoming renewal season, increased efficiency is likely to be a top priority for any franchise system. Tips to help franchisors save time and money in preparing for a successful 2012 renewal season include talking to a certified public accountant before the end of the fiscal year to establish whether additional capitalisation is needed to avoid the imposition of financial assurances.

Franchisors need to embrace the principles of, and train their entire organisation in, smart communication. Smart communication is the art of communicating with franchisees and others in a way that will decrease the risk of litigation and help to win a case should litigation arise. This update outlines the six basic principles of smart communication.

Arbitration clauses are prevalent in many form contracts, including franchise agreements. The Supreme Court recently examined "whether the [Federal Arbitration Act] prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures" in AT&T Mobility LLC v Concepcion. The case may have major implications for franchisor/franchisee relations.

A franchisor that attempts to sell franchises in the United States must comply with a patchwork of federal and state laws that regulate franchising. These involve detailed disclosure of the franchise opportunity at the federal level, as well as additional disclosure obligations at the state level. A basic understanding of the purpose and scope of these laws is a necessary component of any US expansion plan.

The Iowa Supreme Court has handed down its decision in KFC Corporation v Iowa Department of Revenue, upholding the state's ability to tax out-of-state franchisors without a physical presence in the state. Although not unexpected, this decision will lead to increased enforcement efforts in Iowa and perhaps other states.

Franchising in healthcare requires compliance with franchise laws and numerous state and federal healthcare laws. Landmines await the unwary franchisor. Franchisors that proactively anticipate the complexity of this regulatory landscape – and design appropriate models – will be well positioned to take advantage of unprecedented market opportunities.

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Venezuela

The government has issued the first of several regulations establishing a new currency control regime to be administered by the Commission for the Administration of Foreign Exchange. The commission will determine the types of goods and services that will be considered priority items for importation. Unfortunately, the services of most franchisees are not expected to be categorized as such.

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