Your expansive guide to franchising’s legal frameworks, and what a business should look for when it comes to comprehensive counsel
Interview by Kieran McLoone, deputy editor for Global Franchise.
The legalities of franchising might not be the most outwardly thrilling subject associated with this dynamic and global business model, but it’s a specialism that is intrinsic to international success.
Protecting your brand from a whole litany of legal troubles can only be done with an experienced, knowledgeable team. Foregoing proper system and processes will open a brand up to issues which could damage not only the brand’s reputation, but could also jeopardize an entire franchise network.
To cover everything you need to know and highlight some key trends within the industry, we’ve spoken to several experts from a plethora of legal firms and have prepared a crash course for brands with global ambitions.
This week Carl Zwisler of Lathrop GPM LLP speaks about international polarity.
KM: Which global markets are the most tumultuous from a franchisor perspective, due to regulations and frameworks?
CZ: Based upon laws currently in place and laws that seem to be under serious consideration, franchisors should thoroughly analyze existing laws and proposals in Belgium, California, China, Indonesia, Malaysia, the Netherlands, Saudi Arabia, South Korea, and Thailand.
Belgium has just adopted two new laws: one prohibits “unfair contract terms”. The other prohibits unfair use of economic advantage in agreements, such as franchise agreements. Franchisors are not likely to know the limits of these prohibitions until they have been sued and courts have interpreted the laws.
California has adopted a law that some interpret as characterizing franchise relationships as employer-employee relationships. If that interpretation is upheld by courts, franchisees may sue franchisors for overtime, minimum wage and hours violations, among other claims.
China’s franchise regulations have been in place for a decade, but interpretations continue to evolve. In an apparent response to the U.S. trade sanctions imposed by the Trump administration, franchise registration times have lengthened. On the date of this writing, the full impact of COVID-19 on doing business in China is unknown.
The Malaysia High Court has ruled that the franchise registration section that both the administrator of the law and foreign franchisors have relied on when registering franchises in Malaysia is the wrong section of the law, calling into question whether any foreign franchisors are in compliance with the law.
The Netherlands is about to adopt a franchise law that would impose unrealistic obligations on franchisors. The proposed law actually requires parties to a franchise agreement to be “good franchisors” and “good franchisees.”
Saudi Arabia has just adopted a new comprehensive franchise law, the details of which are being set out in regulations. Our educated guess is that the initial regulations will be trying for franchisors.
South Korea has one of the most active franchising markets in the world, but its Fair Trade Commission has been adopting changes to the franchise law almost yearly, each time imposing new burdens and restrictions on franchisors. One example: a franchisor that requires a franchisee to remodel or upgrade its business premises, will be required to pay up to 40 per cent of the expense.
Thailand had just adopted regulations to require franchisors to disclose all material information. Of course, no one knows what that means.
KM: Are there any markets that are largely similar in how franchisors operate, so that a business may choose to easily grow from one to the other?
CZ: People and regulations are more similar than not, regardless of where they are. However, a potentially fatal mistake that franchisors do make, is to assume that conditions and laws are the same as the ones that they have experienced in their home countries.
We often advise U.S. franchisors to consider Canada as a first international territory. It is truly different and will help the franchisors to learn about cultural and legal differences, but provide the advantages of proximity and a common language and similar legal system (except for Quebec).