In Asia, turbulent undercurrents for franchising
Philip F. Zeidman
Discussions of recent legal developments affecting franchising in Asia were held amid the usual trappings of the annual International Bar Association Conference, the first in Asia in years. Even by the eye-popping standards of these gatherings, this one was over the top: 6,300 people from 130 countries; an opening ceremony addressed by the prime minister and attended by the emperor and empress; all in a sprawling city awash in sushi receptions galore.
For many attendees it was their first exposure to the city and the country, and for those who did not take the time to escape the environs of Tokyo itself, the charms of Japan were too often invisible: Their memories will be largely of enormous displays of neon, with most of their time spent in thoroughly westernized hotels (but with impeccable service).
Only an occasional jarring note served as a reminder that they really were in a foreign country. One amusing illustration: Fleeing from election season in America, with torrents of cash seeking to influence the last weeks of the contests, we were greeted by a report that one of the prime minister’s top female lieutenants might be forced to resign because of “financial irregularities” in her campaign.
Her sin? Distributing uchiwa (handheld fans) to voters in her constituency with her caricature, name and title printed on them. Are there no standards left?
Keeping lawyers busy
From its status as the least regulated major franchise market in the world only a few short years ago, it has become the most regulated. There is hardly a square inch of Asia without some form of franchising regulation. The result is more than enough work to keep lawyers busy. But what about the effect on franchising itself? Has this deluge of legislation served a useful purpose?
That was the question addressed by one of the sessions, featuring panelists speaking on each of the major countries with one form or another of franchise legislation: Indonesia, Japan, Malaysia, the People’s Republic of China, South Korea and Vietnam. In all the jurisdictions there is some form of pre-contractual disclosure obligation, and there are at least some “relationship” features in most of the countries, but with considerable differences.
The range is broad indeed: From Japan, with a modest disclosure regime imposed on only certain franchising companies and with a very light hand by the government, to the other end of the spectrum, South Korea. By a procession of amendments, South Korea has steadily increased the role of government, reaching a level of intrusiveness in the affairs of franchising companies unseen anywhere else in the world.
Between these two extremes, Indonesia and Malaysia tilt to some degree toward the South Korean model, but somewhat less onerously; Vietnam considerably less; and China, which has evolved to become relatively manageable.
While there has been little coordination among the countries, there are some common themes. In virtually every case, the franchise laws were not precipitated by significant reports of abuses, nor even took place in the context of a substantial degree of franchising activity in the country.
The great growth of franchising here, both cross-border and indigenous, is a distinctly recent phenomenon. And in virtually every country, the restrictions imposed on franchisors can be traced to social, political and economic concerns to which franchising was essentially a marginal bystander. Franchising in these societies is simply collateral damage to social engineering.
Perhaps some examples of restrictions and obligations in the region will illustrate:
• mandatory franchisor sharing of expenses of certain franchised remodeling;
• a limitation of the number of units in the hands of franchisees or master franchisees—essentially, requiring more franchise grants than a franchisor might prefer;
• the requirement that franchises, or a certain portion of them, be granted to people of a designated ancestry;
• limitations on year-to-year growth;
• the requirement that a certain percentage of goods and services be from local sources, however artificial the method of that calculation.
There is no question that the regulation of franchising is more organized and systematic now than in the unlamented days when it was simply an afterthought in schemes dealing with transfers of technology. But has this wave of regulation in fact promoted the growth of franchising, as the champions of the proposals frequently insisted it would? Or has it stunted franchising and discouraged foreign entrants?
My own conclusion is that, for all of the millions of dollars and yen and yuan and won and dong and rupiah and ringgit which, directly or indirectly, have been spent to comply with these laws or to avoid them, the continued growth of franchising in Asia has taken place not because of these laws but in spite of them.
But can we leave the inquiry at that point? I would suggest not. It was impossible not to be dispirited by a number of the comments of the panelists. Here are a few—
“Many companies have created what they call ‘licensing’ arrangements. They know these meet the law’s definition of a ‘franchise,’ but they also know that the government has so far just averted its eyes.”
“The regulatory structure creates real problems for franchisors, and so many of them have just decided to ignore the law because they don’t believe the government will enforce it.”
“There is a huge difference between the number of franchisors doing business in the country and the numbers listed in the official registry. And everybody knows it.”
“The nature of the regulation is such that it is very difficult to comply with. But if you’ve developed a relationship with the man in charge at the regulatory agency, you can get him on the telephone and he will frequently waive or dilute the regulation for you.”
For myself, I left the session with two thoughts:
These regulatory schemes provide ample opportunities for lawyers to ply their trade, whether in the traditional way of shifting misery from one party to another or by seeking interpretations most beneficial to their client.
But the nature of these regulations—and, more important, the way in which they are apparently going to be enforced—creates a fertile breeding ground for cynicism, lack of respect and mistrust of institutions. And that is a social cost which we all bear.
Philip F. Zeidman is a senior partner in the Washington, D.C., office of DLA Piper. He can be reached at Philip.Zeidman@dlapiper.com.