Franchising in Europe? Not really
Illustration by Jonathan Hankin
Franchising in Europe was the ambitious title of the program conducted by the International Bar Association’s International Franchising Committee during the IBA’s Annual Conference held here. U.S. franchisors and their counsel know that one does not really franchise “in Europe,” except in the narrow geographical sense. One does not offer franchises to “the European market,” despite the occasional lofty announcement by a franchisor of a “Pan-European strategy.”
Indeed, the offering of a franchise to cover more than one country is rare indeed. We see it in special circumstances: where the countries are small, adjoining and culturally similar. Or where a family has strong connections in several countries in the region (such as the Middle East).
But rarely in Europe. Totally, Europe now includes 51 independent states. Even in the European Union itself there are now 28 member states. Linguistically, there are 121 European languages, with 24 in the EU alone. With all of the reliance on the assurance that English is the universal language, try telling that to the numerous part-time staffers hired to “help” at this conference.
(I once heard the governor of the Spanish province of Catalan say, “After a lifetime of traveling the world, I’ve come to the conclusion that the only universal language is the English spoken by non-English speaking people.” Perhaps it is, as taxi drivers all over the world would say “no problema,” but it’s a reminder of the distance we still have to go.)
A somewhat artificial aggregation
Even though the goal of a “single market” is what motivated the formulation of the European Union, “Europe” remains a somewhat artificial aggregation of many national markets that remain distinct linguistically, culturally and legally.
There is no overarching body of law that governs franchising in Europe’s many countries. Competition law regulations do provide a framework within which individual companies operate, and they do impose some limits on certain provisions of a franchise agreement. But most issues that concern franchise lawyers are a product of national, not supra-national, legislation.
The panel of lawyers assembled here did represent the principal European countries with franchise-specific laws (France, Spain, Italy), as well as certain major markets without such laws (Germany, the United Kingdom). The survey was not exhaustive, of course; there are also franchise laws in Belgium, Sweden, Russia and in countries in the former Soviet Bloc.
And that, in turn, raises the continuing question: Which of these countries should be viewed as European? And which are really part of Central Asia? For that matter, how will the analysis differ when (if?) Brexit formally detaches the United Kingdom?
The panelists tackled a number of issues that a franchisor entering a European country will need to consider. In the process, they shone a light on the diversity of treatment among the countries reviewed. Let’s take only one of many examples, but a critical one:
Are there any requirements a franchisor must meet before offering franchises in a country? I do not refer here to the obligations of presale disclosure, because those are well known and not subject to much by way of interpretation. Nor do I refer to the obvious need to protect one’s trademarks before proceeding. I refer instead to obligations of a corporate, structural or experiential nature.
Here in the United States, we take a certain pride in our laissez faire approach, in contrast to many other government-centric societies: “You can start any franchise you want to, anytime you want to, as long as you don’t lie to the prospective franchisee.”
Well, that’s not entirely true. In many states if your company does not have a certain minimum net worth you may not be able to offer franchises unless, for example, you defer collecting the initial franchise fee, post a bond or obtain a guarantee.
Beyond the United States, by now most franchisors are familiar with the infamous “2+1” rule in China, requiring the franchisor to have operated at least two company-owned units for at least one year (originally, in China, a prohibitive requirement later relaxed to mean anywhere in the world). Some other franchisors may be familiar with a similar but far less stringent requirement in Vietnam. But if you ask franchisors that question about countries in Europe you will generally find them unaware of any such barriers. In fact, however, they definitely exist.
In the United Kingdom, many franchisors do establish a pilot unit first. While there is no legal requirement to do so, membership in the British Franchise Association imposes an obligation to have operated “a business concept with success, for a reasonable time in at least one pilot unit” before beginning to franchise.
In Italy the concept must have been “tested on the market,” usually understood to mean the European market, although many commentators have interpreted this to mean anywhere in the world.
In France, in addition to the requirement of a “market study,” courts have imposed a duty to have operated, in a French territory, units similar to those to be franchised for a period of time first. Whether that requires one, two or some other number, and for one year or for a different period, and what sort of “success” must be demonstrated, is a matter on which courts may differ.
Nationalism dies hard
You get the point: On these and myriad other matters, some large and some small, nationalism dies hard (as, we have recently been reminded, does tribalism). Franchisors who plan to enter “Europe” will soon realize, perhaps to their consternation, that is not as simple as finding it on a map.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or email@example.com.