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Hot Pursuit

Satchel Paige’s philosophy, as applied to int’l franchising


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Philip F. Zeidman

As baseball season hits full swing, articles appear about the legendary Satchel Paige, who began his colorful career decades before black players were accepted. An apocryphal story has Paige being asked the secret of his ability to perform at a phenomenal level, day after day, year after year. His response: “Never look back. Something might be gaining on you.”

It’s hard not to use that memorable retort when asked how international franchisors can negotiate the treacherous field of cross-border franchising. Only a few years ago a franchisor venturing into the international arena could devise an expansion strategy that would avoid any countries with franchise legislation, comfortable in the knowledge there were vast swathes of the planet in which to do business.

Those days are long past. There are now more than 40 jurisdictions in the world with “franchise laws” – the great majority of them explicitly using the term, and the few that do not nonetheless clearly aimed at the franchising method of distribution. Lest any reader think that daunting number is a product of the widespread regulation of franchising in the United States, think again: That number does not include any of the states in this country with franchise legislation.

But in reality these statutes, which now blanket the globe, understate the true magnitude of the regulatory impediments franchisors confront. For they do not include laws that are being proposed, at what seems to most observers to be an uncommonly rapid pace.

In some cases those proposals are to modify the franchise laws already on the books. In Russia, for example, the Duma is considering significant amendments that could in some respects help franchisors, such as by making the registration of franchise agreements easier.  

In another country with a franchise law already on the books, South Korea, the developments have been far less benign. They stem in part from a wave of protests against what is viewed as a disproportionate share of franchises being opened by large conglomerates, or by the “princelings,” the offspring of the founders of the chaebols. But now they have taken an ominous turn toward broader measures: the designation of 16 business areas that “require small-business friendly restrictions.” The restrictions include not opening more than 2 percent of the total units in the previous year, and not opening new stores within a prescribed distance of another unit. Also: Large companies in other businesses are not to enter that market through mergers, acquisitions or otherwise.   Taken together, these are limitations of breathtaking scope.

A call for laws

Elsewhere, there is a call for laws in a jurisdiction with no franchise legislation yet in place at all.  Franchising is already regulated heavily in Canada, with five provinces having enacted legislation, and recurring proposals for legislation that would operate countrywide.  A major province, British Columbia, has not adopted legislation, but the influential British Columbia Law Institute has now proposed a legislative pattern for that province 

Among the recommendations: required precontractual disclosure “substantially” in compliance with statutory requirements to be anticipated; a series of recommendations as to what disclosures should be required, including the existence of exclusive territories and reservations of rights; no mandatory mediation, but a recognition of the potential value of voluntary mediation.

Of equal interest to franchisors are the trends in enforcement of existing statutes.  One recent example is in Tunisia. Despite a continuing expression of concern regarding the requirement of individual governmental approval of franchises in the foodservice field, the government has thus far refused to add that sector to the great majority of other industries that can now be the subject of franchise transactions pursuant to the Tunisian franchise law with no further review by the government.  

But now we know that additional units will be opened by Pizza Hut, one of the very few franchises already in place, and it is also known that others are in the pipeline. Does this reflect a “loosening?”  Or, rather, is it an affirmation that there will be no blanket shifting of this category despite the pressure to do so?  Or is it simply a reflection that no one can make safe predictions until the political situation stabilizes?

Another example is in Indonesia. Much of the attention to the franchise regulation has been on the limitation of the number of units a franchisor or master franchisee can hold.  Thoughtful observers have homed in on a less publicized but potentially far more onerous provision, one which requires a franchisor or franchisee to source no less than 80 percent of its needs from Indonesian sources. 

The most recent informal advice is that governmental officials there are increasingly aware of the difficulties this will impose, and may be receptive to an exemption or a variance on a showing of hardship. 

But it would also be a mistake to focus only on “franchise laws” as such.  It is by now understood that, even in the absence of a specific franchise statute in a particular jurisdiction, the restrictions on a franchisor’s conduct may be essentially just as constricting. An example: the extent to which a franchisor may be obligated to make pre-contractual disclosure to a prospective franchisee, which could be equivalent to the limitations imposed in other countries by statutes. In Germany, for example, despite the absence of a disclosure statute, the franchisor must ensure that all relevant facts have been presented to the prospective franchisee, including, by some interpretations, the prospects for success.

Finally, the restrictions may arise not from statutes at all, but from court decisions. The popular notion that this is a problem in only “litigation-crazed America” has, one hopes, by now been pretty well discredited. Canada is as good an example as any, and not because its proximity to the United States has rendered it peculiarly vulnerable to “the American disease,” but perhaps because its courts’ decisions are more widely reported than in many other countries.  

Consider only a few of the recent judicial holdings there: Whether a franchisor can be held liable for huge damages for failure to “protect and defend” the brand over a decade.  Whether a former franchisee can operate a restaurant from the same premises where he has operated a franchised restaurant which has been terminated. Whether a franchisor can be prohibited from building new stores in the same area where the franchisee was operating.    And many, many more.

Shrewd like Satchel

Satchel Paige liked to play dumb. But he was one shrewd fellow.  Look around.  There is something gaining on you. 

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.

 
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