After Brexit: 'Business as usual' or 'Franchisors should PANIC!'
Of the dozens of newsletters, alerts and other instant analyses of the effect of Brexit, or the United Kingdom’s exit from the European Union, on franchising, these two headlines above are perhaps the most memorable (and, no, I did not add that emphatic type or exclamation point).
They are diametrically opposite, so can they both be right? Or wrong? And isn’t it a bit more nuanced than that?
Yes, it certainly is, and one of those nuances is the circumstance of the particular franchisor’s operation.
Let’s start with the simplest, plain-vanilla scenario: A U.S.-based franchisor of services, but not products, sells franchises in the United Kingdom and, separately, in one or more countries that are members of the European Union. The law selected to govern the contract is U.S. or one of those countries, but not the UK. There is no movement of personnel between the UK and the continent.
The threshold consideration, and one that will affect every franchisor in these scenarios of ascending complexity, is the effect Brexit may have on economic conditions in the UK market.
We have all learned that franchising cannot be detached from fundamental movement in the larger economy. Thus, a factor such as consumer confidence remains a key variable.
While the evidence thus far is modestly reassuring (franchising held up reasonably well during the most recent economic setback; it withstands market volatility pretty well; and UK financial institutions have given no indication of slackening as sources of support) no one can ignore some warning signals, including the sharp drop in the value of the pound due to Brexit.
And we must be alert to triggers such as the widely predicted global slowdown, international security issues, and even uncertainty and confoundment over the U.S. elections.
The second consideration of critical relevance, even in this simplest of hypotheticals, relates to intellectual property. While much will depend upon the exact terms of the UK’s departure from the EU, some consequences are emerging.
Intellectual property protection will become more costly. The cost-efficient European Union-wide protection system will probably no longer cover the UK, necessitating separate maintenance of those marks.
Marks that had only been used in the UK may now need to be registered under the EUTM system, or be attacked for non-use.
It seems unlikely that many of those debating the merits of Brexit gave much thought to issues like these. But franchisors will now need to do so, and promptly.
Let’s now consider an arrangement with an additional layer of nuance: The franchisor grants a franchise that covers both the UK and the EU.
Will the franchisor wish or be able to extract the UK territory, for separate treatment? Is this quantitatively different from other multi-country franchises? Does Brexit qualify as the sort of event for which a force majeure clause would permit termination?
While that will depend upon the language of that provision, let’s make the assumption that it will not (and that seeking to take that approach in future contracts is likely to provoke significant pushback).
That moves us up another step in the ladder of analysis: Now let’s assume that the sale of products is a component of the franchise grant. And let’s also assume that English law was selected to govern the relationship, whether or not accompanied by a choice of the UK as the base of operations.
This raises supply chain issues as well as the related concerns of territorial restrictions and anti-competition law. Companies for which the free movement of goods between the UK and continental Europe is important have, by and large, been blissfully free of concerns, especially about the substantial body of associated paperwork.
That’s going to change, as franchisors will need to learn a lot about export-import laws, import duties and a range of certificates, permits and licenses. There will certainly be a search for other countries as candidates, entailing an examination of the relevant treaty networks.
Moving beyond logistical concerns, consider competition and territorial issues. While the UK has developed certain legal doctrines of special interest to franchising, its membership in the EU has dictated that the legal environment for franchising differs little from that of any continental European country (especially one without a franchise-specific law).
But since some EU case law will no longer be binding if English law governs, it will behoove the franchisor to examine how its practices may be more (or less) constrained; the EU’s block exemption will be inapplicable, but it will be essential to monitor what approach the UK will then take. Consider, for example, the franchisor who wishes to impose restrictions on franchisees’ use of social media and websites beyond what EU law will permit.
Two issues related to territories emerge. Will a franchisor be able to prohibit a European franchisee from selling to UK customers (or the reverse), not permissible under EU rules? And how is an existing franchise agreement that grants rights throughout Europe affected? Could the franchisor now grant rights for the UK?
Let’s add a final fillip in these selected hypotheticals: The franchise system is one in which the movement of personnel between the UK and EU countries is essential.
The alarm over the prospect of unconstrained immigration may now lead to the end of one of the centerpieces of the EU: Free movement across state lines. What will Brexit mean, for example, for the travel of a franchisor’s staff?
As always, the largest single concern for businesses is the wide range of uncertainty around Brexit. But, uncertainty and delay notwithstanding, while it would be counterproductive to PANIC!, it is not too early for franchisors to begin making plans.
Philip Zeidman is a senior partner in the Washington, D.C., office of DLA Piper and an expert in international franchise law. Reach him at firstname.lastname@example.org