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Franchising’s success around world draws attention—and legal proposals


Xao Tu

Illustration by Jonathan Hankin

Editor’s note: Philip Zeidman, our regular columnist, is away and his colleague Tao Xu is filing this and the next report.

By the time you read this column, I will have traveled to Sydney, Australia, for the International Bar Association’s annual conference.  

Because I am not a cabinet official, I will have had to endure the indignity of flying commercial. Six years ago, Washington’s Governor Gary Locke flew economy class to China with his family to begin his ambassadorship there. His commercial flight travel was widely admired in China, which prompted the Chinese state media to criticize Gov. Locke for “using his fake humble style to humiliate the truly humble servants of China’s Communist Party.”  

Here we are, six years later, talking about our cabinet officials’ Mnuchin and Price’s plane travels. How times have changed! I will share thoughts from Sydney in the next column, while I am filling in for regular columnist Phil Zeidman.

For now, sitting in a hotel conference room where the International Franchise Association’s International Committee held its semi-annual meeting, one cannot help but feel a sense of uncertainty.  

It is the nature of this kind of “legislative update” meeting that reports of various legislative and regulatory proposals concerning franchising create a sense there are many stifling developments. The reality is that most of these proposals will remain, well, proposals.

However, there is now a palpable sense that franchising, perhaps as a result of its increasing success in many parts of the world, has attracted much attention from the legislators and regulators.

New legislation or regulations targeting franchising have been proposed in a number of jurisdictions, including the Netherlands, Egypt, Namibia and Saudi Arabia. And many other countries are in the process of “studying” franchise laws.

A backhanded ‘welcome’

On the same day that IFA’s International Committee held its meeting (September 12), across the Atlantic, in Strasburg Germany, the European Parliament passed a resolution on the “functioning of franchising in the retail sector.” The EU Parliament, to its credit, began its resolution with a “welcome” to franchising “as a business model which supports new business and small-business ownership.” It then bluntly acknowledged the shortfall in franchising reaching its potential, noting that franchising is “currently under-performing in the EU, representing only 1.89  percent of GDP, as opposed to 5.95 percent in the USA and 10.83 percent in Australia.”  

Not surprisingly (and to the delight of the proponents of Brexit, I suppose), in the face of such under-performance, the EU Parliament’s first reaction is to instruct the EU commission to undertake several initiatives to potentially regulate the terms of the franchise agreements, as if the lack of laws and bureaucracy were the cause for lack of franchising in the European markets.

And of course there is the lamentable passage of Australia’s Fair Work Amendment (Protection of Vulnerable Workers) Act 2017. Both the Australian government and some
commentators have taken great pains to point out the legislation does not impose “joint employer” liability, as it only imposes certain liabilities and obligations on the part of the franchisor, rather than making the franchisor responsible for, for example, the back wages due to the franchisee’s employees.

This is an important distinction, in the narrow legislative sense. But in the broader context of “moving the needle” on the franchisor’s exposure based on a franchisee’s actions, this distinction may be illusory.  

7-Eleven’s Australia master franchisee has so far paid out more than AU$110 million to its franchisees’ current and former employees, far more than any possible regulatory penalty. Yes, it was voluntary, but did the company really have a choice in face of the relentless media attention?

Foreign franchisors should work with the regulators to define what the new law is expecting of them in taking “reasonable steps” to prevent “contravention” by its Australian franchisees of local labor laws.

One cannot underestimate the potential for this approach to set the “precedent” for the legislators and regulators in other countries. It is probably because countries like Australia, Malaysia, South Africa and China have a mandatory “cooling-off” period during which a franchisee is allowed to exit the franchise agreement, that the government of Saudi Arabia is now proposing to include such a right in its draft Franchise Law.  

In this increasingly inter-connected world, the more countries that adopt a particular approach in regulating the franchise agreement terms, the less “novel” this kind of requirements seems. The more they are “normalized” the more likely that other countries will look approvingly on such requirements, and in some cases mistake them for the reason that franchising is successful in those jurisdictions that have such requirements.

It is by no means a coincidence that in its resolution on franchising, the EU Parliament actually “regrets” that so far the EU member states, to the extent they have regulated franchising at all, have focused on pre-contractual disclosure, rather than the franchise agreement terms, and “points, in particular, to the need for … the introduction of a cooling-off period after signing the agreement.”

Franchisors and their advisers have always insisted the best approach is disclosure and self-regulation; they have been largely successful so far. But is there a crack appearing? The legal compliance burden has rarely prevented franchisors from going into any particular market. Is that changing, especially for start-up franchisors?

Will this development contribute to the trend that franchisors increasingly only deal with well-capitalized multi-brand operators? And the biggest question of all: Is that really good for the long-term health of franchising?

Tao Xu is a partner with DLA Piper in Reston, Virginia, and a colleague of our regular columnist Philip Zeidman. He will be filing this and the next international column in Franchise Times. Contact him at 703.773.4181 or tao.xu@dlapiper.com


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