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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Emily O’Connor
Once the Franchisor has chosen a Territory where it wants to expand, it must carefully consider the impact the laws of that country have on its business. These laws may apply to the business format the Franchisor desires to use and to many other aspects of the franchise business, including: trademarks and intellectual property; rules on currency exchange; import/export restrictions; employment and immigration; antitrust and competition; anti-terrorism, anti-bribery and anti-corruption laws; privacy and data protection; language requirements; taxes; and, franchise registration and disclosure laws. The laws of the Territory may also have a different impact, depending on the business format the Franchisor desires to implement.
In some cases, restrictions may also be imposed on a Franchisor’s rights to engage in international transactions by their own governments. For instance, US-based Franchisors must comply with the regulations of the Office of Foreign Assets Control (OFAC, a part of the US Department of the Treasury), which publishes a list of foreign individuals and entities with whom US nationals and companies are not allowed to deal17.
This Chapter will discuss possible restrictions that may affect the creation and implementation of a franchise network in a foreign country.
When entering into an agreement with a foreign party, one needs to check whether the laws of the country of the Franchisee can affect the validity of the agreement or specific clauses.
The following types of statutes may affect the agreements discussed in this Guide.
Several countries have enacted laws specifically regarding franchise agreements, dealing with either pre-contractual information (disclosure) or the rights and obligations of the parties under the contract, sometimes called “relationship laws.”
Such laws may define the agreements covered, which definitions may be wider (e.g. all agreements giving a distributor the right to use a trademark) or narrower (e.g. only agreements implying Fees and transfer of substantial commercial Know-how) than the definition commonly used in business.
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Parties should consequently check in advance the scope of application of such laws.
Commercial agency should be distinguished from franchising, because the agent is an intermediary, not a reseller. However, in countries where the concept of agency also covers distributors (e.g. Lebanon), one should check whether these laws might also apply to the agreements discussed in this Guide.
In some European countries the rules on commercial agents (and in particular on goodwill indemnity) are applied by analogy to distributors/ resellers who are closely integrated within a network. These principles might in certain cases also apply to Franchisees or Area Representatives.
In some cases DFAs may be close to employment contracts if the Franchisee is an individual and/or the Franchisee’s freedom to organize itself and operate as it sees fit is very limited and controlled by the Franchisor. (See also § 4.4.3).
In some countries an individual who enters the business of direct franchising as a Franchisee may be considered as a consumer and consequently subject to the provisions protecting consumers. (See also § 4.4.4).
In all countries, it is important for the Franchisor to register its primary trademarks as soon as possible to protect them from unauthorized users. Not infrequently, trademark pirates may attempt to register the Franchisor’s mark first and then ransom them back to the Franchisor.
In some countries, franchises are regulated by the local intellectual property authorities. In a number of countries, the Franchisor may need to make a filing with the local intellectual property office, such as with a summary form of the Franchise Agreement in the local language.
In the United States, having a federally registered mark for the franchise program may help avoid application of some state business opportunity laws.
The Franchisor should also consult with local counsel to see whether there are local laws dealing with the protection of trade secrets, confidential information, software, data protection, privacy and similar areas. Local patent and copyright laws also may have to be taken into account.
Franchise Agreements necessarily contain clauses that restrict the parties’ freedom to compete (through, for example, exclusive purchase requirements, non-compete obligations, and prohibitions to sell outside the franchise network) or that can affect third parties, such as exclusivity [Page39:]provisions. These restrictions are generally considered to be in compliance with antitrust rules (since they are necessary for the functioning of the franchise), but only within certain limits, which must be verified case by case under the applicable law. (See also § 4.4.10 and Annex 2).
In many jurisdictions, Franchise Agreements must comply with applicable privacy and data protection laws, which are determined by countries individually, in the absence of any global framework. Information covered by such laws may include data relating both to Franchisees or Candidates and to customers. (See also § 4.4.11 and Annex 3).
National rules protecting franchisees are typically mandatory. This means that they cannot be derogated by contractual clauses. Thus, if Spanish law, for example, governs the agreement with a Spanish Franchisee, such agreement must comply with Spanish rules on disclosure.
However, if the parties agree to have their contract governed by another law, it may not be clear whether the contract has to comply with only the mandatory rules of that designated law and/or also the mandatory rules of the Franchisee’s jurisdiction.
The answer may depend on the nature of the mandatory rules of the Franchisee’s country. If these rules are “simply mandatory,” they can be derogated; if they are “internationally mandatory rules” (also called “lois de police,” “norme di applicazione necessaria,” “overriding mandatory provisions,” “Eingriffsnormen”) they will remain applicable, whatever the law chosen by the parties. It should be noted that the term ‘internationally mandatory rules’ is not commonly used in the United States.
Rules protecting a “weaker” party will often be considered to be internationally mandatory.
One should bear in mind that the internationally mandatory character of certain rules must be respected in any case by the courts of the country that enacted them, but will not bind the courts of other countries or arbitrators, who will have discretion in deciding whether to apply them. However, if these rules are disregarded, the judgment (or award) may not be enforceable in the country enacting the above rules.
The laws of the Master Franchisee’s or Area Developer’s country may require formalities concerning the contract or in rules applicable to the franchise relationship.
a. Disclosure laws
Several countries have pre-sale disclosure laws requiring the Franchisor to provide the Candidate with information on a number of issues that will enable the Franchisee to make an informed decision on whether to enter into the MFA.
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Disclosure laws require the Franchisor to disclose specific information to the prospective Candidate some time (e.g. 10, 14, 20, 30 days) before signing the contract. In some jurisdictions, should the Franchisor require the Candidate to make any payment before signing the contract, the time period during which the Franchisor has to fulfill its disclosure obligation starts running from the moment of such payment rather than so many days before the agreement is signed.
In some countries (e.g. the United States) the disclosure document must be updated at least every year and, more generally, whenever there is a material change. Moreover, for franchises operated in the US, both the Franchisor and the Master Franchisee are responsible for each other’s compliance with the FTC Franchise Rules and are jointly and severally liable (towards the FTC) for each other’s violations. In addition, according to most state franchise sales laws in the United States (e.g. California), directors, officers and the persons involved in the sales process are considered jointly and severally liable towards the other party for disclosure and other statutory violations (see, also § 4.4.12).
The information to be disclosed normally concerns the Franchisor, the Franchisor’s trademark, the franchise System, etc. The aim of such disclosure obligation is to put the Candidate in a position to evaluate the seriousness and profitability of the business.
As of the date of this publication, Belgium, Brazil, Canada, China, Indonesia, Italy, Japan, Malaysia, Mexico, Romania, Russia, South Africa, South Korea, Spain, Sweden, Taiwan, Thailand, Tunisia, the United States, and Vietnam have franchise disclosure laws 18.
In some countries (e.g. Belgium, France) disclosure rules apply not only to Franchise Agreements, but also to other commercial contracts. In other countries, local non-binding Codes of Ethics may impose a disclosure obligation on members of an association.
Some civil law countries do not have disclosure laws specifically applicable to Franchise Agreements, but the Franchisor’s obligation to disclose any relevant information to the Candidate is inferred from case law interpreting the general principles on pre-contractual liability (e.g. in Germany).
In most countries the rules on disclosure apply not only to direct franchising but also to Master Franchise relationships; whether they apply to ADAs may depend on whether the local Units will be operated under the ADA or separate Franchise Agreements.
Whenever the Master Franchisee is based in a country having disclosure laws, the Franchisor must comply with those rules. The above-mentioned rules also apply to the contractual relationship between the Master Franchisee and its Sub-Franchisees.
The consequences of non-compliance depend on the specific country,[Page41:]but may include nullification of the contract or a Franchisee’s right to damages (e.g. in Germany) or rescission. In some jurisdictions, the Franchisor would also be subject to criminal penalties.
Disclosure rules are often considered internationally mandatory (“overriding mandatory provisions,” as called in the EU Regulation “Rome I”). Consequently, possible disclosure provisions of the country of the Master Franchisee, Area Developer or Franchisee cannot be avoided by submitting the contract to the application of the law of the Franchisor’s country (or of the laws of a third country), at least if the dispute is brought before a national court in the Master Franchisee’s country. (See § 4.2 for more detailed explanation on internationally mandatory rules.)
Franchisors should note that to comply with disclosure rules can be very expensive and may require considerable preparation time; this is, for instance, the case when preparing a disclosure document in accordance with the FTC Rules and state disclosure laws in the United States.
b. Rules on franchise registration
Before signing the MFA, the Franchisor also needs to verify whether the laws of the Master Franchisee’s country require the Franchisor to register its company and/or the Franchise Agreement with a public authority.
For instance, in Vietnam, foreign Franchisors are allowed to commence a franchise activity in the country without setting up a local business entity, but they have to submit an application to the Ministry of Industry and Trade, and provide a large amount of information and certificates concerning their company as well as the franchise activity they want to commence.
In several countries registration of the contract is required.
In some countries, the registration process is long (e.g. in Malaysia it takes four to five months) and may involve the payment of fees (e.g. in Vietnam) or the provision of additional documents (besides the contract) to the competent authority.
Where registration is required, the Franchisor should also consider further implications, for instance that the contract to be registered has to be drafted in the local language (and not in the Franchisor’s language); or that, in cases of bilingual contracts, the choice of the foreign language as the authentic language may not be accepted (e.g. in China). (See § 4.4.9 on language requirements.)
In certain countries, because trademark license agreements have to be registered with the relevant public authority in charge of IP rights, Franchise Agreements (which include, or are presumed to include, a trademark license) also need to be registered with those public authorities (for example, Thailand. See § 4.3 for more information on trademark registration).
The United States has 15 states with registration and disclosure laws. Registration or a filing is required in all but one of those states. Before being able to offer or sell a franchise in 13 of those states, the Franchisor or Master Franchisee (called a “subfranchisor” under these laws) must file its franchise disclosure document (FDD), including all agreements regarding the franchise offering (including the Franchise Agreement),[Page42:]and await a confirmation that the FDD may be used. The 14th state only requires filing of a notice of a sale19.
c. Franchise relationship laws
In some countries there are rules applicable to the contractual relationship between Franchisors and Franchisees, so-called ‘relationship laws’, which may also apply to MFAs.
Besides the general principles governing commercial contracts provided for in civil law countries (which in most cases can be contractually derogated by the parties) some jurisdictions have introduced special rules protecting the Franchisee, which are normally mandatory and, in some cases, internationally mandatory (See § 4.2 for more detailed explanation on internationally mandatory rules.)
Some of the aspects regulated by these relationship laws are, for instance, a general obligation of good faith; the Franchisor’s obligation to provide the Franchisee with the necessary support; the Franchisee’s obligation to respect confidentiality or, to a certain extent, to undertake a post-contractual non-compete obligation; or the Franchisor’s non-discrimination obligation.
Certain rules aim at guaranteeing a minimum duration of the contract, in order to protect the Franchisee’s investment (e.g. pursuant to Indonesian Regulation 12, a franchise contract cannot last less than 10 years, while Italian law 129/2004 provides for a minimum duration of three years).
Other rules require the parties to insert specific provisions in the contract (e.g. the Malaysian, Mexican, Italian and South African franchise laws).
Further rules apply to termination (e.g. Malaysian, South Korean franchise laws; laws of some US states), often requiring good cause to terminate or not renew.
Some relationship laws also impose certain requirements concerning dispute resolution.
The United States has a large number of state relationship laws. 24 states, plus two US territories, have passed laws which in one way or another regulate some aspect of the relationship between Franchisors and their Franchisees, particularly with respect to the termination or non-renewal of the relationship, and two other states regulate the distributorship relationship.
A complete listing of all the countries that have adopted some type of relationship law is beyond the scope of this report. There appears to be a recent trend for new franchise legislation in some countries to focus on relationship aspects, and many disclosure laws contain a relationship[Page43:]element. A thorough analysis of the various franchise relationship laws in the world can be found in an article by John Sotos, “Recent Trends in Franchise Relationship Laws,” International Journal of Franchising Law, Vol. 10, 2012, Issue 1, pages 3 to 28 (Claerhout Publishing Ltd.). Mr Sotos’ article has a chart comparing the laws in 27 jurisdictions.
d. General principles applicable to all contracts in civil law countries
It is also important to consider that, in civil law countries, there are general principles applicable to all contracts and contractual obligations, including Franchise Agreements.
One of the main generally applicable principles is that of good faith, which requires the parties to act in good faith during the negotiation, conclusion and execution of a Franchise Agreement. Violations of the principle of good faith may result in the violating party being required to pay damages to the other party.
e. Mandatory legal issues
1. Further mandatory rules
Besides the mandatory rules discussed in § 4.2, the Master Franchise or ADAs may be subject to further mandatory rules.
For instance, in the United Arab Emirates, Law No. 18 of 1981 provides for a strict protection of the intermediaries, by limiting the supplier’s right to terminate the contract and by granting the intermediary a goodwill indemnity at the end of the contract; the definition of the intermediary provided by such law is very wide and includes not only commercial agents and distributors, but also Franchisees. Similar rules exist in Saudi Arabia and also apply to Franchise Agreements (as per Ministerial Order No. 1012 of 1992). As far as the UAE is concerned (unlike Saudi Arabia), apparently the Franchisor may avoid registration of the agreement and, in that case, the above mentioned provisions should not apply; of course, this possibility shall be carefully evaluated by the Franchisor with the assistance of a local lawyer.
In other countries similar mandatory provisions are applied by jurisprudence to franchising contracts. For instance, in Germany the rules that grant a goodwill indemnity to commercial agents at the end of the contractual relationship are also applied to Franchisees (so far, however, not to Master Franchisees or to Area Developers) under certain circumstances.
In some countries the Franchisee is regarded as a consumer and protected by mandatory rules. For example, the South African Consumer Protection Act (No. 68 of 2008) contains some specific provisions applicable to Franchisees; those provisions, for instance, require that the contract must be concluded in writing and must be comprehensible for a consumer (note that 14 official languages exist in the country); moreover, the Franchisee has a right of cancellation within 10 business days from signature, without costs or penalties.
2. Conclusive considerations regarding mandatory rules
In light of the above, it is important for the Franchisor to verify the applicability of all mandatory rules provided for in the Master Franchisee’s jurisdiction. Where mandatory rules apply, the Franchisor[Page44:]must evaluate the implications of adapting the franchise System to those rules, in terms of feasibility, costs and time.
In some cases, the Franchisor may not be concerned about the contractual relationship between Sub-Franchisees and the Master Franchisee, since the Franchisor is not directly involved. On the other hand, a Franchisor may decide that certain provisions should be included in the contract between the Master Franchisee and the Sub-Franchisees, e.g. granting Franchisor the right to step in (directly or through a new Master Franchisee), in case of termination of the relationship between the Sub-Franchisees and the Master Franchisee.
In those circumstances, it may be important for the Franchisor to evaluate the possible application of mandatory rules not only of the Master Franchisee’s jurisdiction, but also of the Sub-Franchisees’ jurisdiction, whenever they are different from the Master Franchisee’s country.
f. Other laws that may apply
There are a variety of other laws that can affect a Master Franchise relationship. Among the most common are competition/antitrust laws, block exemptions, industrial or intellectual property laws, product liability and warranty laws, commercial agency laws, civil codes, and virtually any law that may affect the industry in which the Master Franchisee and Sub-Franchisee may operate, together with the common law in common law jurisdictions.
In some countries, there are also peripheral laws that could affect a Master Franchise relationship that may not be widely recognized or appreciated. In the United States and its territories, for example, there are federal and/or state business opportunity laws, relationship laws, multi-level marketing laws, and industry specific laws that may be applicable to certain types of franchise relationships if an exemption cannot be found. A brief overview of the US laws may be instructive.
1. Business opportunity laws
Twenty-six states and the FTC have adopted so-called business opportunity laws or seller-assisted marketing plan laws. If a seller offers a marketing or sales plan to start a business, or makes certain types of representations in connection with the sale of the business opportunity, these laws are likely to apply to the relationship. Trademark association is not required. The FTC business opportunity rule only requires disclosure, but the 26 state business opportunities laws generally require the seller to file or register with the state and to disclose certain specified information to the purchaser prior to the time the purchaser pays any money. Most state business opportunity laws can apply to certain types of franchise programs because of the sale of a marketing program or sales program. Generally, however, Franchisors with federally registered trademarks or service marks or those that comply with the FTC Franchise Rule or local franchise disclosure laws are usually exempt from the state business opportunities laws.
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2. Special industry laws
There are also federal and/or state laws that relate to specific industries, such as wholesalers or dealers selling motor vehicles, petroleum products, farm and industrial equipment, lawn and garden equipment, outdoor power equipment, hotels, campgrounds, marine products, liquor, wine or beer, or multi-level marketing arrangements.
For example, according to The CCH Business Franchise Guide (Wolters Kluwer), automobile dealership relationships are regulated by the Federal Automobile Dealer Franchise Act (often called the “automobile dealer day-in-court” law) and 50 separate jurisdictions; gasoline station operations are covered by the Federal Petroleum Marketing Practices Act and 38 separate jurisdictions; farm machinery and similar types of other dealerships are covered by 44 jurisdictions; and liquor, beer and/or wine distributorships are regulated by 47 jurisdictions. The scope of these laws can vary considerably, so local counsel should be consulted to determine whether a particular arrangement may be covered.
In most countries it is acknowledged that trademarks are an essential element of franchise Systems, and Franchise Agreements. Effective franchising is not feasible without an effective trademark. If there is a legal definition of franchising in a jurisdiction, it usually describes a System’s trademark as a constitutive element of a Franchise relationship. National and international franchise associations give similar importance to a System’s trademark. From a commercial point of view, the trademark is important because the concept of the franchise must be identifiable by the uniform outward appearance of its products or services and outlets, which is mainly achieved by a common trademark.
As a rule, Franchisors wishing to expand internationally already possess trademark protection in their country of origin. However, when a Franchisor thinks about going international, it must also consider how to internationalize its trademark protection.
Nowadays, marketing of and by franchise Systems is unthinkable without an Internet presence. As a consequence, domain names play an important role. As a rule, domain names contain the System’s trademark or at least an abbreviated version of it. The aspects that must be considered in the process of internationalizing a franchise System regarding the System’s trademarks and domain names will be outlined here.
In the process of internationalizing trademark protection, a Franchisor will first have to decide what kind of trademark it seeks to protect abroad: word marks, on the one hand, or figurative and other marks, on the other hand. Moreover, the Franchisor must determine whether the trademark may be used in an identical way abroad and in the country of origin. As a result of such considerations the System’s trademark in the country of origin itself could even be called into question. Guidance concerning the different ways of internationalizing trademark protection[Page46:]is given here, beginning with an explanation of the various types of trademarks, followed by an outline of the aspects to be considered in the process of internationalization. Finally, the various ways of internationalizing trademark protection will be presented.
a. Types of trademarks
Traditionally, a distinction has been made between word marks and figurative marks. However, many jurisdictions also acknowledge other types of trademarks, such as three-dimensional trademarks and trademarks that emulate the shape of the product itself or which consist of a sequence of sounds or a color only. But the majority of trademarks registered and used worldwide are still traditional word marks and figurative marks.
The word mark protects a sign that consists of a word, whereas the figurative mark protects a graphic design. In most cases, franchise Systems do not use only word signs as a business identifier; they also often add figurative signs to their word signs.
When trademarks are being internationalized, it is useful to remember that, occasionally, in foreign cultures and languages, the perception of trademarks — both words and figurative marks — may differ considerably from the perception of the trademark in the country of origin.
b. Perception of trademarks in foreign countries and languages
When using figurative marks in foreign cultures, one must not forget that graphic symbols might have a different meaning than in the country of origin. It is therefore necessary to make sure that graphic symbols do not evoke any negative connotations and associations, or constitute absolute grounds for refusal of protection, in the target country.
Word marks are subject to the same considerations and may be even more likely to evoke negative connotations and associations than figurative marks. The automobile manufacturer Chevrolet gained unwanted notoriety with its brand name “Nova” in Spanish-speaking countries. In English, the language of the country of origin, the word “Nova” can be linked with the identical Latin adjective, which the targeted public is able to associate with the word “new”. In Spanish, however, the name, spaced “no va”, literally translates as “it does not go” or even “it does not work”. Opinions differ as to whether this association caused Chevrolet to sell the Chevrolet Nova, which was manufactured in Argentina, under the name of Chevrolet Malibu, Chevrolet Super and other names. Chevrolet provided other reasons for this decision. This example illustrates that a word mark that sounds nice in one language can easily generate negative connotations and associations in another language.
When a Franchisor decides to go international, it is also important to make sure that protection of the trademark in the target country does not fail due to absolute or relative grounds for refusal. In many national laws on trademarks, the existence of similar or identical trademarks registered earlier is regarded as relative grounds for refusal. This means that the more recent trademark is ineffective in relation to the older trademark. Purely descriptive signs constitute absolute grounds for[Page47:]refusal. It is, for example, generally accepted that the word “car” cannot be monopolized as a trademark for cars. Whereas trademark offices regularly check absolute grounds for refusal, most jurisdictions stipulate that relative grounds for refusal can only be claimed by interested parties. It is, therefore, recommended to check whether there are any absolute or relative grounds for refusal prior to registration in a target country. It cannot be ruled out that word marks will not encounter absolute or relative grounds for refusal in countries where the trademark is to be launched just because there have been no difficulties in the country of origin.
Nowadays, word marks that convey a certain meaning are usually not translated into the language of the target country, at least if the target country uses the same script. However, there are some exceptions. Nestlé, for example, decided to alter and translate the name of its trademark Pure Life in some countries to ensure that its meaning was conveyed appropriately. As a result, the Spanish version of the trademark was changed into Pureza Vital. However, when franchise Systems are internationalized, it is usually not advisable to translate trademarks.
There is yet another aspect that has to be considered when word marks are internationalized. Not all languages use the same script. Although Latin characters can be understood in most European countries, and in the Americas, Africa and Australia, there are, particularly in Asia, many other scripts, such as Cyrillic, Arabic or Chinese, in use. A word mark in a script that is not the target country’s official script can only be registered as a figurative mark. It is, therefore, advisable to provide a so-called transliteration in order to transfer the word mark into the script of the target country, and to endeavor to create a sound pattern which is identical or at least as similar as possible to the sound pattern of the word mark in the original language.
Chinese script is an exceptional case. Like other languages based on logograms, Chinese characters do not merely represent certain sounds but also convey a distinct meaning. Transliteration into Chinese script involves selecting characters that come as close as possible to the word mark’s sound pattern in the original language and also convey the meaning of the original word mark in the best manner.
The implementation of the considerations and recommendations outlined above will be easier with some trademarks and more difficult with others. The implementation will be particularly difficult if the word mark consists of terms that are specific to the original language or if puns are used which can be understood only in the original language. In these cases, considerations and ideas, which may have played an important role when the word mark was developed, will most probably not be understood in the target country. Sometimes companies about to go international decide to alter the trademark in the country of origin and to use the altered trademark as the basis for internationalizing the company. An example of such an approach is the well-known Internet platform for business contacts, which initially operated under the name openBC or Open Business Club and which changed its name to Xing before engaging in major internationalizing procedures.
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c. Ways of internationalizing trademark protection
Some take the view that the protection of trademarks and other forms of industrial and intellectual property protection amount to the creation of state-sanctioned monopolies. Indeed, probably all jurisdictions would agree that any trademark comprises the right to exclude third parties from using it, at least within the Territory in which the trademark was registered.
In the process of internationalizing franchise Systems, it is therefore indispensable to extend trademark protection to other countries. Recommendations concerning the applicant for registration, the appropriate timeframes for the extension of trademark protection to be made, and a description of the various ways of extending trademark protection to foreign countries follow.
1. Applicant for registration
Franchisors should carry out the registration of their trademarks in other countries by themselves and not leave the task to their Master Franchisees or other franchise partners in the target country. If a Franchise partner in one of the target countries discontinues the Franchise due to disagreements, complications may arise if the Franchise partner was the one to register the System’s trademark in the target country. If the Franchise partner has registered the trademark in the target country under its own name, the Franchise Agreement should contain provisions that obligate the Franchise partner to transfer the System’s trademark to the Franchisor or to any third party named by the Franchisor upon the termination of the agreement. If, however, the Franchise partner decides not to transfer the trademark to the Franchisor or a third party named by the Franchisor, the Franchisor will have to take legal actions to enforce the Franchisee’s obligation to transfer the System’s trademark, which may take years. During the duration of these proceedings it is usually not possible to operate the franchise System in the target country.
It is therefore strongly recommended that where possible the Franchisor register the System’s trademark under its own name in the target countries.
2. Timeframe for the extension of trademark protection
Often, trademarks that operate successfully in a certain country are registered in other countries by third parties hoping to profit from selling the trademark to its “real” proprietor. Companies falling victim to this kind of trademark piracy tend to agree to settlements as legal actions against these “trademark pirates” are usually very costly and time-consuming.
Franchisors are advised to ensure as early as possible that trademark protection is available and would be effective in all possible target countries.
However, in some countries a third person might have a bona fide trademark registration, which could block the extension of the System’s trademark. In such circumstances, it may be a good solution to conclude a so-called delimitation or co-existence agreement.
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3. Ways of extending trademark protection
There are several ways to extend trademark protection, depending upon the legal situation in the respective target country.
a. Direct registration in the target country
It is, of course, always possible for the Franchisor to apply directly for registration at the patent and trademark offices of the target country. In most cases, however, it will be necessary to hire a legal or patent attorney in the target country.
b. Extension of trademark through WIPO in accordance with the Madrid System
By the end of the 19th century, it was widely accepted that direct registration of industrial property rights in every country separately was expensive and time-consuming. If industrial property rights other than trademarks were registered somewhat belatedly they were even threatened by refusal on the grounds that the registration requirement of novelty could not be fulfilled. The threats concerning the protection of industrial property rights on an international level were recognized soon enough and various solutions were considered. As a result, on March 20, 1883, the Paris Convention for the Protection of Industrial Property was adopted. This Convention contains general rules concerning various industrial property rights, including trademarks. Based upon this Convention, the Madrid Agreement Concerning the International Registration of Marks was concluded on April 14, 1891. Since then the Madrid Agreement has been amended several times and a new agreement to supplement the Madrid Agreement has been adopted. This new agreement contains various provisions to facilitate the international registration of trademarks. The entire mechanism is known as the Madrid System. The agreements as well as the entire Madrid System are governed by the World Intellectual Property Organization (WIPO) headquartered in Geneva. Based upon a basic registration that in most cases comprises a national trademark, the Madrid System permits the extension of the trademark protection of the basic registration to other member states of the Madrid System. The majority of countries in the world are members of the Madrid System.
Applications to extend trademark protection in accordance with the Madrid System can be filed by the representative who filed the basic registration or by other representatives domiciled in one of the member states of the Madrid System. Even if registration extends to only three member states of the Madrid System, the fees payable to WIPO (including the costs of the patent or trademark office of the country of the basic registration) are usually lower than the fees that would be incurred by direct registration in the member countries and when the costs for legal representation in the various countries are considered, registration through the Madrid System will prove to be considerably cheaper.
Applications to extend the protection of the basic trademark are forwarded by WIPO to the patent and trademark offices of the countries indicated in the application. If any country lodges an[Page50:]objection, all proceedings become subject to the laws of the country that has lodged the objection. As a rule, a licensed representative before the patent or trademark office of the objecting country or jurisdiction has to be hired in such a case. Trademarks that have been registered through WIPO are considered as trademarks of the individual member country and are subject to the laws of the respective member country.
c. Registration through a union or association of states
Apart from the above-mentioned possibilities of internationalizing trademark protection, trademark protection can also be extended to other countries through the various unions and associations of countries worldwide. Some of these associations have the competence to grant uniform and autonomous industrial property rights within their Territory. The Benelux countries, which include Belgium, the Netherlands and Luxemburg, rank among the oldest associations that grant uniform industrial property rights. The best known association is the European Union, which is also entitled to grant autonomous and uniform trademark and design protection. For this purpose, the EU established the Office for Harmonisation in the Internal Market, which is responsible for the registration of trademarks and designs in the entire Territory of the European Union. However, European Community trademarks and national trademarks continue to co-exist. As a result, many companies own not only a European Community trademark but also various national trademarks granted by the member states of the European Union in order to internationally protect just a single trademark.
Hence, within the EU, trademark protection can be internationalized through the registration of a European Community trademark in addition to national trademarks. It is not even required to obtain a national basic registration before applying for a European Community trademark. Instead of obtaining one or more national trademarks granted by the individual member states, applicants can opt to apply for a European Community trademark only.
Both the Benelux countries and the EU are now members of the Madrid System. As a result, a basic registration obtained outside the EU can now be extended to the entire Territory of the EU through the Madrid System. In reverse, a European Community trademark can also serve as a basic registration for extending trademark protection in accordance with the Madrid System.
Top-levels domain names, such as “.com” and various other new top-level domains, are assigned by the Internet Corporation for Assigned Names and Numbers (ICANN), a nonprofit organization headquartered in Los Angeles, California. National top-level domains are assigned by similar national organizations that serve as national registration agencies. Both ICANN and the national registration agencies adhere to the “first-come, first-served principle”. However, ICANN and national registration agencies do not check whether registrants infringe name or trademark rights of third parties, or whether a registered Internet[Page51:]domain name is consistent with other rights of third parties.
Trademarks and domain names affect franchise relations quite differently. While the trademark is a constitutive requirement for any franchise relation, the Franchisor is not legally required to provide its Franchisees with a domain name, unless the Franchisor has contractually agreed to supply a domain. However, due to economic considerations, it is often quite useful for a Franchisor to operate a website under a domain name that is derived from the System’s trademark. In this case, it may be advisable that the Franchisor asks, or perhaps even obligates, its international franchise partners to participate with sub-sites.
In order to avoid finding that a desired domain name has already been registered by a third party and is thus not available, Franchisor should register not only trademarks as early as possible but also domain names derived from these trademarks. Registration should preferably be carried out when a company first starts thinking about internationalizing its franchise System as a domain name. In addition, some jurisdictions grant commercial designations such as domain names a certain degree of trademark protection. As a result, it is sometimes possible to base legal action against a domain registration by third parties, which is considered undesirable, on an existing domain name instead of an existing trademark.
As with trademarks, it is advisable to register domain names under the Franchisor’s own name rather than under the name of a Master Franchisee, Area Developer or any other contracting party so that no one can block use of the domain name if a dispute arises.
If a Franchisor wishes to register its domain name under a national top-level domain it has to take into account that some competent registration agencies may accept registrations only from applicants who are domiciled or headquartered in the respective country or who have a representative domiciled in the country.
Should it be necessary to proceed against undesirable domain names of third parties despite early registration, legal action can often be based upon trademark rights, if the undesirable domain name could be confused with the Franchisor’s trademark or domain name.
ICANN, in cooperation with the World Intellectual Property Organization (WIPO), has established the Uniform Domain Name Dispute Resolution Process (UDRP), an arbitration-like proceeding governed by WIPO. The UDRP process may be less time-consuming and cheaper than litigation before national courts or arbitration. Within the limits of the UDRP process, WIPO is entitled to order the violating party to transfer the domain name to the non-violating party. Other registration agencies such as the European Registry for Internet Domains (EURid), the registration agency for “.eu” domains, have established processes similar to UDRP.
Note that courts and arbitrators typically cannot obligate third parties to transfer a contested domain name to the challenging party, but rather only to cancel the name or order parties to refrain from using it.
The MFA, the SFA and the ADA should each address use by the Master Franchisee, Sub-Franchisee or Area Developer of any domain name based on the Franchisor’s trademarks. Among other matters, this[Page52:]provision should address which party can register the domain name, how it may be used, and which party owns it upon expiration or termination of the agreement.
If the Franchisor wants to implement its franchise System in a foreign country, it is essential that the Franchisor verify whether that country imposes any restriction on the business it wants to start.
A first possible restriction regards the investment: there may be limitations on foreign entities in setting up local companies or the requirement to allocate a majority or minority share to a local partner. This aspect should be carefully evaluated if the Franchisor intends to establish its own company in the country or to set up a joint venture with a local Master Franchisee or Area Developer.
Local restrictions may also concern the particular products to be sold in the franchise shops (e.g. in the pharmaceutical sector, or food restrictions), or the specific services to be provided (e.g. in case of opening schools for children or employment agencies).
Those restrictions may impede the implementation of the franchise System in the target market or imply excessive costs for its implementation. The Franchisor should therefore carefully consider the implications of those possible restrictions for the Master Franchisee or the Area Developer (and consequently for itself).
Immigration and visa issues must be considered when analyzing potential markets and structuring the parties’ obligations in Franchise Agreements. The immigration and visa laws of the Territory must be understood and complied with for representatives of Franchisors to be able to spend time in the Territory for activities such as researching locations for Units, training Franchisees and their staffs, inspecting Units, meeting with representatives of their Master Franchisees, Area Developers and Franchisees and for a variety of other purposes. The immigration and visa laws of the Franchisor’s home country must also be understood and complied with for representatives of Master Franchisees, Area Developers and Franchisees to be able to spend a time in the Franchisor’s country to attend training and other meetings.
Franchisors, Master Franchisees, Area Developers and Franchisees are often called upon to assist each other to obtain visas and other necessary government permissions for their employees and representatives to enter the country. If this is the case, the scope of the parties’ responsibilities should be spelled out clearly in the Franchise Agreement. In most cases, the resident of a country cannot assume full responsibility for obtaining visas for the representatives from another country. Cooperation of the other party is necessary to obtain the necessary documents to establish the right to obtain the visa. Experienced immigration counsel should be consulted for information on immigration and visa requirements where a Franchisor plans to open its own Units using its employees from its home country or another country, and who will be resident in a Territory for[Page53:]extended periods for activities such as training, or for permanent or long-term employment in the Territory.
For examples of immigration and visa requirements for foreign citizens to enter certain other countries, see Annex 1.
a. Exchange controls 20
Exchange controls are regulations that restrict payments or block transfers of funds across borders. Most developed countries allow parties to negotiate Fees and to transfer funds across borders without government intervention. In other countries, however, the government regulates payments flowing in and out of the country21. Exchange controls can often result in a delay in receiving fees due under a Franchise Agreement.
If exchange control issues need to be addressed, the Franchisor and Master Franchisee, Area Developer or Franchisee need to build sufficient time and procedural requirements into their agreements to allow for the approval process to occur before a payment must be made from the country where the exchange controls exist. This has several other effects. In many cases, the Central Bank in the payor’s country will need to approve the fee structure negotiated by the Franchisor and Master Franchisee, Area Developer or Franchisee, so funds can be sent from one country to another and the rate at which the local currency will be converted into the currency of the other country. The Franchise Agreement must assign responsibility for satisfying the exchange control requirements to the appropriate party. If the Franchisor requires that the Initial Fee or other payment be made before confidential or proprietary information is provided to the Master Franchisee, Area Developer or Franchisee, then, time to obtain Central Bank approval must occur before training is provided, access to operations manuals is granted or sites are approved.
b. Who bears foreign exchange risk?
The value of currencies relative to each other fluctuates, in most cases on a daily basis. Other than those currencies with are fixed in relation to the currency of another country22, when the Franchisee receives revenue in the local currency, but pays Fees in the currency of the Franchisor’s country, one or both of the parties will bear some risk that the conversion of the currency from the Franchisee’s country to that of the Franchisor’s currency will not be an exact conversion.
Although it is possible to convert revenue on a daily basis, most Franchisors and Franchisees find that process to be too cumbersome and time-consuming. The most common form of conversion is based on the frequency of payments to the Franchisor. If Fees are paid monthly, then the revenues earned in the local currency are converted to the[Page54:]currency of the Franchisor’s country on the date payment is due or some fixed prior date, such as three business days before payment is due. That allows both parties to determine the conversion rate to confirm that the amount paid and the amount due are correct. This results in the Franchisor bearing the risk of currency fluctuation during the period prior to the date the Fees are due; but, after the Fees are due, the Franchisee bears the risk. This prevents a Franchisee from delaying payment just to wait for a more favorable conversion rate that allows the Franchisee to use less local currency to pay the amounts due in the Franchisor’s currency.
Where the division of the duties and responsibilities for the overall operation of the business run by the Franchisee more closely resemble an employment relationship rather than a Franchisor-Franchisee or independent contractor relationship, the parties run the risk that the relationship could be re-characterized as an employment relationship. The consequences of re-characterizing the relationship include converting the revenue of the Franchisee into compensation for services rather than business income, which means the Franchisor has the responsibility to withhold taxes and other charges required by governments23. This is much more likely to arise as the result of a dispute between the Franchisor and Franchisee, than between a Franchisor and Master Franchisee or Area Developer. The lesson for the Franchisor and Master Franchisee, however, is to make sure that the structure of the relationship that the Master Franchisee is required to establish with its Sub-Franchisees has the proper allocation of responsibilities to create an independent contractor relationship rather than an employment relationship. Factors in the relationship to address include:
When the Franchisor has too many of these responsibilities, the relationship risks being re-characterized as an employment relationship.
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In some countries, the relationship between a Franchisor and a Master Franchisee, Area Developer or Franchisee may be subject to certain consumer protection laws. For example, in South Africa, the franchise disclosure laws are part of the Consumer Protection Act24.
In the United States, most of the states have passed Deceptive Trade Practices Acts, often called “Little FTC Acts”, which parallel the protections afforded by the Federal Trade Commission Act25. These Little FTC Acts set broad state standards barring unfair methods of competition and unfair and deceptive acts and practices. Some of these laws apply to businesses, but others are limited to natural persons. Some of these laws also apply just to the sale of tangible goods and others apply to services, but not to intangible property.
Corruption and bribery of public officials have been worldwide problems for many years. It is getting increasing attention as more countries are enacting laws to prevent such conduct and organizations propose model regulations to address this issue. As a result, Franchisors and Master Franchisees, Area Developers, Franchisees and Sub-Franchisees and their employees who engage in activities that try to improperly influence the decisions made by public officials run the risk of both civil and criminal prosecutions.
While each country’s laws and regulations have some differences, they have some common features. The anti-bribery provisions prohibit offering or giving anything of value to a foreign official or political candidate27(directly or indirectly) to obtain or retain business or to obtain an improper advantage in doing business. They apply broadly to every country’s citizens and residents (whether in the country or not); companies organized in or with a presence in the country (including subsidiaries controlled by the company); foreign companies with employees in the country; foreign nationals acting for companies in the country; and, third parties hired by the foregoing (e.g., agents, consultants, representatives, distributors, etc.). They also hold parent companies strictly liable for the actions of their majority-owned and -controlled subsidiaries (including foreign subsidiaries) and impose a good-faith obligation with respect to the actions of non-majority-owned and non-controlled subsidiaries28. For Franchisors, anti-bribery violations can be based on the wrongful acts of others, such as Master Franchisees,[Page56:]Area Developers, Franchisees, Sub-Franchisees and their employees. These laws often do not require proof of actual knowledge. A person may be liable for a violation if a reasonable person under similar circumstances would know that a violation is highly probable.
The anti-bribery laws prohibit giving “anything of value”, which covers “payments” ranging from expensive gifts or entertainment expenses to non-essential travel costs and improper campaign contributions. The “improper advantages” in doing business might include avoiding the payment of taxes or duties, preventing adverse government actions, obtaining regulatory approvals or renewing or retaining contracts. A payment does not have to be actually made, and the bribery does not have to be successful in order to constitute a violation. For example, a gift made by a Franchisee to a local government official to obtain a license for a location for a Franchisee’s Unit could be a violation by the Franchisor29.
Consequences of anti-bribery violations can include criminal and civil sanctions30, being barred from participating in government procurement contracts, being barred from receiving export licenses, being barred from participation in certain government agency programs, loss of corporate goodwill, and negative publicity31.
The UK Bribery Act was passed in April 2010 and became effective on July 1, 2011. Its purpose was to modernize the outdated and complex legislation that previously regulated this area. Very much like the US Foreign Corrupt Practices Act (FCPA),, the Bribery Act has extensive extra-territorial application that affects many international companies including, of course, franchise Systems.
The Bribery Act applies to all UK companies, partnerships and nationals, foreign individuals ordinarily resident in the UK and foreign corporate bodies carrying on a business or part of a business in the UK irrespective of whether the offense is performed within the UK or anywhere else in the world. The Bribery Act also applies to offenses committed between private individuals and companies, not just where a public official or public body is involved, and to bribery both domestically as well as[Page57:]abroad. So, a Franchisor that is not based in the UK, but that has Company-Owned Units in the UK could be subject to the Bribery Act32.
Red flags that might put a Franchisor, Master Franchisee, Area Developer, Franchisee or Sub-Franchisee on notice of prohibited activity include:
The Organization for Economic Co-operation and Development (OECD) — a multinational organization whose purpose is to provide a forum in which governments can work together to share experiences and seek solutions to common problems — updated its Guidelines for Multinational Enterprises in 2011. The OECD has 34 member countries, including the United States, United Kingdom, Canada and most European countries33.
According to the OECD, the “Guidelines are recommendations addressed by governments to multinational enterprises operating in or from adhering countries. They provide voluntary principles and standards for responsible business conduct in areas such as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, competition, and[Page58:]taxation.”34Although they are voluntary and not legally enforceable recommendations, the member countries have made a binding commitment to implement the principles and standards and encourage their use.
Chapter VII of the updated Guidelines is a totally revised chapter on “Combating Bribery, Bribe Solicitation and Extortion,” which incorporates earlier recommendations from the OECD. It provides that:
“Enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage. Enterprises should also resist the solicitation of bribes and extortion.” The Guidelines then list activities that multinational enterprises should follow to implement the Guidelines. The Guidelines state that “[t]he adoption of appropriate corporate governance practices is also an essential element in fostering a culture of ethics within enterprises.”35
Franchisors granting franchises in OECD member countries should familiarize themselves with the Guidelines and incorporate the anti-bribery provisions into their operations manuals and other directives to Franchisees.
a. Specially Designated Nationals and Blocked Persons List
US-based companies are prohibited from doing business with persons or entities named in the Specially Designated Nationals List (SDN List)36. The US Government updates the list periodically with new persons being added.
At the outset of a business relationship, US-based Franchisors should conduct adequate due diligence to ensure that potential Franchisees and persons affiliated with the Franchisee are not named on the SDN List. In addition, Franchisors should document their due diligence activities and establish a compliance program to ensure ongoing compliance with their obligations under the US anti-terrorism and sanction programs. A compliance program should include at a minimum representations in the Franchise Agreement that the Franchisee is not listed on any of the SDN Lists, periodic certifications from the Franchisee confirming compliance, a requirement that the Franchisee provide notice and a right to approve any transfers of an interest in the Franchisee by its owners or admission of new owners, and a right to terminate the Franchise Agreement should the Franchisee or its owners or affiliates ever appear on any prohibited lists.[Page59:]
b. Money laundering
Money laundering is the process of disguising the sources, changing the form, or moving the funds obtained through some form of criminal activity, including illegal arms sales, smuggling, drug trafficking and prostitution, to a place where the funds are less likely to attract attention37. Many countries have enacted a variety of legislation aimed at curtailing money laundering38.
These laws are significant to Franchisors because they can be held civilly and criminally liable if their Master Franchisees, Area Developers, Franchisees or Sub-Franchisees use the payment of fees under their Franchise Agreement to launder money in violation of any of these acts. It probably goes without saying that any attempt by a party in another country to pay fees due to a Franchisor in cash should be looked at very carefully and, where required, reported to the appropriate government.
c. ICC tools to fight bribery and corruption 39
ICC has developed a suite of anti-corruption tools for companies to use proactively as part of their integrity programmes, the cornerstone of which are the widely-known ICC Rules on Combatting Corruption40.
Additional resources include: The ICC Fighting Corruption Handbook (2008); ICC Guidelines on Use of Agents, Intermediaries and Other Third Parties (2010); the RESIST training tool (developed with business and civil society partners); the stand-alone ICC Anti-corruption Clause (2012) for incorporation into contracts; and the ICC Ethics and Compliance[Page60:]Training Handbook (2013), with respect to which ICC will develop related training materials.
Each country has laws and regulations that define how persons and entities can engage in international transactions. These laws and regulations can affect a variety of aspects of international franchise transactions, including which products and services can be exported to and imported from other counties, and, to some extent, even persons and entities that cannot enter into agreements with citizens and entities in a country. Franchisors and Franchisees who do not comply with these laws face civil and criminal prosecution from the countries affected by their actions. Violations of these laws can result in fines, imprisonment of personnel and transactions being declared to be void and unenforceable.
For example, some countries, such as Canada and Australia, restrict the importation of dairy products. So, a Franchisor that requires its Franchisees to use a proprietary dairy product that is purchased from the Franchisor or suppliers outside of Canada or Australia, must be able to identify a local supplier to provide the products if it wants to open Units in these countries.
The following discussion of US law provides examples of some of these restrictions that apply to Franchise Agreements.
a. US Anti-boycott laws
US Franchisors operating internationally should also be aware of their obligations under US anti-boycott laws. The US anti-boycott laws, namely, the 1977 amendments to the Export Administration Act (EAA) and the Ribicoff Amendment to the 1976 Tax Reform Act (TRA)41, discourage, and in some cases prohibit, US companies from participating in or supporting foreign boycotts not sanctioned by the US government.
The anti-boycott laws are of particular importance for any company doing business in the Middle East given that many countries in that region support the Arab League boycott of Israel. This Israeli boycott is not supported by the US government and compliance with this boycott by US entities or individuals violates US laws or may be penalized under the TRA. The US Department of the Treasury publishes a list of boycotting countries that includes: Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and the Republic of Yemen. Iraq is not currently on the list, but the latest notice indicates that its status with respect to future lists remains under review by the Department of the Treasury42.
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Any requests made to US entities or individuals to comply with the boycott must be reported to the US Department of Commerce on a quarterly basis and to the IRS on an annual basis. Criminal and civil penalties can be imposed for violations of the anti-boycott regulations and failure to file the required reports. In addition, cooperation with or participation in an international boycott may result in a company losing certain tax benefits (for example, foreign tax credits or deferral of taxation of earnings of a controlled foreign corporation).
b. US — OFAC country sanction programs
OFAC also administers sanction programs that target specific countries and governments. The scope of the sanctions and prohibited activities varies depending on the country. For example, in some cases, exports of certain items to the country are permitted if the company has a license from OFAC or the Department of Commerce. In other cases, there are different limits on exports to and imports from a particular country or the sanctions relate to specific groups or people. There are also some exceptions for humanitarian relief and other limited situations. Cuba, Iran, Sudan and Syria are also listed by the US State Department as state sponsors of terrorism. OFAC also administers sanction programs targeting counter-terrorism, counter-narcotics, diamond trading and non-proliferation. Details of the various sanction programs are available on the OFAC website43.
a. Choice of law
The drafter of the MFA might wish to have the contract governed by its own country’s law (or another law the drafter is familiar with) instead of the law of the country of the Master Franchisee, especially where the standard provisions of the contract the drafter normally uses may conflict with mandatory rules of the local law. Or, the local law may, for instance, contain rules protecting the Franchisee by limiting the right to terminate the contract or by granting the Franchisee a goodwill indemnity.
In such a situation, the Franchisor should carefully consider the choice of the law governing the MFA. If the choice of law clause designates the law of the Franchisor’s jurisdiction as the governing law, the issue that arises is whether the local court of the Master Franchisee’s jurisdiction will in principle be prevented from applying the mandatory rules under the local law.
In some cases the law of the Master Franchisee may contain mandatory rules which must be applied by the local courts even where the parties have chosen to submit the contract to another law (see above § 4.2 on the internationally mandatory rules). This may be the case for antitrust/competition law or local food regulation, tax laws, or for rules regarding pre-contractual disclosure (disclosure rules). Where this is the case, local courts will disregard the choice of law and will nevertheless apply the local rules.
Unfortunately, the distinction between simply mandatory rules and internationally mandatory rules (or the scope of application of the rule) is[Page62:]often not clear. In some cases it is so provided in the statute itself, reflecting the decision of the national legislator. An example is the South African Consumer Protection Act of 2008, which protects the Franchisee as “consumer” and explicitly states that the law applies to every transaction occurring within the country. As each national legislator is free to decide which rules to consider “simply” mandatory and which to consider “internationally” mandatory, there may be substantial differences between various legal systems: one country may consider as “internationally” mandatory certain rules that other countries qualify as “simply” mandatory.
Parties may avoid internationally mandatory rules by choosing another law and by submitting possible disputes to courts in a jurisdiction other than that of the Master Franchisee, as the latter court may in principle disregard the mandatory rules of the law of the Master Franchisee. However, in this case the choice of court clause (or arbitration clause) may be ineffective and a possible judgment may not be enforceable in the Master Franchisee’s country.
Nevertheless, the Franchisor should consider complying with the rules (if any) of the Franchisee’s country, even when the contractual relationship has been submitted to a different law.
b. Enforceability — Validity of a contractual clause
It cannot always be assumed that all contractual clauses will be enforced as drafted. The applicable law may limit the enforceability of certain kinds of clauses or even hold the entire clause to be void and unenforceable. In particular, the drafter of an international Franchise Agreement should always verify whether all provisions of the contract comply with the applicable law (whenever this is not the law considered when the contract was originally drafted). This may apply in particular to non-compete covenants and confidentiality clauses, because courts in many jurisdictions impose limits on the validity of these clauses. The Franchisor should make a careful search of the applicable rules in advance to avoid the risk of disputes later.
1. Post-term non-compete covenant
A non-compete clause applicable during the term of the contract is a common feature in most Franchise Agreements and does not normally give rise to particular problems. However, a post-term non-compete covenant may be invalid or subject to limitations in various jurisdictions due to its impact on competition and on the Franchisee’s right to exercise its activity.
The most typical regulation is that the non-compete covenant must be limited in the time, space and kinds of activities from which the Franchisee is prohibited. Compensation for limiting the freedom of the Franchisee may or may not be required. In some jurisdictions, such a regulation is imposed by the statute, while in others the case law controls. In many countries, the regulation of competition law, besides the rules of private law, is applicable. While the general principle that the post-term non-compete covenants should be limited in time, space and/or activities may be clear, the exact limit is often difficult to know. This is so, in particular, when the limit is[Page63:]determined by the courts as under the common law of many states in the United States or the case law of France. In such a case, some court may declare that the non-compete covenant in the international MFA is too broad and “rewrite” it into what the courts regard as reasonable. There are no perfect measures to avoid such risk. Still, the Franchisor is advised to reconsider what exactly is the interest that it wishes to protect through the non-compete clause and to explicitly relate the interest at stake to the non-compete clause to the extent possible. This is because the courts in many jurisdictions tend to balance the Franchisor’s interest to be protected, such as supplementing the protection of trade secret or retaining the clientele, and the Franchisee’s interest in the freedom of profession.
2. Confidentiality44
The confidentiality clause is more likely to be enforceable than the non-compete covenant, as long as the protected information is secret, substantial and identified. Still, the Master Franchisee might dispute the “title” to the information, such as the customer list, at a later stage by alleging that Master Franchisee contributed to its creation or improvement. To avoid later disputes, the Franchise Agreement should provide that only the Franchisor may exploit the compiled information, no matter whether or not the Master Franchisee or Sub-Franchisee has partly contributed. Further, a careful Franchisor will require the Master Franchisee to insert a similar clause in the SFA so as to exclude the possibility that the Sub-Franchisee or its employee claims its title to the information. Depending on the situation, it may also be worthwhile to consider executing a confidentiality agreement to which the Franchisor, Master Franchisee and all the Sub-Franchisees become parties.
The confidentiality of information can be relevant even before the MFA is concluded. In the course of the negotiation, the Franchisor might need to disclose part of the confidential information upon execution of a non-disclosure agreement. In doing so, the Franchisor should check whether the court of that country will affirm that a non-disclosure agreement is binding, even in the absence of the conclusion of the MFA. If there is a risk that the court regards an instrument produced in the course of the negotiation as not binding on the parties, the Franchisor must make it clear that the non-disclosure agreement is a fully-fledged “contract” that is independent from the MFA itself. It is also advised to consider the coverage of the non-disclosure agreement carefully and include, if necessary, the employees or other people as parties to it.
As regards the remedies, it is useful to provide explicitly in the contract that the Franchisor is entitled to injunction in addition to damages. This is because the courts in some countries, in particular those of the civil law jurisdiction, may not regard trade secrets and[Page64:]Know-how as constituting a property right and, as a result, may refuse to order an injunction unless there is a contractual clause providing for such relief.
c. Enforceability - Enforcement of a judgment or an arbitral award
Most international MFAs have a clause on jurisdiction and/or arbitration. The Franchisor might think that the court of its home country would be convenient, because its staff is familiar with the procedure there. However, there are more elements to think about before drafting a clause on the forum.
In case of a choice of forum clause in favor of the courts of the Franchisor’s country, one should first check whether this choice is effective in the Master Franchisee’s country, i.e. whether the courts of such country would be bound by the choice of forum clause and thus be prevented from accepting a claim made by the Franchisee. Furthermore, the Franchisor should check whether the judgment of the court of the Franchisor’s country would be recognized and enforced in the Franchisee’s country. This issue is not critical within the EU, where Regulation 44/2001 gives full effect to choice of forum clauses (provided they are agreed in writing) and warrants recognition of foreign judgments. However, in all other countries this may not be the case and parties should verify the effectiveness of possible choice of forum clauses before entering into the MFA.
Regarding arbitration, similar problems arise. The Franchisor should check whether the arbitration clause will prevent parties from bringing an action before a court, and whether the possible award will be recognized. In most cases this will be the case, due to the New York Convention, which is ratified by most countries around the world. However, there may be exceptions, for instance where the subject matter is considered to be non-arbitrable or where the award could violate the public policy of the country where recognition is sought.
When submitting possible disputes to international arbitration, parties will normally retain the right to bring claims for interim or provisional measures before the local courts. However, it is recommended in any case to expressly provide a clause stating that the parties are entitled to request provisional measures to local courts, without affecting the arbitral jurisdiction.
d. Enforceability - Further problems of enforcing the Franchise Agreement
In some emerging market countries, a judgment or an arbitral award that affirms the right of the Franchisor against the Master Franchisee or a third party might not be enforced sufficiently. For example, a shop sign that was declared to be infringing the registered trademark of the Franchisor may be required to be modified only insignificantly. The manufacturer of counterfeit products that apparently infringe the Franchisor’s patent may simply ignore the injunction order of the court and there may be no effective measures to prevent the continuation of their production. In such a case, the clauses in the contract, however well drafted they may be, lose much of their value in practice.
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The enforcement problem could be even more serious when the Franchisor has no property right in the form of intellectual property but protects its interest by the confidentiality clause. In many cases it is not easy to prove that the information subject to the confidentiality clause was in fact utilized with respect to suspect goods.
When such difficulty in enforcing the intellectual property or the contractual clause is anticipated, the Franchisor may need to consider an alternative mechanism that is easier to be implemented and effectively protects its interest. For example, the Franchisor may control the access to the important information so that no one person can acquire a complete set of information necessary to manufacture the product. As a trade secret is most frequently divulged by an employee or retired employee, the remuneration, including the payment upon retirement, must be carefully designed so as to give the employees an incentive to keep confidentiality. When executing a confidentiality agreement, the Franchisor is advised to avoid general drafting but to specify the information that shall not be divulged. To enhance the consciousness of the employees about the significance of confidentiality through their training and education may also be useful.
The Franchisor should not leave the drafting of an MFA solely in the hands of lawyers, but should be involved to ensure — particularly, for example, when entering an emerging market — that the contract works in tandem with non-contractual aspects of the deal to accomplish Franchisor’s goals in the region.
The most common language of communication in the business world is English, which is widely used and generally readily spoken in international business circles. The wide-spread use of the English language, however, does not release Franchisors from their obligation to adapt to the practices of other countries, whether legally or culturally, in terms of the translation of their legal or other documentation, as well as the presentation and marketing of their products or services.
Many Franchisors prefer to provide Master Franchisees with disclosure documents, franchise and other agreements, and manuals and other collateral documents, in the Franchisor’s own language. While this is often permitted by the laws of the Master Franchisee’s jurisdiction, there may be practical and legal reasons why using the language of the Master Franchisee’s jurisdiction may be necessary, required, preferred or prudent for some or all of these documents.
Local counsel should be consulted to determine the existence of applicable language legislation and the extent of any translation that needs be done. This may be important because even countries with the same language (such as Germany, Switzerland and Austria) still differ in technical and legal terminology.
There are also some countries, such as Spain, that require Franchisors to register/provide disclosure documents as well as standard agreements in a certified translation, including international trademark certificates. In Germany, for example, the laws on general terms and conditions require[Page66:]the provision of a Franchise Agreement in the language in which the negotiations took place.
In several countries with disclosure laws, the disclosure document can be provided in the Franchisor’s language, but documents filed with the authorities (such as a trademark license or summary of the Mater Franchise Agreement) or agreements provided to the Master Franchisee must be in the local language. In those situations, it is often common for the filed document to have side-by-side translations of the document in both languages. Some countries require that all or certain documents be in the local language. A prudent Franchisor should check with local counsel early in the process to determine what the local language requirements may be and plan accordingly.
Regardless of whether the local laws require a translation, from a cultural and marketing point of view, Franchisors are often well advised to have most or all of their documentation translated into the local language if they want to successfully undertake expansion into a country. Translation into the local official languages is often of fundamental importance, e.g. in Spain, Portugal, Italy and Greece, to name but a few European countries.
As an initial consideration, translating a long disclosure document, agreement or manual can be quite expensive and there are no assurances that the translation into another language will be accurate and/or convey the intended meaning. For that reason, with respect to all documents that are going to be translated, there should be a clear statement as to which language version is controlling. It is also critical that when a Franchisor deals with a Master Franchisee Candidate, that Candidate be fluent in the controlling language to minimize misunderstandings or misinterpretations. Some agreements contain a representation to that effect.
The Master Franchisee should be encouraged to raise any language issues as early as possible in the negotiation process or at the very least promptly after signing the agreement, during the period the Master Franchisee is starting up its business and still has a good relationship with the Franchisor but may have questions on how to comply with the terms of the agreement. If those issues are not raised and resolved until after the Master Franchisee is operating, that could strain the relationship between the parties.
Because the costs of translations can be quite high, the Franchisor often will find ways to pass these costs on to the Master Franchisee. At the inception of the relationship, the Franchisor should build the initial translation costs into its Initial Fee structure so there would be no separate translation charge to the Master Franchisee. If translations occur subsequent to execution of the MFAs, however, it is common for the Franchisor to require the Master Franchisee to bear those costs.
When a Franchisor allows a Master Franchisee to translate a sensitive document into its own language, such as a manual, the Franchisor must take care in its agreements to require that the copyright in the translation be owned by the Franchisor, and not by the translator or Master Franchisee. A copy of the translated document or documents[Page67:]should be provided to the Franchisor. A procedure to accomplish this should be spelled out in the MFA.
The SFAs used by the Master Franchisee almost always should be in the local language. The Franchisor may want the Master Franchisee to use a prescribed form of SFA or may want to have approval rights over the terms and form of the Master Franchisee’s own form of SFA. In such situations, the Franchisor will likely require the Master Franchisee to provide a translation (sometimes a certified translation) of the SFA at its own cost.
But, whether the translation is certified or not, there are almost always going to be language nuances that do not translate perfectly, especially if the translator does not have a legal background. It is a risk that every Franchisor involved in international sales activities must be aware of and the Franchisor must be able to maintain the flexibility to address and resolve possible misunderstandings or misinterpretations due to an inaccurate translation as early as possible, preferably in the negotiations before the MFA is signed.
The very nature of a franchise relationship involves a commitment by one party (the Franchisee) to offer and sell goods and services of another party (the Franchisor) to consumers and other third parties under terms and conditions dictated by the Franchisor. Therefore, antitrust and competition laws, which are designed to promote competition and prevent parties from imposing barriers to competitors and consumers, are at the core of franchise transactions. While virtually all countries define rules on competition and antitrust, the European Union46focuses particularly on these issues and defines mandatory rules applying to Franchise Agreements. Many questions are comparable but countries vary on how far and with what degree of complexity antitrust and competition are legally regulated.
Typical competition or antitrust issues are triggered by the grant of exclusive licences, product distribution rights or territories, as such agreements may reduce competition and may, therefore, be held to be anti-competitive. The same factors apply to an obligation that requires Franchisees to purchase products exclusively from the Franchisor or designated suppliers. Mandatory pricing requirements by the Franchisor will most certainly trigger price-fixing issues, and, directly or indirectly, antitrust questions. Further, Franchisors invariably impose both in-term and post-term noncompetition covenants on Franchisees.
See Annex 2 for a discussion of antitrust and competition laws in the United States and the European Union.
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Due substantially to the digitalization of marketing, sales and communication processes, privacy and data protection are increasingly relevant to virtually any business transaction, including franchising. As there is no global treaty or other framework on how to handle this data, each country can define its own approach to privacy and data protection. On many occasions, Franchise Agreements must comply with privacy laws in the country of the business, the country of the customer, the country of Franchisee and the home market of the Franchisor.
In relation to data privacy, typically Franchisors make use of both Franchisee and customer data. Franchisors and Franchisees may collect, store and use personal information in a number of ways, including sales information and information gathered on websites, via email and through Internet transactions. During Franchisee recruitment, Franchisors collect and save personal information from Franchisees and Candidates through franchise application forms, notes of interviews, field assessments and performance reviews.
More and more jurisdictions are adopting specific laws dealing with data protection and privacy issues and for the reasons set out above, such laws regularly apply to data retained within franchise networks.
See Annex 3 for information regarding privacy laws and requirements in selected countries.
Besides the liabilities arising out of possible non-performance or breaches of the contract, which will be governed by the Master Franchise or ADA as well as by the applicable law, the Franchisor should evaluate carefully the risk of incurring further liabilities.
For example, the Franchisor should consider the risk that it may be deemed responsible, under the applicable law, for instance, for warranty obligations or product liability should it sell through the franchise System products manufactured by itself or by a supplier expressly designated by it (e.g. in Russia).
In addition the Franchisor may face the risk of being considered liable for infringement of third parties’ IP rights.
Generally in a Master Franchise relationship the Franchisor will not be responsible for possible claims brought by the Sub-Franchisees against the Master Franchisee (in the absence of any contractual relationship between the two); however, in some circumstances (and particularly when the Master Franchisee is insolvent) the Sub-Franchisees may attempt to act directly against the Franchisor (oftentimes described by US courts as “vicarious liability’’). In light of that, it may be advisable for the Franchisor to provide in the contract that the Master Franchisee must hold the Franchisor harmless from any claim brought by any Sub- Franchisees against the Franchisor.
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The Franchisor can take further precautions to that aim, e.g. by inserting a clause in the MFA, according to which the Master Franchisee undertakes to provide the Franchisor with insurance covering such a liability risk.
A further liability may also arise for foreign Franchisors having a Master Franchisee in the United States: both the Franchisor and the Master Franchisee are responsible for each other’s compliance with the FTC Franchise Rules and are jointly and severally liable (towards the FTC) for each other’s violations. In addition, according to most state franchise sales laws in the United States (e.g. California), directors, officers and the persons involved in the sales process are considered jointly and severally liable for disclosure and other statutory violations (see, also § 4.4.12).
Finally, a violation of an anti-bribery provision (e.g. the US Foreign Corrupt Practice Act) by the Master Franchisee, the Area Developer, the Franchisee or their employees, may lead to liability of the Franchisor (see also § 4.4.5 on this issue).
Tax issues regularly arise when setting up international franchise strategies. International operating franchise Systems are usually confronted with different tax regimes. Most tax issues are income- and sales-tax-related. Additional tax questions typically arising only in cross-border franchising are double-taxation and the so-called withholding tax.
Ideally, these key areas are structured preferably before defining the Franchise Fee or other income structures in a Franchise Agreement.
Because of the great number of possible tax considerations, both Franchisor and Franchisee should clarify with a legal or tax consultant the tax considerations that might apply when running the franchise business in the target market.
Within these key areas value added tax (VAT), transfer pricing, taxation of subsidiaries and foreign income taxation are to be structured preferably before defining the fee or other income structures in an MFA.
The variations of possible tax structures for international Franchisors are virtually endless. However, there are a number of critical questions that typically influence the international tax strategy:
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There are more issues, depending on the business strategy and home as well as target countries involved. In the following section, a few terms are further described.
Franchisors operating internationally are confronted with different income tax regimes. Typical combinations include:
Depending on the business strategy of a Franchisor a number of income tax issues will arise, including the allocation of income to several states. Ideally the Franchisor in state A as well as the daughter company domiciled in the target market will both yield profits. As a consequence two countries will claim taxes and the Franchisor can create profits in either state by pricing for delivering within the franchise System (“transfer pricing”). The characterization of income varies from country to country. As an example, in the United States income from sources outside the United States is characterized as:
A Franchisor should review any and all applicable income definitions in the home market as well as in the target markets before structuring its Fee and payment scheme in an international Franchise Agreement.
A Franchisor should consider how to structure the supply and performance relations between itself and Master Franchisees and Unit Franchisees in a way that as much profit as possible accrues in states with more favorable tax regimes and correspondingly fewer profits accrue in countries providing higher taxation. However, in order to prevent random profit-shifting, tax regulations stipulate that any inappropriate transfer prices between related companies must be corrected (e.g. Art. 9 OECD Model Convention).
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Such principles apply specifically between parent Franchisor companies and permanent establishments in the target country. In this context it is important to prevent double taxation.
In view of this situation, Franchisors should assess the risk of founding a permanent establishment, analyze functionality and prepare the necessary documentation at an early stage.
The supply of goods or services for consideration are in many countries subject to sales tax (or value added tax) (e.g. in the European Union according to the EU-VAT directive 2006/112/EC).
The key question arises whether and where the transaction made by the Franchisor is taxable and subject to VAT and whether respective input tax deduction is possible. The determination of the place of taxable transactions is crucial to answer the questions of how the invoice is issued correctly and whether a deduction may be accessed. If VAT is not handled properly the Franchisor risks costly additional payments and even criminal proceedings in some countries. In addition, the Franchisor and/or Franchisees as receiving parties cannot deduct the input tax.
Many national tax regimes provide for the debtor’s (e.g. the Master Franchisee in the target market) obligation to retain and pay to the local tax fiscal administration a part of payments/income to the Franchisor abroad. If the Franchisor, in addition, does not fulfill its obligation to pay local tax to the fiscal authorities in the target market, the Master Franchisee/Franchisees are held liable for the Franchisor’s obligations.
But, as most foreign Franchisors are also obliged to pay taxes for their income in their states of residency, they are subject to a double taxation.
However, double taxation and in consequence an unlimited tax liability on the worldwide income of the Franchisor in the target market as well as in the state of residency can be avoided if a double taxation treaty is applicable. These treaties stipulate the allocation of taxation rights and the splitting of profits. Many countries have entered into double taxation agreements with most major countries, which provide that an income will be subject to taxation in one country only.
If a double taxation treaty is applicable the debtor (e.g. the Master Franchisee in the target market) has the opportunity to submit an application for a so-called certificate of exemption to the competent tax authority (e.g. in Germany, the Federal Department of Finance). The effect of such certificate of exemption is that the debtor need pay no withholding tax and the debtor is relieved of its liability if it does not fulfill its obligation to pay withholding tax for the Franchisor.
The Franchisor should clearly address withholding tax questions in its international Franchise Agreement.
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International Franchise Agreements usually provide for different fees to be paid by the Franchisee to the Franchisor, e.g. the Initial Fee, the Franchise Fee and the Marketing Fee.
The tax treatment may vary depending on the rights the Franchisee is granted under the franchise.
If, e.g. the fee is paid to the Franchisor for the concession of trademark and similar rights, the acquired rights will be capitalized as an intangible asset that will be amortized in equal amounts over the total duration of its operational use. With regard to the contractual concession of certain rights the total duration of the operational use is determined in accordance with the agreed contractual period. During this period the amounts of amortization are tax deductible as operating expenses, and therefore reduce the Franchisee’s fiscal income.
The fee charged for the provision of immediate services to the Franchisee, e.g. rendering ongoing advice, training, advertising, etc., is tax deductible in the year in which it becomes payable by the Franchisee. Those fees are operational costs.
A foreign Franchisor should check whether it is subject to local limited tax liabilities to determine whether the respective fee triggers trade tax and/or the Franchisor is liable for the VAT attracted by the fee.
For a domestic Franchisor, the Initial Fee will be normally treated as taxable income, and as a result (corporate) income tax, VAT and trade tax would be triggered.
For the Franchisee, fees paid to the Franchisor will be treated as a business cost and thereby directly tax deductible in the year they occur. Tax deductions are not necessary for the purposes of income taxation. However, the Franchisee may be liable for the VAT attracted by those services if provided by a non-resident Franchisor (withholding tax).
In addition, VAT and/or trade tax could be also triggered.
Franchisor should consult a tax advisor to understand the tax treatment of the different Franchise Fees.
Common law, also known as case law, is law developed by judges through decisions of courts and similar tribunals, as opposed to statutes adopted through the legislative process or regulations issued by the executive branch48.
One third of the world’s population lives in common law jurisdictions or in systems mixed with civil law. Common law originated in England and is used there and in countries that trace their legal heritage to England as former colonies of the British Empire. Very important and well developed franchise markets such as the United States, Canada (with some exceptions in Quebec) and Australia are based on common law legal systems as well as growing franchise markets such as Malaysia, New Zealand or Singapore.
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While common law systems follow court decisions, which are considered “law” with the same force of law as statutes, by contrast, civil law systems are based on a framework of statutory laws which can be interpreted (only) by courts.
Historically civil law systems trace their history to Roman law and the Napoleonic “Code Civil”. This is why most European countries (excluding the UK and Ireland) follow the civil law system. In addition, most Central and South American countries, and China and Russia, have a civil law system.
For franchise Systems growing internationally it is important to be aware of the differences between the common and civil law systems as the two systems have different ways of drafting, reading and understanding contracts. As a rule of thumb, common law Franchise Agreements tend to be longer, describing more precisely case-by-case situations, while civil law agreements refer to statutory rules or even general principles (such as good faith and fair dealing). A Franchisor using a Franchise Agreement based on civil law in common law jurisdictions may risk not fully meeting the criteria or level of regulations necessary in the target market. On the other hand, a common law-based Franchisor will find it difficult to “sell” a common law Franchise Agreement in a civil law jurisdiction as the template might be seen as too long to a Candidate with a civil law background.
When converting a Franchise Agreement drafted for use in a civil law or common law system to a version to be used in a jurisdiction of the other system, parties must take extra care to adapt the Franchise Agreement to both of their needs and to express their joint understandings clearly.
Thus, contracts drafted for use in a common law system will often contain concepts (such as representations) that do not exist in civil law countries. This means that, whenever the contract has to be submitted to[Page74:]a law other than the law governing the original text, one should verify that the all the provisions make sense under the “new” applicable law.
Potential readers from other jurisdictions may simply misinterpret the wording. For example, a “guarantee” defined in a common law agreement might translate in some civil law jurisdictions as a legally defined “Garantie”, e.g in Germany, which imposes certain additional duties on the promising parties. A Franchisor using such terms should find out about such a “duty-trigger” in local laws through local counsel reviewing the agreement. On the other hand, a “warranty” defined in a common law agreement might not comply with locally applicable minimum standards in the target market.
Another thing to keep in mind is that some clauses, which make sense under a given legal system, may be difficult to understand for people accustomed to another one. Since it is important that parties understand what they sign, it is recommended to avoid clauses that have to close links to a given law (particularly if that law is not applicable in the specific case).
In general terms, businesses engaged in international trade should try to work out more neutral drafting standards that can work as well in a common law environment as in a civil law system.
17 See § 4.4.7.
18 A list of countries that have enacted franchise disclosure laws can be found in Annex 7; further information to this regard can be found in International Franchise Sales Laws, Andrew P. Loewinger, Michael K. Lindsey Editors; in the website of the International Distribution Institute (IDI — www.idiproject.com); in Dennis Campbell, International Franchising, Ed. Juris. The text of the main disclosure laws can be found in the website of the International Distribution Institute (IDI — www.idiproject.com).
19 In some of the 13 states, the filing is effective upon receipt by the state or shortly thereafter, but in the majority of states the examiners will review the FDD and some will provide comments requiring revisions. The FDD, together with its agreements, becomes registered upon the issuance of the state’s approval order or filing acknowledgement. If a Franchisor with a registered trademark filed its initial registration in all of the 14 states that require registration or filing, plus the six business opportunity states that require an exemption filing, the fees would be U.S. $6,625. The registration or filings must be renewed on an annual basis. If the Franchisor filed an annual renewal in all of the 14 franchise registration or filing states and the two business opportunity states that require an annual filing, the fees would be U.S. $3,375. Note: material change amendments might also be needed during the course of the annual registration. If a Franchisor filed in each state requiring a material change amendment filing, the fees would be U.S. $1,195.
20 This section is based upon the paper written by Jeffrey A. Brimer, Alison C. McElroy and John H. Pratt, entitled Going International: What Additional Restraints Will You Face?, prepared for the American Bar Association Forum on Franchise 2011 Annual Meeting.
21 For example, the payment of fees from South Africa or Brazil to a foreign Franchisor requires exchange control approval by their Central Banks.
22 For example, The United Arab Emirates Dirham is fixed at 3.67212 to the US Dollar.
23 In a preliminary ruling in Awuah v. Coverall North America, Inc., Business Franchise Guide (CCH) ¶14,473, 740 F. Supp. 2d 240 (D. Mass., Sept. 28, 2010), the court held that the Franchisor of janitorial businesses misclassified its Massachusetts franchisees as independent contractors under the meaning of the Massachusetts Independent Contractor Statute and, ruled, as a matter of law, that Franchisees were employees of the Franchisor under the statute. This holding may be unique to janitorial franchises because these franchises operate differently from other franchises. Janitorial Franchisors typically locate business for their Franchisees, bill the clients, collect the amounts due from clients and return to the Franchisees the amounts collected, less the fees and other charges to the Franchisee.
24 Act No. 68 of 2008, April 24, 2009.
25 15 USC § 45.
26 This section is based upon the paper written by Jeffrey A. Brimer, Alison C. McElroy and John H. Pratt, entitled Going International: What Additional Restraints Will You Face?, prepared for the American Bar Association Forum on Franchise 2011 Annual Meeting.
27 See, for example, the US Foreign Corrupt Practices Act (“FCPA), 15 U.S.C. §§ 78dd — 1, et seq., defines “foreign officials” to include government employees, employees of state-owned enterprises and private persons “acting in official capacity.” Even if an enterprise is not wholly-owned by the state, it may fall under the purview of the FCPA if a non-U.S. government exercises substantial control over its operations. The term “political candidates” includes candidates for foreign office and foreign political parties. Both terms include the spouses, dependents and siblings of any person otherwise falling within the “foreign official” or “political candidate” definition.
28 See 15 U.S.C. § 78m(b)(6).
29 There are limited and specific exemptions for nominal payments related to non-discretionary government actions, but these exceptions are very narrow. Any company relying on these exceptions must understand that the exceptions are read and applied very narrowly.
30 Under the FCPA, criminal penalties are imposed by the U.S. Department of Justice (“DOJ”). For anti-bribery violations, criminal penalties for individuals may include fines up to $100,000 per violation and imprisonment up to five years. For entities, fines are up to $2,000,000 per violation (or more under alternative fine rules. Criminal penalties for books and records violations are, for individuals, fines up to $5,000,000 per violation and imprisonment up to 20 years and, for entities, fines up to $25,000,000 per violation (or more under alternative fine rules). Civil penalties for the anti-bribery provisions are imposed by the U.S. Securities and Exchange Commission (“SEC”) and, for privately-held companies, the DOJ. The fines for an officer, director, employee or agent are fines of up to $10,000 per violation for any willful violation. For entities, fines are up to $10,000 per violation and injunctions. The SEC may seek an additional fine of up to $500,000 on the gain obtained as a result of the violation.
31 For public companies, FCPA violations are categorized as a type of fraud; therefore, a company’s failure to disclose an FCPA violation may itself trigger a Sarbanes-Oxley Act (“SOX”) violation. Section 302 of SOX (certification of financial statements by CEOs and CFOs) requires a company’s auditors and board of directors to disclose any fraud, whether or not material, involving persons with a significant role in corporate internal control. Section 404 of SOX (internal control procedures) requires a company to report on internal controls with respect to all of its consolidated subsidiaries, including minority-owned subsidiaries.
32 Generally speaking, Franchisees do not perform services for and on behalf of their Franchisor. They perform services on their own behalf; and, so, Franchisees will not be “associated persons” for the purposes of The Bribery Act. An exception to this is where a Franchisor has obtained national account contracts or requires customer contracts to be entered into between the Franchisor and the ultimate customer and Franchisees perform those contracts as agents of the Franchisor. If a Franchisee is treated as “associated”, the Franchisee must also make a bribe with the intention of obtaining or retaining business for the Franchisor for an offense to be committed by the Franchisor. Again, generally Franchisees obtain and retain business for themselves and not their Franchisor.
33 The OECD works with governments to understand what drives economic, social and environmental change. It measures productivity and global flows of trade and investment. It also analyzes and compares data to predict future trends and sets international standards on all sorts of things, from the safety of chemicals and nuclear power plants to the quality of cucumbers.
34 The original Guidelines were adopted by the OECD Council in 1976. The recent update was the fourth update since their original adoption. A copy of the updated Guidelines can be found at http://www.oecd.org/dataoecd/43/29/48004323.pdf. For more information on the history of the Guidelines, see www.oecd.org/daf/investment/guidelines. See, http://www.oecd.org/department/0,3355,en_2649_34889_1_1_1_1_1,00.html.
35 See Guidelines at page 45.
36 A convenient listing of the various lists of prohibited persons — appropriately titled “Lists to Check” — is available on the U.S. Department of Commerce website at http://www.bis.doc.gov/complianceandenforcement/liststocheck.htm.
37 For more information on money laundering and governmental activities to halt the practice, see the Financial Action Task Force website at: http://www.fatf-gafi.org/pages/0,3417,en_32250379_32235720_1_1_1_1_1,00.html.
38 For example see: Title 31, United States Code Section 5331, requires reporting of this information to both the Internal Revenue Service and the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”);Title 31 USC Section 5332, the Bulk Cash Statute, which affects anyone who transports or attempts to transport currency or other monetary instruments of more than $10,000 from a place within the United States to a place outside of the United States or from a place outside the United States to a place within the United States, and knowingly conceals it with the intent to evade the reporting requirements of 31 USC Section 5316;Title 18 USC Section 1960, which requires money service businesses to be registered with the federal government; Bank Secrecy Act — The Currency and Foreign Transactions Reporting Act, Public Law No. 91-508, Title II, which, along with financial institution record-keeping requirements, became known as the Bank Secrecy Act (“BSA”) and mandates the reporting of certain currency transactions conducted with a financial institution (Form 4789), the disclosure of foreign bank accounts (TD F 90-22.1), and the reporting of the transportation of currency exceeding $10,000 across United States borders (Form 4790);Money Laundering Control Act of 1986, makes it illegal to conduct certain financial transactions with proceeds generated through specified unlawful activities, such as narcotics trafficking, Medicare fraud and embezzlement, among others; and the Asset Forfeiture Program, which is one of the federal government’s most effective tools against drug trafficking, money laundering, and organized crime. In conjunction with other federal, state, and local law enforcement agencies, the U.S. government uses asset forfeiture statutes to dismantle criminal enterprises by seizing and forfeiting their assets. Most seizures and forfeitures are the result of Title 18 and Title 31 money laundering and currency investigations.The key money laundering offenses in the UK are contained in the Proceeds of Crime Act 2002 (“POCA”); Proceeds of Crime Act, 2002, c.29 (Eng.); Money Laundering Regulations 2007, The Money Laundering Regulations 2007, 2007 No. 2157 (Eng.); and, The Terrorism Act of 2000 Terrorism Act 2000, 2000 c.11 (Eng.).
39 Information on the full suite of ICC anti-corruption tools and activities may be found at: http://www.iccwbo.org/advocacy-codes-and-rules/areas-of-work/corporate-responsibility-and-anti-corruption/
40 Available at: http://www.iccwbo.org/advocacy-codes-and-rules/areas-of-work/corporate-responsibility-and-anti-corruption/ICC-Rules-on-Combatting-Corruption/
41 26 U.S.C § 999.
42 Actions that may be penalized or prohibited under the anti-boycott laws include agreements: - to refuse or actual refusal to do business with or in Israel or with blacklisted companies; - to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality; - to provide or actually providing information about business relationships with or in Israel or with blacklisted companies; or - agreements to provide or actually providing information about the race, religion, sex or national origin of another person. Additional examples of permitted and prohibited activities in connection with boycott requests are included in the Export Administration Regulations. See 15 C.F.R. § 760.2.
43 http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx.
44 The ICC Model Confidentiality Agreement (and ICC Model Confidentiality Clause), ICC Publication No. 664E, 2006 Edition, is available for purchase at: http://store.iccwbo.org/icc-model-confidentiality-contract
45 This section and Annex 2 are based on a paper written by Jeffrey A. Brimer, Alison C. McElroy and John H. Pratt, entitled Going International: What Additional Restraints Will You Face?, prepared for the American Bar Association Forum on Franchise 2011 Annual Meeting.
46 Members of the EU — Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, UK.
47 This section is based upon the paper written by Jeffrey A. Brimer, Alison C. McElroy and John H. Pratt, entitled Going International: What Additional Restraints Will You Face?, prepared for the American Bar Association Forum on Franchise 2011 Annual Meeting.
48 Duhaime’s Law Dictionary, Definition of common law.
49 http://en.wikipedia.org/wiki/File:LegalSystemsOfTheWorldMap.png.