EU Franchising Directive Proposed

This guest column provides the views of Gray Plant Mooty Lawyer Carl E. Zwisler on a proposed “new legal regime for the European Union.” 

By Carl E. Zwisler

A column in the independent United Kingdom magazine Franchise World, which is unrelated to the International Franchise Association’s publication Franchising World, recently argued for a new legal regime for the European Union.

In the column, the author, attorney Mark Abell, Ph,D., co-chair of the Field Fisher Waterhouse franchise practice, writes that the lack of homogeneity in the regulation of franchise sales and franchise relationships in the EU creates technical barriers to franchising.  Civil codes in EU countries impose an obligation of good faith on franchisors which is often required to require franchisors to make presale disclosures to franchisees.  However, the interpretation of good faith disclosure obligations varies materially from country to country, and franchisors have no specific disclosure guidelines upon which they can rely.  Abell says neither self-regulatory schemes adopted by national franchise associations nor national laws provide adequate protection to franchisees. Thus, he argues, Europeans are reluctant to enter into franchising relationships.  He contends that franchising is underperforming in the EU when compared to the United States and Australia, and posits that the current regulation of franchising in the EU is at least partially to blame.

Abell proposes that the EU should adopt a Franchising Directive which would pre-empt both aspects of national laws which he identifies as creating disincentives for the growth of franchising, and EU antitrust (competition) laws which typically regulate franchisor conduct.  EU “directives” establish end results that must be achieved in every member country. National authorities must adapt their laws to meet these goals, but would be free to decide how to do so.

The Franchising Directive would require franchisors to provide prospective franchisees with disclosure documents (EFDDs) before they sign a franchise agreement or invest in a franchise.  No registration would be required.  The EFDD would require much less information than a U.S. FDD, but it would have to be prepared in whichever one of the official languages of the prospective franchisee’s country of residence that he or she requests. Exemptions from disclosure would be similar to those in the U.S. FTC Franchising Rule. Disclosures would be required at least 15 “working days” before a payment is received by the franchisor or a franchise agreement is signed, and the franchisee and franchisor would each have additional five working days after signing the agreements to rescind it without penalty.

“Unconscionable” franchise agreement provisions and unconscionable conduct would be prohibited in franchisee relationships.  Abell lists specific behaviors which would be deemed unconscionable.  Unfortunately, much would continue to be left to the interpretation of the courts and the national agencies which would have the authority to enforce the Directive.  Examples of unconscionable conduct include:

1.  A franchise agreement which permits a franchisee to compete with the franchisor either during the term of the franchise or after it ends would be unconscionable.

2.  Encroachment on the territory of an exclusive franchisee would be unconscionable.  Franchisors who think that the term “exclusive franchisee” would save them from challenges so long as they properly disclose the precise nature of the parties’ rights (which is not required in an EFDD) might be surprised to learn that Abell references Scheck v. Burger King Corp, 756 F. Supp. 548 (S.D. Fla. 1991) as an explanation of this duty.  In that case, the franchisee had not been granted an exclusive territory, but the trial court sanctioned the franchisor for granting a third-party franchisee the right to open a restaurant near Scheck’s restaurant.  That case has been overturned in Florida and wherever else it has been raised as precedent in the United States.

A unique requirement of the Directive is intended to help prospective franchisees understand the EFDDs and franchise agreements.

“It is the franchisor’s obligation to ensure that if a franchisee is required to invest a sum greater than 20,000 Euros, the franchisee takes legal and financial advice from advisers affiliated to the national franchise associations. This obligation is satisfied by the franchisor being presented with a certificate from the potential franchisee’s legal and financial advisers stating that the potential franchisee has taken appropriate advice from them and that they have completed the self study module [approved by a certified national franchise association].”

But according to European franchisors Abell surveyed, the principal obstacle to international franchising for them is finding a suitable franchise partner.

There are other statistics to consider.  With a 2010 population of about 500,000,000, the EU had about 10,000 franchise concepts according to the European Franchising Federation.  In the United States, with a population of around 318,000,000 people in 2010, Darrell Johnson, CFE, president of FRANdata, estimates there to be 3,500 active business format brands, and as many as 1,500 brands which have been franchised, which are not now growing.  The EU has proportionately more franchise brands than the United States.  When one considers that franchising has been widely used in the United States since the 1950s and that until 1989 many EU member countries were part of the communist bloc, a relative U.S. lead in the number of franchise locations is unremarkable.

According to Bill Edwards, CFE, CEO of Edwards Global Services, in an article in Franchising World magazine in March 2011, “Where to Take Your Franchise in 2011,” the most popular countries for franchising, with their rank for ease of doing business as computed by the World Bank publication, Doing Business 2012, include:  Brazil (126), Chile (39), China (91), Colombia (42) and India (132).  The lower the number, the easier it is to do business.  Ireland (10), Spain (44) and the UK (7) were the only EU countries to make his top 22 list. (The World Bank ranks the United States fourth.)  Ease of doing business is an evaluation of a country’s regulatory obstacles to starting and operating a business. This analysis suggests that perceived economic opportunity is the driver for international expansion decisions, not ease of doing business.

It is not clear which if any of these new franchise proposals will gain traction in Europe.

Carl E. Zwisler is a lawyer in the Washington, D.C. office of Gray Plant Mooty. A former IFA General Counsel, Zwisler represents franchisors and master franchisees in international and domestic transactions. He can be reached at carl.zwisler@gpmlaw.com.

Franchise World article authored by Mark Abell, Ph.D., partner of Field Fisher Waterhouse, LLP is available here: http://www.franchiseworld.co.uk/archives/3252