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Preparing for Brexit: Top 5 considerations for franchisors in 2017

06/02/2017

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United Kingdom

2017 is the year in which the UK Government will trigger the exit process and recent events have given the first meaningful insight into the exit process and the likely direction of travel.

Since the United Kingdom voted to leave the European Union ("EU") on 23 June 2016, "Brexit", and what it may or may not mean has dominated the national conversation. In the absence of a crystal ball, we will not know what Brexit is going to mean until we are some way into the negotiations with the EU. However, 2017 is the year in which the UK Government will trigger the start of the exit process and on 1 February 2017 the House of Commons voted emphatically in favour of triggering Article 50. Recent events have given the first meaningful insight into the exit process and the likely direction of travel.

The Supreme Court recently rejected the Government's appeal in R (on the application of Miller and Dos Santos) v Secretary of State and confirmed that Parliament must give its formal approval before the 2 year exit process can be triggered. Prior to this, the UK Prime Minister, Theresa May confirmed that the final Brexit deal reached between the UK and EU will be put to a vote of both Houses of Parliament. In the same speech, the Prime Minister suggested that the UK will be looking to leave the single market (referred to as the "European Economic Area" or "EEA") and possibly some or all of the customs union, whilst trying to retain as much access as is possible. It is unlikely that Parliament will withhold approval for the triggering of the exit process, but the UK Government's approach to membership of the EEA is perhaps the most telling development since June 2016, as businesses can and should take that as a cue to prepare for a "hard" or "clean" Brexit, as opposed to a "soft" one.

So what does this mean for the franchise community? To help shed some light on this matter, members of Fieldfisher's franchise team have identified five key issues that all franchisors doing business in the UK and/or EU should be considering now.

1. Trademarks and brand protection

Harriet Seymour, a partner in our IP Protection Group looks at how Brexit might impact on a franchisor's brand protection strategy:

"It is not clear what mechanism will operate in relation to successor rights to EU trade marks ("EUTMs") (and Registered Community Designs) in the UK when the UK leaves the EU, and whereas both scenarios are unlikely, it is possible that a) EUTMs will simply stop being enforceable in the UK or b) the EUTM system will continue to cover the UK.  Much more likely though is that the EUTM owners at the time of Brexit will be granted successor rights under national UK trade mark law one way or another so that their priority is recognised (there are various ways that might happen). 

But where does that leave the surviving EUTM? Assuming the UK does leave the system, if an EUTM is more than five years from registration it will be vulnerable to cancellation from the EUTM register and will not be enforceable if it is not in genuine use.  If the only use is and has been in the UK and it is not being used in any other EU territory, then the EUTM may eventually become vulnerable once the UK use is no longer maintaining it.  If therefore keeping an EUTM enforceable and maintaining its priority is important to a business then they might consider putting the EUTM registration into use by way of licence or franchise arrangement in an EU member state.   An interest in maintaining the EUTM with genuine use in the EU may affect plans or decisions about partners in the EU whether you are based in the UK or elsewhere."

2. Data Protection

Franchise businesses which collect and use data from European citizens – whether established in the EU or not - should already be aware that the legal landscape changed prior to Brexit with the implementation of the EU General Data Protection Regulation ("GDPR") which came into force on 25 May 2016.   There has been a lot of debate about whether the GDPR will still apply in the UK once it exits the EU. This speculation was seemingly ended on 21 December 2016 when the UK Government released a report confirming its intention to apply the GDPR despite Brexit.

Phil Lee, a partner in our Privacy & Information law group considers Brexit in the context of Data Protection:

"The process of exiting from the EU is likely to be a protracted affair and, during the interim period at, least, the UK will remain fully subject to EU laws – including EU data protection laws.

Businesses still need to undertake their GDPR readiness preparations.  When it comes into effect in May 2018, the GDPR will apply to every business - whether in the EU or not - that offers goods and services to EU citizens or that monitors EU citizens’ behaviour.  UK businesses selling into the EU will therefore still be subject to GDPR requirements, as will wider international businesses operating across the UK and the EU.  The UK’s leaving the EU won’t change this. If the UK doesn’t stay part of the EEA, then it will in effect become a “third country” for data protection purposes - meaning that data transfers from the EEA to the UK could be restricted in the same way as data exports from the EEA to the US.  Or, more accurately, they’ll be restricted unless the EU Commission decides that the UK provides “adequate” protection for data it imports from the EEA, as is the case currently with countries like Canada and New Zealand.  Whether that happens will very likely depend on the next point…

If the UK doesn’t stay part of the EEA (meaning it won’t become subject to the GDPR), then it will need to adopt new national data protection laws (and might be tempted to adopt a “GDPR-lite” regulation) or continue its reliance on the Data Protection Act 1998.  It will need to tread very carefully if it follows this path - while it might be tempted to adopt more relaxed data protection rules than the GDPR to attract investment from countries like the US, if these rules aren’t “strict enough” then it also risks not achieving “adequacy” recognition by the EU, seriously impacting data flows between the UK and the EU."

As a general point to note, the GDPR will apply to both data controllers and data processors, which, in the franchising context, means both franchisors and franchisees; the franchisor will nearly always be the data controller of customer data, but a franchisee may be either a data controller or a data processor, depending on the arrangement between the parties. The franchisor and franchisee are usually independent data controllers – that is, they both have rights to access and use the personal data, but for their own separate purposes. A franchisee may be a data controller of customer personal data even if the franchisor lays claim to IP rights in the data. Non-compliant businesses under the GDPR risk fines of up to 4% of global turnover.

3. Antitrust/Competition law

EU competition law prohibits anti-competitive agreements and abuses of a dominant position.  In the context of franchising, EU competition law most commonly has an impact on:

  • Territorial and customer restrictions that franchisors wish to impose on franchisees.  Whilst franchisees can be protected within exclusive territories from active sales by other franchisees in their territories, franchisees cannot be prevented from engaging in passive sales (responding to unsolicited orders) from anywhere within the EEA.  Online sales also cannot be restricted within the EEA.
  • Pricing restrictions on franchisees.  Requiring franchisees to comply with fixed or minimum resale prices is strictly prohibited except in certain very limited circumstances.
  • In and post-term non-compete clauses.  These are permitted in order to protect the know-how transmitted by the franchisor to the franchisee provided that, in the case of post-term restrictions, they are reasonable in duration and scope.

Nick Pimlott, a partner in our Competition, Regulatory & Trade Group examines the impact that Brexit might have for franchisors:

"Post-Brexit, these rules will continue to apply to any franchising agreement that has or may have an effect on trade between the remaining EU Member States.   This could include agreements with a UK element if they cover, or could have effects, in multiple EU Member States. 

For purely UK agreements, it would be open to the UK to depart from the strictures of EU competition law and adopt a more or less onerous regime.  At present the UK Government's intentions for the future of competition law in the post-Brexit era are not known.  However, it is thought unlikely that in the short term post-Brexit there is likely to be significant change.  UK competition law, as embodied in the Competition Act 1998, is largely based on EU competition law and the case law based on that Act draws heavily on EU case law.   Absent of major legislative change, it will take some time for any material changes of interpretation to feed through into case law once judges are freed from the need to strictly follow the EU approach. 

An area in which divergence is perhaps most likely to arise is territorial and/or online restrictions.   The EU competition law rules on territorial and online restrictions are driven by the overriding objective of the EU to promote and complete the EEA.  Outside the EEA, such considerations will no longer be of relevance to the UK.  It would be open to the UK to take a more economically liberal approach and allow franchisors to offer much greater territorial protection to franchisees and/or regain greater control over online activities.  Whether this will occur remains to be seen."  

4. Jurisdiction and Enforcement

The UK is currently party to various regulations and conventions that ensure that the courts of EU member states apply jurisdictional rules to determine when they will accept jurisdiction over a dispute and that a judgment given in one member state will, subject to certain exceptions, be enforceable in all other participating states.  Many UK based franchisors elect for the English courts to have exclusive jurisdiction over their franchise agreements and for good reason; they are world renowned for a reputation of quality and for supporting the needs of modern commerce.

But one result of Brexit could be that the UK must replace these arrangements or face the prospect of its courts' judgments becoming less effective across Europe.

Andrew Dodd, head of our franchise disputes team, suggests it is too early for franchisors to think seriously about changing jurisdiction or moving to arbitration as the preferred dispute resolution mechanism. 

"It's too early and uncertain to be considering whether Brexit should change our approach to something as important as jurisdiction/forum clauses. No-one knows how Brexit will play out, and even when Article 50 will be invoked, it will take years for us to attain even a degree of detachment from existing legal recognition/enforcement arrangements even if that is the outcome of Brexit".

It seems likely that English law will remain the dominant governing law for commercial contracts globally: English law will largely be unaffected by whether the UK remains part of the EU or not.  It will continue to be selected by businesses for certainty as the choice of law for most commercial arrangements.

 5. Contractual provisions 

One outcome of Brexit will be that franchisors need to carefully examine the legal contracts which underpin their existing relationships with franchisees and suppliers.

Gordon Drakes, a senior associate in our Franchising & Commercial team, considers the possible impact of Brexit on commercial agreements: 

"Franchisors should audit their existing legal agreements in order to ascertain whether any express terms need to be amended or varied as a result of Brexit. For example, references to a defined territory of the European Union and/or EEA will need to be updated to accurately reflect the UK's new position. Equally, references to EU regulations may need to be amended, depending upon the application of such laws to the UK going forward.

However, perhaps of most significance is whether or not Brexit will frustrate areas of contractual performance, or render the commercial bargain as unviable to either or both parties. One obvious area where this could apply is in relation to the imposition of trade tariffs on goods flowing between the UK and EU. It is unlikely that existing force majeure clauses could be relied on as means of terminating a contract on these grounds, but it poses the question of whether franchisors which have identified potential vulnerabilities should consider building in an express right of termination or re-negotiation to mitigate this risk. If they do, careful drafting will be required around pricing mechanisms or describing the events which would activate the new contractual rights.

The challenge that franchisors seeking this flexibility may face from franchisees is that franchising is a long term relationship which requires a high degree of contractual certainty - operating on shorter terms or building in unilateral or mutual early termination clauses is likely to have a detrimental impact on a franchisor's ability to attract and retain long term franchisees who are willing to invest in their business concept. Introducing this type of flexibility is arguably more realistic within a franchisor's supply chain, which will typically operate under shorter term agreements."

Conclusion

2017 has already brought some clarity on the process and likely look of Brexit, and for better or for worse, Brexit will undoubtedly continue to dominate the national conversation over the months and years to come.

Franchise businesses should start preparing for the potential impact of Brexit by auditing their IP rights in the EU and assessing their key contractual relationships with suppliers and franchisees. Preparations for GDPR should continue and a watchful eye should be kept on events as they unfold – if the last 12 months has taught us anything, it is expect the unexpected!

Please speak to your usual franchising contact at Fieldfisher if you would like to know more about this topic and/or would like assistance with auditing your business.

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