May 2008 Franchising World
Retaining experienced and competent foreign counsel will ensure a much smoother transition and thorough understanding of the complexities of international franchising.
By Frank Zaid
Domestic Legal Needs
U.S. franchisors are well acquainted with the fact that franchising is a highly-regulated business. With a myriad of federal and state laws governing the preparation, contents, registration and delivery of franchise agreements and offering circulars, franchisors based in or entering the United States are accustomed to the necessity of complying with franchise-specific legislation and understand the need to engage competent and experienced legal counsel to assist them through the difficult and often tricky compliance process. Larger franchisors may have the ability to hire in-house counsel, or build a corporate law department. Other sizeable franchisors may rely on their existing outside franchise counsel, and smaller franchisors may need to retain franchise counsel for the first time.
In addition to being required to comply with franchise-specific laws, franchisors in the United States, depending upon the nature of their franchise systems, understand that they also need ongoing legal counsel to advise them in many commercial, regulatory and tax areas affecting their operations. It is not infrequent that litigation counsel must be retained to assist when disputes arise. If a franchise business model involves compliance in a regulated industry, like real estate, health care or food or drug distribution, the industry laws and rules add another layer to compliance, and may vary from state to state.
With this background and experience of working with local counsel for their domestic operations, why is it frequently so difficult for franchisors expanding internationally to understand that their legal needs in international markets must parallel, to a large extent, their legal needs in their own domestic markets?
Need for Local Counsel in International Markets
All too often franchisors expanding internationally assume that they do not need to be advised on local laws in the international markets to which they are expanding and that knowledge of their domestic laws will suffice. Franchisors who do their research will discover quite quickly that there are many foreign countries in the world that have now enacted franchise specific laws dealing with the offering of franchises in their respective markets, and that franchisors entering these markets must comply with these laws.
International franchise laws differ considerably from domestic United States or Canadian franchise laws. In some countries, a disclosure document or offering circular is required to be delivered prior to entering into a franchise agreement. In other countries, registration with a government agency, and approval of the offering, may also be required. Some countries will require registration with government offices for licensing of intellectual property or the payment of royalties by the franchisee to a non-resident franchisor. Some local franchise laws require the operation of corporate units prior to franchising, and others require translation of the documents to the local language. Many foreign franchise laws mandate the use of local governing law, and specify that disputes must be determined in the local courts according to the local judicial system. Simply put, there is no substitute for obtaining local counsel experienced in franchising to advise on the requirements of and practice under foreign franchise laws. The roles of in-house counsel, domestic outside counsel and local foreign counsel are often merged in the process of advising a franchisor expanding internationally.
Role of In-house Counsel
For those franchisors with in-house counsel or an in-house law department, the process of preparing and negotiating franchise documents to be utilized in the foreign country will normally start internally. These documents must be drafted, conformed to local law and negotiated with the foreign franchisee. All franchise compliance laws must be researched and complied with prior to execution of the franchise documents. The details of the arrangements will require considerable attention and knowledge of other local laws.
The role of local in-house counsel in international franchising may include the following:
• advise regarding the structure of the proposed transaction,
• coordinate the roles of outside counsel, local counsel and, in many cases, trademark counsel,
• develop outlines and drafts of franchise documents,
• negotiate the international franchise documents with the international franchisee or the international franchisee’s counsel,
• coordinate compliance with local laws, including franchise disclosure or registration requirements,
• coordinate compliance with and enforcement of franchise document terms including implementation of default or termination remedies,
• coordinate mediation, arbitration, litigation or other applicable dispute resolution mechanisms, and
• research domestic laws in the franchisor’s home country which might affect the international transaction, including laws restricting business activities in certain foreign jurisdictions or with specified individuals.
Occasionally in-house counsel will also serve as the franchisor’s contact with the foreign franchisee’s lawyer, lender or investment bank regarding the franchisee’s efforts to raise capital or secure locations for the international franchise project. In-house counsel may also assist in securing arrangements with product or service suppliers which, in many cases, may be local branches or affiliates of the same suppliers to the franchise system in the franchisor’s home market. In-house counsel will also want to ensure that the use of the franchisor’s trademarks and other intellectual and proprietary property is in conformity with local laws, carry all proper legal notices, and that proper steps are taken to monitor the use of the trademarks by the foreign franchisee.
Role of Outside Counsel
A franchisor expanding internationally may also need to retain the services of competent outside domestic legal counsel, even if the franchisor has in-house counsel or an in-house law department. An attorney or law firm with significant experience, not just in franchising, but also in international business transactions, may be the prime candidate to coordinate the entire due diligence process for the proposed international transaction, including obtaining advice on specialized business issues such as taxation, securities law, bankruptcy, technology and consumer protection laws, and where disputes arise, on litigation or alternate dispute resolution mechanisms.
Role of Foreign Counsel
In international franchise transactions, it is essential that the franchisor obtain experienced and competent legal advice from local counsel in the foreign market or, alternatively, from an international law firm with extensive knowledge of the law, legal system and culture of the target country. The selection of foreign counsel is a critical decision for a franchisor and should not be taken lightly. Experienced international franchisors often learn that while their foreign legal counsel are first utilized to advise on franchise laws in the foreign market, fairly soon in the process they will also be called upon to advise on many commercial legal issues and, ultimately, on many business and cultural matters affecting the expansion of the franchise system into the foreign market. The amount of legal advice given in respect of local commercial and business matters will often exceed 50 percent of the total amount of time undertaken by local counsel in assisting the international franchisor.
Local counsel must advise on a number of issues in addition to franchise compliance, including the following:
• general corporate matters,
• tax matters,
• compliance with local foreign investment laws,
• trademark registration and protection,
• protecting trade secrets, confidential information, patentable products or services and copyright,
• monitoring and challenging local intellectual property infringers or counterfeiters,
• anti-trust issues,
• consumer protection issues,
• lease and real estate matters,
• translation of documents, and
• compliance with applicable regulated industry laws and codes.
Obtaining Foreign Counsel
Now that we have established the necessity of retaining experienced and competent foreign counsel in international franchise transactions, the question which follows is how best to locate, retain and work with foreign counsel. There are many sources for obtaining leads for and references on foreign franchise counsel and to determining the qualifications of potential candidates. Sources may include:
• referrals from other international franchisors,
• referrals from local counsel,
• legal directories published internationally or in the foreign market,
• local law societies or bar associations,
• professional or business trade organizations,
• domestic government agencies with offices or contacts in the foreign market,
• local country franchise associations,
• legal ratings directories which rank lawyers on a non-paid independent basis, and
• franchise publications, books or conference articles or presentations.
Once an introductory contact has been made, franchisors should not be shy in asking direct and fundamental questions of the foreign franchise counsel being considered to determine the person’s and the associated firm’s experience and ability to work with the franchisor in accordance with the franchisor’s requirements.
Depending upon the particular franchisor, the franchisor’s business, the nature of the transaction, and the country or countries involved, the following criteria should be considered:
• knowledge of the local country’s franchise laws and regulations,
• experience in international franchise transactions,
• experience in relevant local laws affecting franchising,
• ability to communicate in the franchisor’s principal language,
• experience in international dispute resolution,
• experience and contacts with local government agencies and officials regulating franchising,
• experience and contacts with local government agencies and officials regulating other areas involved in the franchise system,
• familiarity with the franchisor’s business or industry,
• availability of compatible office technology to interact with the franchisor and its domestic advisors,
• compatible fee policies,
• ability to address key legal and business issues involved in the international franchise program including enforceability of standard franchise document provisions in the local country,
• familiarity with laws affecting the availability and enforcement of monetary judgments, choice of law, forum, jurisdiction, and enforcement of foreign judgments, arbitral awards or equitable remedies including non-competition and de-identification covenants,
• ability to advise on foreign exchange regulations and local banking practices,
• experience in dealing with applicable import/export and immigration laws,
• experience with the application of local anti-trust laws to the franchise offering, and
• in countries where legal regulation is divided between federal and state, provincial or district laws, the availability of different offices and professionally qualified local counsel to advise on a unified transparent national basis.
As stated at the outset, domestic franchising requires legal advice on compliance with franchise specific laws and many business, regulatory, tax and other commercial laws. International franchising requires similar compliance and local legal advice. Retaining experienced and competent foreign counsel to advise in these areas will add a cost component to the offering, but in the end will ensure a much smoother transition and thorough understanding of the complexities of international franchising, assist in avoiding surprises and disputes at a later date, and go a long way toward developing a successful international franchise expansion program.
Frank Zaid is a senior partner in the Toronto office of the Canadian law firm, Osler, Hoskin & Harcourt LLP. He can be reached at email@example.com.