How Does Brexit Impact International Franchisors with Franchisees in the EU?

Sooner rather than later,  franchisors should consider how to adapt their trademark protection strategy in the U.K. and EU to take account of impending changes resulting from Brexit."

By Dr. Mark Abell and Shelley Nadler

While all eyes in the U.S. were fixed on the Trump vs. Clinton election, on June 23, the U.K. voted 51.9 percent to 48.1 percent in favor of leaving the European Union — a totally unexpected result that could have substantial impact not only on the world economy, but also on U.S. businesses with a presence in the U.K. and Europe.

The surprise outcome of the referendum ran against general expectation and, by and large, the general desire of business. Commentators have interpreted the results as voicing the frustration felt by the economically and politically alienated and disengaged, those who felt that “the Establishment” had let them down. It was in effect a protest vote. Parallels have been drawn in the U.K. press between those who supported the withdrawal from the EU and the support currently enjoyed by Donald Trump in the U.S. presidential campaign.

It is noteworthy that British franchisors did not — either collectively or individually — participate in the referendum debate and that the British Franchise Association did not lobby or voice support for or against the U.K.’s exit from the EU. Some wonder if they should have been more engaged in the debate, as they will now have to live and conduct business in what could well be a very different economic environment.

This article explains the roadmap moving forward and outlines both the likely legal and commercial impact of the so-called “Brexit” for U.S. or other international franchisors with franchisees in the U.K. and the rest of the EU.

Where do we go from here?

Referenda are constitutionally alien to the U.K. They are the invention of faint-hearted politicians seeking to abdicate responsibility for decisions that have an existentialist impact upon the United Kingdom. Their outcome is purely advisory. They are not legally binding, but they do create strong political pressure to act.

Under Article 50 of the Lisbon Treaty, an EU Member State may, in accordance with its constitutional requirements, decide to withdraw and implement this by notifying the European Council. The council will negotiate a withdrawal agreement with that state on behalf of the EU. The withdrawal agreement must be agreed by a qualified majority of the council, with consent of the European Parliament.

EU treaties will cease to apply to the withdrawing state from the date the withdrawal agreement comes into force or, failing such agreement being concluded, two years after the council was notified of the withdrawal (unless the council unanimously agrees to extend this period). David Cameron has announced his intention to step down as prime minister this autumn. A new leader is expected to be in place by the Conservative party conference in October. It will be for Parliament to determine when/if to trigger Article 50 and commence negotiations of the terms of a Brexit.

The next U.K. general election is due to be held in 2020. Following the resignation of David Cameron, the new Conservative party leader may wish to call an earlier general election to endorse her mandate for leadership. Under the Fixed Term Parliaments Act 2011, this would require a two-thirds majority in the House of Commons.

What happens to EU law now?

There will be no immediate change to English or Scottish law as a result of the referendum decision and so franchisors should not be panicked into taking steps to change their franchise or other agreements at present. Things will become clearer over the coming months. However, it is worthwhile understanding some of the technical issues in play and their potential impact on international franchisors with franchisees in the U.K. and the rest of the EU.

Unlike the U.S., the EU is not a federal state. Broadly speaking, EU legislation is either directly applicable in the U.K. (e.g., regulations) or only once transposed into domestic legislation (directives). Upon a Brexit, directly applicable EU law, including treaty provisions and regulations, will cease to have legal force in the U.K., unless Parliament passes equivalent domestic legislation. Directives that have been transposed into U.K. primary legislation will continue to operate, but the U.K. statute will no longer be required to comply with the directive from which it derives: U.K. Parliament will be free to amend the legislation as it sees fit. Secondary legislation introduced under the powers set out in European Communities Act 1972 (ECA 1972) to implement EU law will lapse when the ECA 1972 is repealed, subject to the enactment of saving provisions. Directives are likely to continue to be relevant to the interpretation of U.K. statutes that derive from them where there are ambiguities.

The Court of Justice of the European Union case law is likely to continue to be persuasive in U.K. courts after a Brexit, particularly with respect to U.K. law derived from or harmonized with EU law. This influence will diminish over time as U.K. law diverges. Some U.K. statutes contain a requirement to interpret the legislation consistently with CJEU rulings: this requirement will continue to be effective after a Brexit unless and until the U.K. statute is amended. Depending on the U.K.’s new status in relation to the EU (which is to be negotiated), the U.K. may join the European Free Trade Association (EFTA), and then also the Lugano Convention on Jurisdiction and Judgments and possibly the European Economic Area (EEA).

Implications of Brexit

Overall, the effect of a Brexit on international franchisors will depend on the U.K.’s future relationship with the EU. If the U.K. joins EFTA and through it joins the EEA, the position in relation to many aspects of legal practice will remain unchanged. This must be a real possibility and if it is the outcome, there is likely to be less upheaval from a legal point of view.

However, regardless of who wins the Tory leadership race, if the more "Eurosceptic" vein of thought prevails, it is likely that the U.K. will negotiate a looser arrangement with the EU via a series of bilateral and multilateral trade agreements or reliance on the rules of the World Trade Association, OECD and G20, of which it will remain a member.

Franchise Regulation

Although there is franchise-specific regulation in France, Spain, Italy, Sweden, Belgium, Romania and two of the three Baltic States, there are no EU-wide franchise specific regulations. As such, Brexit will have no impact in this regard. However, if the European Parliament’s current review of the regulation of franchising were to lead to an EU-wide franchise regulation, the U.K. would probably not be obliged to adopt such a regulation.

Trademark Law

The most significant effect of a Brexit on international franchisors will be in terms of brand protection strategy for the U.K. and Europe. This therefore needs some urgent and expert consideration.

It is likely that EU rights, such as registered and unregistered community designs and EU trademarks (formerly referred to as Community Trade Marks or CTMs), will no longer have effect in the U.K. and there will be questions about what will happen to the “U.K. portion” of such rights obtained before Brexit. If existing rights automatically reduce in geographical scope to exclude the U.K. their value will diminish, which will have a commercial impact on the rights holder. This is something that  franchisors with EU trademarks need to keep an eye on as it may at some point mean that they have to re-apply for some of their trademarks in the U.K.

There is also the issue that some franchisors have EU trademark registrations but only use their marks in the U.K. Once the U.K. no longer forms part of the EU, these EU trademark registrations could be vulnerable to attack for non-use. Franchisors in this situation would have to consider expanding their use in the EU to defend their EU trademark registrations or consider filing independent national U.K. applications which would survive any possible future demise of their EU trademarks based on non-use.

Cross-border dispute resolution

Disputes where one party is based in the U.K. and another in an EU member state may be affected by a Brexit. Other disputes may also be affected if the subject matter has some connection with a member state.

The Brussels Regulation currently governs jurisdiction and the enforcement of judgments within the EU. The Lugano Convention sets out very similar rules, so if the U.K. becomes a signatory to this convention post-Brexit little will change. Otherwise, the position will depend on negotiated bi-lateral and multi-lateral agreements with other countries, or the possible ratification by the U.K., in its own right, of the Hague Convention on Choice of Court Agreements (which the EU has ratified).

Employment and immigration law

A number of areas of U.K. employment law, such as the National Minimum Wage and the law relating to unfair dismissal, are outside the scope of EU law and likely to be unaffected even when the U.K. ceases to be part of the EU. Other areas — including unlawful discrimination, certain family-friendly rights, working time, collective redundancy consultation and business transfers — have been influenced by the EU, often having a basis in European directives or case law. However, in many instances the U.K. provides protection in excess of the EU minimum requirement and changes are unlikely.

EU employment laws that are considered to impose the greatest burden on businesses — such as agency worker rights, collective consultation and working time rights — are the most likely to be subject to change, but many other EU employment laws (including those covering discrimination) have become entrenched in the UK's legal and ideological framework, and drastic changes to these seem much less likely.

The position on immigration is less clear. Labour shortages, a loss of talent and mobility restrictions are all ways in which businesses could be affected depending on how the government elects to regulate or remove EU nationals’ right to live and work in the U.K. Extending the current Points-Based System to apply to EU nationals is possible but not a foregone conclusion.

International franchisors with a presence in the U.K. should audit their workforce in terms of immigration status, considering applications that could be made now (e.g., for permanent residency), and communicate with concerned employees.  In the longer term, if and when the government proposes that laws be amended or repealed, employers should also review employment contracts (with a view to addressing any unenforceability risks that might arise), policies, procedures and benefit schemes, and check any European Works Council arrangements.

Changes to immigration laws in relation to EU citizens currently living and working in the U.K. could have a substantial impact on your franchisee’s employees particularly in the food, beverage and hospitality industries.

Data protection and cyber security law

Various EU provisions are likely to come into force in the U.K. before a Brexit takes place. These include the General Data Protection Regulation (GDPR), due to take effect on May 25, 2018, the Network & Information Security (NIS) Directive, likely to be implemented by spring 2018, and a new directive for the police and criminal justice sector that must be transposed by member states by May 6, 2018.

Post-Brexit, any franchisor which processes or monitors EU citizens' personal data in connection with its offer of goods, services or monitoring activities, or has a group company or staff operating within the EU, will still have to comply with the GDPR. The extent to which the GDPR will be adopted in the U.K. will depend heavily on the type of relationship the U.K. adopts with the EU. However, it seems likely that either the GDPR or a law that looks very like it will be required in the U.K. given that the U.K.’s current law is in need of refreshment (it is nearly 20 years old) and given the way that EU data transfer laws operate.

The U.K. will wish to continue to trade with the EU post Brexit, therefore closely comparable data protection and cybersecurity laws in many areas will be necessary to avoid barriers to trade.

Franchisors with franchisees in other EU member states will need to be very careful to ensure that they comply with EU data protection and cyber security laws even after Brexit.

Anti-trust law

This area of law is extremely relevant to franchising in the EU and the U.K. U.K. anti-trust law is already well developed and is based on the EU model. EU competition rules will continue to apply post-Brexit to agreements or conduct of U.K. businesses that have an effect within the EU and parallel EU and U.K. enforcement action will become possible. However, the commission will have reduced powers in the U.K., e.g., no power to carry out on-site investigations (dawn raids) in the U.K. nor to ask the Competition and Markets Authority to investigate on its behalf.

Importantly for franchising, new block exemption measures (including the block exemption that covers franchising) at U.K. level will be needed, as the U.K. Competition Act currently relies on the EU block exemption regulations (which will no longer apply following a Brexit). It may mean that the U.K. adopts a more U.S. “Chicago School rule of reason” style of approach to restrictions on issues such as exclusivity and price maintenance. This would allow franchisors far greater flexibility in their franchise agreements.

Franchisors should be aware that…

Brexit may provide grounds for termination of a contract, depending on the specific facts and drafted terms (e.g., the material adverse change or force majeure clauses in a contract). The question is particularly relevant to franchise agreements that have the EU as the territorial scope. Parties might argue that a contract has become frustrated as a result of Brexit. This is of great relevance to any  franchisors that have granted master franchises for the European Union, rather than specifically named countries.

There could be a gradual repeal of EU regulations and restrictions seen to be burdensome. For example, relaxation of competition law rules to allow the inclusion of more territorial restrictions than are currently permitted by the EU competition rules, or a decision not to implement laws akin to the new GDPR. That could be a positive change for international franchises located in the U.K.

Franchisors with a large number of commercial contracts, particularly with entities within the EU, should consider in due course auditing these contracts to determine the effect Brexit will have on rights and obligations under these agreements.

The commercial impact of the cost of increased trade barriers between the EU and the U.K. could have an adverse impact for some U.S. franchisors with networks based in the U.K. and covering other EU member states due to, for example, the impact of the restriction of free movement of persons and monitoring of currency fluctuations.

Uncertainty

The impact of Brexit on international franchisors is currently uncertain. The one thing that franchisors should do, sooner rather than later, is consider how they adapt their trademark protection strategy in the U.K. and EU to take account of impending changes resulting from Brexit. It seems that this concern is appreciated by many U.S. franchisors, as Bird & Bird is already dealing with a flood of such queries and are helping the franchisors concerned to adapt their brand protection strategies to these future changes.

Other than that, franchisors must keep a watchful eye as various areas of law develop in response to the political changes that look likely to take place over the next two years or so.

Mark Abell is global head of the Franchising, Licensing and Multi-Channel Strategies team at Bird & Bird, and he also leads the company’s Food & Beverage Group. Shelley Nadler is a member of Bird & Bird’s Franchising, Licensing and Multi-Channel Strategies team based in London.