Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
Franchise & Licensing
There are no significant recent developments to be noted in this regard. In 2015, a technical group was created with the purpose of drafting the terms of the Franchising Regulation, however, as far as we know, this was never approved or implemented accordingly.
Ontario’s franchise statute, the Arthur Wishart Act (Franchise Disclosure) 2000, was amended on 14 November 2017 to clarify certain exemptions under the act and to allow franchisors to enter into confidentiality agreements and location or territory reservation agreements, as well as to take fully-refundable deposits, that are not more than a prescribed amount (expected to be C$20,000), without triggering the disclosure obligation. This brings Ontario into line with other provinces, most notably British Columbia, and, particularly with the permitted use of confidentiality agreements, allows Ontario franchisors to engage in prudent business practices that are accepted in some form in most jurisdictions around the world. Unfortunately, many of the amendments are not yet in force as the related regulations have not been passed (see “https://www.sotosllp.com/2017/11/ontario-franchise-legislation-amendments-passed/”). It is not certain when these amendments and related regulations will be passed into law.
At tax reform bill is under discussion at Chile’s Congress that includes no franchise-specific provisions, but the following two aspects thereof may have an impact on international franchising in Chile: (i) the creation of a sole fully integrated tax regime setting forth total tax burden on all foreign investors, that would be capped at 35% regardless of the existence of a tax treaty in force; and, (ii) international tax rules would be updated and simplified in order to attract foreign investment into the country.
There are no current governmental activities or other official campaigns focusing on franchising as a business model in Denmark.
Azerbaijan expects adoption of a Competition Code in the near future, which is likely to positively impact franchising.
Recently, there are many laws issued regulating different matters such as:
1- Law No. 181 of 2018 concerning the Consumer Protection Law, that came into force on December 2018 and has replaced the former Consumer Protection Law No. 67 of 2006. We believe that certain provisions of this law may have a direct impact on franchising in Egypt as franchisees in their deal with the end-user/consumers are mandatorily required to follow certain actions including but not limited to: 1) to maintain and guarantee the health and safety rules and quality standards for the consumer vis-à-vis the products, 2) to inform the consumer with all the core date of the product, 3) to avoid any misleading or deceptive behavior when advertising the product. 4) to hand to the consumer an invoice (a receipt) of their transaction, including all the details of the transaction i.e. date, time, price of the product and the i.e. franchisee’s details, 5) the franchisees which are suppliers of durable goods shall warrant such goods against manufacturing defects for at least 2 years from the date the consumer receives them. The warranty shall cover inspection, repair and supply of the original spare parts of the products, as well as bearing the costs of transportation of such products if they need to be repaired outside the consumer's premises, including installation and operating expenses, The New Law has introduced a new significant obligation on the supplier whereby it is committed to replace the product if the defect is repeated twice within 1 year of its repair, 6) The refund period is extended to 30 days in case the product turns out to be defective or non-conforming and 14 days as of the date of purchasing the product, without giving any reasons, and 7) to cope with the electronic market spread where many people now perform their shopping online, the Law has devoted some provisions to regulate key aspects of online shopping to protect the consumers in their electronic transactions as the Law mainly addresses the data that should be made available for the consumer at the time of the transaction, the time limit for cancelling the online order, and the right to refund the purchased item within 14 days of its receipt.
2- Law No. 175 of 2018, is the law combating IT crimes: Due to the fact that the global economic changes and developments, which led to the widely spread online shopping and accordingly the e-commerce transactions which shall be used in several businesses as the franchise, for the purpose of protecting and controlling same, the Egyptian legislator has intervened and issued Law No. 175 of 2018 combating IT crimes. The law penalizes various cybercrimes such as illegally logging into a website or private account, hacking or deactivating emails or websites, and illegally accessing credit card details. It is worth mentioning that this law shall apply outside Egypt, against any one of the crimes stipulated under the said law whenever the crime is punishable in the country where the crime is committed, under any legal description in any of the cases stated under the law. As a result of the issuance of this law, we expect that it will be much easier to prove any of the violations that will occur and concluding e-transactions will be quiet safer which may increase the franchise existence in Egypt.
3- Law No. 15 of 2017 on facilitating the procedures of licensing the industrial establishments. The Law is a major step toward facilitating the licensing procedures which is one of the challenges facing the industrial sector in Egypt. The license of the Industrial Development Authority (IDA) became the sole license required for establishing and operating an industrial facility. The Law clearly provides that no approvals or licenses shall be required from any other authority with respect to the industrial licenses.
Although not specific to franchising, the gradual decrease of capital gains taxes will be relevant to all business in France, and may in fact make France a more attractive location for franchising. The corporate tax rate for large companies has dropped from 33.33% to 28%, and it will be progressively reduced to 25% by 2022.
Also relevant to franchising is the GDPR. Any franchise conducting business in France or collecting the information of French consumers may be subject to the GDPR regulations. Franchisors and franchisees should be careful to determine whether they fall into a Data Controller and Data Processor relationship, in which case they will have to draft a Data Protection Agreement.
The capital controls which were introduced in June 2015 have been lifted as of September 1st, 2019 (art. 86 Law 4624/2019).
The Federal Law for Personal Data Protection Possessed by Private Persons (“FLPDPPP”), which was issued on July 5, 2010, foresees individuals’ rights to protect their personal information, which collection, treatment or transfer must be carried out with the prior consent of its owner, with a few established exceptions. The FLPDPPP may have a direct impact in the operation and structure of companies involved in franchising that process personal data of their customers, since in most cases, franchisees collect and process personal data from their customers and then transfer such data to the franchisors for marketing, analysis and other purposes.
Therefore, it is important for franchisors to verify that their Mexican franchisees are in compliance with the FLPDPPP and its Regulations, and that they include a provision in a privacy notice to be signed by the customer (granting his/her prior consent) which sets forth the future transfer of his/her data to the franchisor. Failure to do this may allow customers to initiate a legal action against the franchisee, which may result in the imposition of fines, potentially affecting the franchisee’s operations and the goodwill of the trademark and the franchised business.
Furthermore, Mexico’s Anti-Corruption Law in Public Contracting Procedures, which was published on 11 June 2012, sets forth the sanctions and liabilities applicable to private entities or individuals related to their participation in a federal public contracting procedure, who carry out activities or offer or promise money or other bribes to authorities in order to obtain advantages or benefits, or otherwise alter the relevant award derived from the tender or bid. This liability is extended to foreign entities or individuals who participate in these procedures, as well as their shareholders, partners, associates, representatives, attorneys-in-fact, principals, subcontractors, employees, commissioners, agents, or any other person who intervenes in federal public tenders or bids on behalf of such bidders or contractors. Also, the Anti-Money Laundering Law mainly foresees the establishment of rules and procedures that detect and prevent activities or transactions that involve illegal proceedings or terrorism financing.
The Anti-Corruption Law in Public Contracting Procedures and the Anti-Money Laundering Law are taking a stronger presence in Mexico, since the current administration in Mexico is very serious and thorough in making sure that these two last laws are fully complied with. Therefore, it is important to include in franchise agreements a provision contemplating the obligation to comply with these laws, which was not a usual provision in agreements until recently.
The most recent amendment to Lebanese law was the amendment made to the Lebanese Code of Commerce through Law No. 126 of March 29,2019. This law has amended the Lebanese Code of Commerce to meet local and international standards and evolutions. These amendments introduce new legal concepts resulting from the development of business in Lebanon. This law did not introduce any rules related to franchise; however, being a commercial agreement it will have some impact on franchise agreements.
In terms of the market access, foreign franchisors are obligated to comply with the restrictions on foreign investment set out in the foreign investment industry guidance catalogue. As the new foreign Investment Law shall take effect in 2020, which is a landmark legislation with the aim of improving the business environment for foreign investors and ensure that foreign invested enterprises participate in market competition on an equal basis, the China’s franchising market will also enter into a new era. The current disclosure and filing requirements under PRC franchise laws are becoming more complete and enforceable. Besides, more specific industry rules shall come out through detailed acts and administrative regulations.
Due to recent regulatory framework modifications regarding Intellectual Property Rights, the registration of trademarks and other distinctive signs has been simplified. Currently, most of the procedure for registering a trademark before INDECOPI is done online, which not only implies a reduction of time, but also makes the registration less expensive.
There are no other legal developments that will have an impact on franchising in Peru.
There is no franchise-specific bill pending in Congress. Attempts at regulating this industry have failed three times in the Philippine Senate, i.e., in 2007, 2010, and 2014. The bills primarily sought to protect potential franchisees from deceptive business franchising practices. Among the proposals were mandating pre-investment disclosures and compulsory provisions as regards standards of conduct, conditions on franchise transfer, franchise termination, and post-term restrictions on competition.
On a related matter, a bill that was recently filed in Congress proposes to reduce current restrictions on foreign retailers by lowering their minimum paid-up capital requirements to just US$200,000. At present, foreign investors may only participate in the local retail sector if their paid-up capital is at least US$2,500,000. If the bill is passed, the lower barriers to entry of foreign retail franchises may lead to increased competition among incumbent and new franchising stakeholders, and would substantially affect the current market structure.
The Commerce (Cartels and Other Matters) Amendment Act 2017 became law in New Zealand in August 2017. This new Act amended the Commerce Act 1986 and key changes have been made in relation to cartel conduct prohibitions, collaborative activity exemptions, vertical supply contract exemptions and joint buying and promotion agreements exemptions as explained in 10 above. Because the cartels legislation impacts upon key areas contained in franchise agreements, in my opinion it is very important to explain the basis of a number of clauses which are commonly inserted in franchise agreements.
On 8 April 2019, the Commerce (Criminalisation of Cartels) Amendment Act 2019 became law. The Amendment Act has a two year transitional period and will come into force in April 2021.
The specific policy objectives for introducing criminalisation for cartels are to:
• promote detection and deterrence of cartels while ensuring that efficiency enhancing collaborative activity is not deterred;
• improve cartel enforcement by the Commerce Commission; and
• facilitate New Zealand’s contribution to enforcement efforts against global cartels.
The new cartel offence is targeted at the individuals who are the decision-makers for the cartel and their corporations. The key element of the offence is the requirement to show ‘intention’ to engage in cartel conduct.
The maximum fines are the same as the maximum pecuniary penalties that may be imposed under the civil cartels regime, with the additional sanction of up to 7 years imprisonment in the case of individuals.
There are also other elements in the Amendment Act that are designed to mitigate business uncertainty and compliance costs from the new criminal regime.
These include the following:
• existing exceptions and exemptions in the Act to the civil prohibition for cartel conduct will also apply to the new criminal offence, including the exceptions relating to:
o collaborative activities (such as joint ventures), and
o specified international shipping activities (such as vessel-sharing agreements)
• new defences in the new section 82C provide for circumstances where a defendant is mistaken in fact as to whether one or more of the exceptions applied
• a two-year transitional period before the criminal offence comes into force to allow for businesses to learn from experience under the existing civil regime for cartel conduct that came into effect in August 2017.
Franchise business model is developing constantly and actively all over the world. Russia is not an exception, and it may be seen that many global businesses exploring the Russian market nowadays by offering new brands, systems, technologies and products in various industry sectors in this country.
Russian legal system has already implemented the main tools and benefits of international franchise law and practice, including from the civil-law perspective. New concepts and rules in the franchise area may appear in the future as soon as new legal amendments are required and come into play in Russia.
Withholding tax on royalty payments
The Norwegian Ministry of Finance is currently preparing a proposal for introducing withholding tax on royalty payments to foreign recipients, in domestic tax legislation.
When setting up a new franchise arrangement with Norwegian franchisees, a foreign franchisor should consider whether the applicable tax treaty, if any, allows Norway to impose such withholding tax and whether a tax allowance would effectively be applicable in the country of the recipient.
Franchising in general
Over the past decades there have been a number of initiatives to pass a franchise law, in Norway. The latest initiative came in 2018. The proposal included obligations for franchisors to register name of franchisees in a public registry, including information such as contract lengths, number of employees in the franchisees etc.
The proposal also suggested to grant rights for employees of the franchisee towards the franchisor, such as joint employer's liability, right to representation in the board of directors of the franchisor, joint obligations for the franchisor and franchisee to ensure health & safety for employees of the franchisee.
The proposal also suggested obligations for the franchisors to inform franchisees of the number of other franchisees, franchisor owned stores/units, locations of other franchisees within a 50 kilometre radius as well as historical data over financial results for other franchisees, financial results for franchisees in the same premises or similar premises as the premises in which a franchisee is considering establishing and an overview of bankruptcies and disputes involving franchisees in the area over the past 5 years.
Finally, the proposal also suggested that the franchisor should openly inform possible franchisees of any terms in the franchise agreement which could have a financial consequence for the daily operation. These terms should not be subject to confidentiality clauses. It was also suggested that the parliament considered regulating terms of termination of franchise agreement so that franchisors should not upon its sole discretion be allowed to terminate the agreement upon expiry of the agreed contract period.
The proposal was voted down by the Parliament in 2018 but there was a unanimous decision by the Parliament to further consider the franchising model in respect of employer liability and rights for employees as well as franchisees position towards franchisors. As of September 2019, there is no publicly available documentation suggesting that there is any currently active ongoing work conducted by the Norwegian government to address these matters and follow-up on the Parliament's decision to look closer into regulating franchising in Norway.
Employee Non-Solicitation (a/k/a No-Poaching) Provisions and Non-Competition Covenants
Recently, employee non-solicitation provisions (a.k.a. non-poaching provisions) commonly found in most franchise agreements have come under attack by franchisee employees, some members of Congress, the Federal Trade Commission (“FTC”) and the Antitrust Division of the U.S. Department of Justice (“DOJ”). Opponents of these provisions have argued that non-solicitation clauses in franchise agreements qualify as “naked” non-poaching agreements and therefore constitute per se violations of antitrust laws. “Naked” no poach agreements are agreements between competitors to refrain from recruiting, soliciting or hiring one another’s employees. They argue that these agreements are per se violations of Section 1 of the Sherman Act, because, according to the FTC and DOJ, these agreements inhibit employees from benefiting from a competitive market for their services. In challenging these clauses, the FTC and DOJ look at whether the no poach agreement is a standalone agreement or part of a larger collaboration between the competitive companies. If it can be established that the inclusion of a no-poach condition was necessary to support a broader business purpose between the competitors, then the no poach condition is not likely to be per se illegal and may not be illegal at all.
In 2016, the FTC and the DOJ published an “Antitrust Guidance for Human Resource Professionals” (“Guidance”) reminding (and probably in some cases, informing) human resources professionals: (i) how antitrust law applies to decisions they make about employee hiring and compensation, and (ii) the potential civil and criminal liabilities faced by employers and individuals who engage in activities that violate antitrust laws. However, this Guidance did not specifically address the “no poaching” and “no hiring” clauses found in franchise agreements. Instead the Guidance provided a broad stroke discussion of, among other things, the illegality of no poaching agreements. And it reiterated that “naked…no poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.”
On January 19, 2018, the head of the DOJ, Assistant Attorney General Makan Delrahim, announced that it would begin bringing its first criminal cases involving alleged “no poaching” agreements in violation of the Sherman Act; however, as of August, 2019, the DOJ had not yet filed any such criminal prosecutions in connection with same. Rather, the DOJ has instead filed statements of interest in class actions filed by franchisees concerning these no-poach provisions. Perhaps the most notable of these actions relate to the brands Auntie Anne’s, Arby’s and Carl’s Jr. In each of these class-action complaints, the franchisees’ employees argued that the no-poach provision was a scheme to improperly keep wages down. In connection with these statements of interest, however, the DOJ stated its belief that these provisions should be analysed under the “rule of reason” and, in protecting a franchisor’s right to (in certain circumstances) maintain no-poach provisions, stated that most franchisor-franchisee no-poach provisions actually are legitimate and promote intra-brand competition. Ultimately, each of these cases settled.
Although the DOJ has not been actively pursuing criminal prosecutions, and appears at least marginally more sympathetic to the franchisors’ reason for incorporating no-poach provisions in their franchise agreements, the states (and particularly the State of Washington) have taken a much more aggressive, anti-franchisor and active approach in trying to end the use of no-poach provisions. After the DOJ’s announcement, the attorneys general of several states began investigating and commencing enforcement actions against no-poach agreements. The first and perhaps most vocal state attorney general on this subject has been Washington State Attorney General Bob Ferguson, who believes that the inclusion of such no-poach provisions is per se illegal. Mr. Ferguson began sending information requests to a number of franchisors asking, among other things, that they state whether any of their franchise agreements during the past five years contained a no-poaching agreement; the reasons for having or changing a no-poaching agreement during the last five years; and, an identification of each restaurant owned by the franchisor and franchisees in Washington. As of August, 2019, approximately 66 national chains have entered into binding agreements with Mr. Ferguson agreeing to remove such no-poach clauses from their respective franchise agreements.
Further, Washington Governor Jay Inslee signed HB1450 (the “Non-Compete Act”) into law on May 9, 2019, which provides that franchisors may not restrict, restrain, or prohibit a franchisee from soliciting or hiring one of the employees of the franchisor or another franchisee in the franchise system. It is also of note that, in addition to addressing the use of no-poach provisions, the Non-Compete Act also imposes new conditions on the use of non-competition agreements, including (among other restrictions) that: (i) they will not be enforced against employees making less than $100,000 per year or independent contractors making less than $250,000 per year and (ii) the period of non-competition cannot be more than 18 months post-employment (without clear and convincing evidence that such longer period is necessary to protect business interests). While this non-competition section of the Non-Compete Act is not specifically targeted against franchisors, it is clear that it will have a major impact.
In addition, in July, 2018, the attorneys general of California, Illinois, New York, Maryland, Massachusetts, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island and the District of Columbia began sending information requests to a number of prominent fast food franchisors (including Dunkin’ Donuts, Arby’s, Five Guys, and Little Caesars) regarding the existence of no-poach provisions in their franchise agreements and whether they had been actively enforcing such provision, in response to which many franchisors subsequently entered into settlement agreements with the states to remove no-poach provisions from their existing contracts.
There are no significant recent legal developments. In 2016, a reform bill was presented with the purpose of amending the current law on franchising, however, as of today, there has been no further developments.
Given the influence and role that European law has had on the UK, the UK's decision to leave the EU will have a profound impact on the UK's legal framework and, potentially, on certain aspects of franchising.
European law will continue to apply where the franchise arrangement has an effect within the EU. However, assuming that the UK is no longer a member of the single market, there is scope for UK legislation to diverge from the EU position in and perhaps adopt a more UK-centric approach. Within a franchising context, changes to existing competition laws are likely to have the most profound impact.
Except in rare cases, English courts have traditionally refused to imply an obligation of good faith into commercial contracts. However, recent cases have challenged this view, so much so that it is generally now accepted that a duty of good faith will be implied into a certain type of agreement, known as “relational contracts”. There was much discussion over what forms a "relational contract" but in a recent case [Alan Bates and Others v Post Office Limited  EWHC 606 (QB), 2019 WL 01228001], the court provided a non-exhaustive list of the characteristics that might typically be found in such a contract, including:
- there must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract;
- the contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship;
- the parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain;
- the parties will be committed to collaborating with one another in the performance of the contract;
- the spirit and objectives of their venture may not be capable of being expressed exhaustively in a written contract;
- they will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships;
- the contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty;
- there may be a significant investment by one party (or both) in the venture; and
- exclusivity of the relationship may also be present.