Often reported as the most successful method of product and service distribution developed during the Twentieth Century, franchising is achieving large-scale global success. Businesses today are encountering a climate open to, and accepting of, new products and services. Language and commercial barriers are reducing further, thus increasing the extent of international business. This however has its exceptions.
Speaking over 25 years ago on the topic of international franchising arrangements, Professor Warren Pengilley commented that franchisors planning overseas expansion should be prepared for this exercise to take twice as long and cost three times as much as anticipated. Professor Pengilley’s point was that international expansion is a complex, and therefore a costly and time consuming exercise. This is nevertheless a challenge that many established domestic businesses will consider and many will overcome. Franchising is a very significant force in the internationalisation of business and Australian franchise systems are featuring prominently. The 2010 Franchising Australia Survey records that 28 percent of Australian franchisors are currently operating overseas.
The complexities of international expansion are of course not limited to legal matters. Social, commercial, geographical, political and fiscal considerations all raise real and significant challenges. It is hardly surprising the Franchising Australia Survey shows that New Zealand is the most popular initial destination for internationally expanding Australian businesses. That 71 percent of systems expand to New Zealand first reflects not only geographical proximity but also close historical links, a shared language, a similar society, familiar social and cultural norms, a stable political system, established commercial infrastructure, a mature and familiar legal system and, few restrictions on foreign investment to list just a few of the most obvious factors. That the UK, Europe and the US rank much higher than South East Asia in the internationalisation strategies of Australian systems suggests that geographical proximity is not the most important factor.
Businesses that are confident they can negotiate the cultural, social and commercial hurdles of course must consider the legal and regulatory hurdles which are real and substantial. Here are some of the key issues:
The expanding business has a range of entry options. A company can establish a subsidiary in the target country, which of course does not involve a foreign partner or, at the other extreme, can franchise direct to a foreign franchisee. This also does not involve the intervention of a third party. However for practical reasons the vast majority of expanding businesses contract with a partner in a joint venture, master franchising or area development arrangement.
Each entry vehicle requires appropriate documentation having regard to the requirements of the local law. Burger King found itself in a geopolitical dispute in the Middle East over the interpretation of international law resulting in threats to revoke their business licenses in Islamic member states creating friction between Burger King and its Israeli franchisee.
In the case of joint venture, master franchising and area development arrangements there is also complex documentation required to record the respective rights and obligations of the parties that emerge from negotiations which are invariably long and complicated and are frequently tense and frustrating. A complicating factor is that in many developing countries, contracts are not accorded the same respect we are used to in Australia and may even be regarded, at least from a business if not a legal perspective, as a basis for further negotiations rather than the binding expression of a concluded agreement.
Negotiating and drafting an appropriate agreement is always a complex exercise. Negotiating and drafting an agreement for a foreign country is even more complex. With respect to franchising, although to some extent it is generic, the laws governing franchising are not. Thirty countries have dedicated franchise regulation but there is no uniformity in the regulatory models applied or even the extent and comprehensiveness of regulation within a particular regulatory model. In the unregulated regimes the relationship is regulated under the commercial laws of general application to all business activity.
The agreements will need to identify the appropriate governing laws and tax related issues. These areas are complex and in most cases deal breakers as which creates a sense of security providing jurisdictional control and tax concessions. The repatriation of fees, royalties, and profits is highly reviewed and determined during the negotiation process and can be a costly exercise if overlooked.
The protection and enforcement of a company’s intellectual property are front of mind for any business and especially so in franchising. International expansion raises complex issues in relation to both protection and enforcement. Protection of intellectual property is complicated by the reality that although business is conducted internationally, trade mark protection is granted locally. A registered trade mark in Australia confers a monopoly only in Australia. As a result, an internationally expanding franchisor can be frustrated by “passive name pirating”— an offshore entrepreneur registering the trade mark in their home jurisdiction. There are many examples but Burger King’s experience in Australia is perhaps the best known. Despite at that time operating in over 70 countries its expansion in Australia was under the name ‘Hungry Jacks” because the name “Burger King” was unavailable having been registered by another person.
In Australia and throughout the western world generally, first use of the mark in the jurisdiction gives the right to register but in some countries such as China, it is a ‘first to register’ system which poses even more challenges for the internationally expanding franchisor. China also raises issues inherent in a language system which is not based on the Roman alphabet — that of registering an appropriate foreign language mark as protection is granted only to the mark itself and not to a transliteration of it. The problem of international registrations has to some extent been lessened by the Madrid Protocol which facilitates registration in member countries through a single filing with the Australian Trade Marks Office. International trade mark protection however, remains an expensive, complex and vitally important exercise for any international business.
A business with local registered marks may still face challenges in enforcing its intellectual property rights. Particularly in developing countries there is not yet the same respect for intellectual property that we are used to in Australia. Enforcement actions are difficult and not always successful. Abercrombie & Fitch has invested heavily in brand protection employing ex-FBI agents to combat the problem worldwide. This is a result of extensive counterfeiting caused by the very reason businesses are looking to grow internationally: the internet and access to information.
–Marwan Kojok is an Executive Partner at DCS Lawyers.