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© DLA Piper 2010 1 Legal Considerations in Adapting Your Concept for International Markets by Bret Lowell DLA Piper LLP October 21, 2010 3:15 – 4:15 pm.

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Presentation on theme: "© DLA Piper 2010 1 Legal Considerations in Adapting Your Concept for International Markets by Bret Lowell DLA Piper LLP October 21, 2010 3:15 – 4:15 pm."— Presentation transcript:

1 © DLA Piper 2010 1 Legal Considerations in Adapting Your Concept for International Markets by Bret Lowell DLA Piper LLP October 21, 2010 3:15 – 4:15 pm

2 © DLA Piper 2010 2 Agenda Expansion Methods Key Agreement Issues Franchise Laws Around the World Other Foreign Laws Negotiation Strategies Q & A

3 © DLA Piper 2010 3 Direct Unit Franchising Area Development Master Franchising Area Representative Joint Venture Expansion Methods

4 © DLA Piper 2010 4 Franchisee owns and operates one franchised outlet. DIRECT UNIT FRANCHISE Expansion Methods

5 © DLA Piper 2010 5 Franchisor grants a “Developer” the right to establish a number of franchised outlets within a specific territory Must meet a development schedule Separate franchise agreement for each unit OR a multi- unit operations agreement covering all units Expansion Methods Area Developer

6 © DLA Piper 2010 6 Franchisor grants certain rights to sub-franchisor. Typically: –Offer and sell franchises –Sub-license franchisor’s trademarks to sub- franchisees –Collect fees and send portion to franchisor –Training/supervision of subfranchisees –Enforce system standards –Frequently, permits establishment of units Expansion Methods Master Franchising

7 © DLA Piper 2010 7 Functionally similar to subfranchising, but... Representative is granted right to recruit prospects Franchisee still contracts directly with franchisor Area representative cannot contract with franchisee, but gets a “subcontract” to – –Solicit new franchisees–Conduct inspections –Find and propose sites–Conduct marketing –Train franchisees Expansion Methods Area Representative

8 © DLA Piper 2010 8 An additional layer Most often used with international area development Allocate risks and returns differently than pure franchising Affords the franchisor opportunities for additional control, but requires investment by the franchisor The bigger the potential of a market, the more likely the franchisor will make an equity investment Expansion Methods Joint Venture

9 © DLA Piper 2010 9 Key Issues in Master Franchise Agreements

10 © DLA Piper 2010 10 Obligation to open units –Schedule –Possible approval of Site Subfranchisees –If failure to comply, option to: Terminate agreement Reduce number of units Reduce size of territory Key Issues

11 © DLA Piper 2010 11 Getting Paid –New Franchisee Irrevocable confirmed L/C Bank guaranty Personal guaranty –Track record of timely payment L/C’s Open account (wire transfers) Key Issues

12 © DLA Piper 2010 12 Getting Paid (cont.) –Convert to designated currency on due date or payment date –If impossible to convert: Receive payment in currency of franchisee’s country Barter If longer than “x” months, suspend services If longer than “y” months, terminate agreement Key Issues

13 © DLA Piper 2010 13 Exclusivity –Franchisor won’t own/operate/grant another franchise in master franchisee’s territory –Franchisee won’t own interest in competing business in-term and post-term –Key definitions: Ownership interest (family, friends) Competitive business Key Issues

14 © DLA Piper 2010 14 Trademarks –One of the most important issues-- your company’s good name –Registration overseas “First to file” country Some countries -- must file within 1-2 years after first filing anywhere Expensive to do global registrations, but often necessary for growth Key Issues

15 © DLA Piper 2010 15 Tax –Franchisee obligation to withhold Usually impose all foreign taxes on master franchisee If master franchisee required to withhold tax on behalf of franchisor, use gross-up clause –Master franchisee pays amount to franchisor that would have been paid if no withholding Key Issues

16 © DLA Piper 2010 16 Term & Renewal –Duration –Right to renew if comply with certain conditions No default Sign new agreement –New schedule –New fees Terminations –Fail to comply with material provision No cure within “x” days –Fail to pay within “y” days Key Issues CLOSED

17 © DLA Piper 2010 17 Post-term Obligations –Not open any added units –No longer service franchisees –Buy-back right –Assign contracts –De-identify –Return items –Covenant not to compete Key Issues

18 © DLA Piper 2010 18 Transfer of Agreement or Control of Franchisee –Not transferable without franchisor’s consent –Special requirements for control transfers Sign new agreement Transfer all rights in one bundle –Rights of first refusal for franchisor Key Issues

19 © DLA Piper 2010 19 Dispute Resolution –Negotiation Senior executives required to meet in nice place (e.g., Hawaii, Singapore, Hong Kong) Bring your lawyer! –Mediation Not litigation or arbitration but still some structure Key Issues

20 © DLA Piper 2010 20 Dispute Resolution (cont.) –Arbitration Provisions in agreement –Applicable rules (ICDR / ICC / UNCITRAL) –Place -- can agree to neutral site –Number of arbitrators –Specify amount and type of discovery –Foreign awards enforceable in court? Key Issues

21 © DLA Piper 2010 21 Dispute Resolution (cont.) –Injunction / Litigation Action filed in court to compel Master Franchisee to act or refrain from acting in emergency situation (e.g. safety hazard at franchised hotel) –Choice of Forum –Choice of Law Key Issues

22 © DLA Piper 2010 22 Franchise Laws Around the World

23 23 Franchise Laws Around the World: Beginning of the 1970’s

24 24 Franchise Laws Around the World: Beginning of the 1980’s

25 25 Franchise Laws Around the World: 2010

26 26 Blue = Disclosure Law Green = Relationship Law Red = Disclosure & Relationship Laws Black = Other Does Not Include: Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority. Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned. The Americas Barbados Brazil Canada Alberta Ontario Prince Edward Island Mexico United States Federal Several States Venezuela Europe EU Within EU Belgium Estonia France Lithuania Italy Romania Spain Sweden Non-EU Albania Belarus Georgia Moldova Russia Ukraine Central Asia Mongolia Kazakhstan Kyrgyzstan Asia China Japan Macau South Korea Taiwan Vietnam The Middle East Saudi Arabia South Pacific Australia Indonesia Malaysia Africa South Africa Laws Applicable to Franchising October 2010

27 © DLA Piper 2010 27 IP –Do it first, and do it efficiently Tax –Gross-up plus seeking foreign tax credit Competition laws –Be reasonable Agency laws –Commercial agency registration in certain countries (especially the Middle East) Key Foreign Law

28 © DLA Piper 2010 28 Negotiation Strategy –Ask for more than what you want –Ask for things that you might not need –Reference other deals –Set deadlines –Know who you are dealing with Negotiation Tips

29 © DLA Piper 2010 29 THANK YOU! Q&A

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