A Census of International Franchise Regulation Andrew Terry Professor and Head School of Business Law & Taxation University of South Wales Sydney Australia Presented at the 2006 China Franchise International Summit International Franchise Academy Beijing Normal University Zhuhai PRC 11-12 November 2006

a healthy franchise requires adequate and appropriate infrastructure political infrastructure economic infrastructure franchise sector commercial infrastructure legal infrastructure

legal infrastructure Legal institutions and processes Commercial laws of General application franchise sector franchise-specific law?

franchising is a unique and proven model for business development entrepreneurship involves risk not the role of government to remove risk but in the particular circumstances of franchising there are elements quite different to normal business development because of the control of the franchisor which can be an overriding risk for other than purely business or commercial reasons the challenge for franchise sectors – how to minimise these additional risks while leaving the commercial risks and decision to be handled by the parties.

franchisee relationship information imbalance franchisor/ franchisee relationship power prior disclosure laws wide acceptance relational uncontroversial Unidroit Model Disclosure Law 2002 Relationship / conduct laws uneven acceptance highly controversial

justification for franchise-specific regulation to avoid economic and social costs of business failure protect legitimate interests fairness standardisation orderly development official recognition, education and encouragement (in developing sectors) “… to regulate commercial franchise operations, protect the legitimate interests of the parties involved and promote the healthy and orderly development of commercial franchising” (China)

voluntary self-regulatory Codes of Ethics adopted by national franchise associations franchise specific regulation regulation by law Act of Parliament Subordinate legislation Ministry rules

The regulated sectors Australia 1998 Belgium 2006 Brazil 1995 Canada Model Law 2005 Alberta 1980/1995 Ontario 2001 PEI 2007 China 1997/2005 France 1991 Indonesia 1997 Italy 2004 Japan 1983/2002 Kazakhstan 2002 Korea 1997/2002 Lithuania 2001 Malaysia 1998 Mexico 2001/2006 Romania 1997 Russia 1996 Spain 1996/2006 Sweden 2006 Taiwan 1999/2003 USA federal (FTC Rule) 1979/2007 state (UFOC) 1970(CA) Vietnam Unidroit Model Law 2002 Note: Little uniformity in nature, extent, scope and comprehensiveness of regulation.

definition of franchise elements trade mark system fee control assistance specific inclusions / exclusions master franchising

registration Australia X Belgium Brazil Canada Model Law Alberta Ontario PEI China  France Indonesia Italy Japan Kazakhstan Korea Lithuania Malaysia  Mexico Romania X Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) 14 UFOC states Vietnam Unidroit Model Law

Other pre-conditions to franchising Australia X Belgium Brazil Canada Model Law Alberta Ontario PEI China 2 stores/1 year France Indonesia Italy concept tested in market Japan Kazakhstan Korea Lithuania Malaysia X (but discretion to refuse regulation) Mexico X Romania X (but discretion to refuse regulation Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam operation for 1 year Unidroit Model Law

disclosure Franchisee prior disclosure Franchisor prior disclosure Franchisor continuing disclosure Australia X  Belgium Brazil Canada Model Law Alberta Ontario PEI China France Indonesia Italy Japan Kazakhstan  IP Korea Lithuania

Disclosure (cont’d) Franchisee prior disclosure Franchisor prior disclosure Franchisor continuing disclosure Malaysia X  Mexico Romania Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

franchisor prior disclosure days pre contract/ payment prescribed disclosure document warning/ advice to franchisee Australia 14  Belgium 30 X Brazil 10 Canada Model Law Alberta Ontario PEI China 20 France Indonesia not specified Italy 15 Japan Kazakhstan Korea 5 Lithuania

franchisor prior disclosure (cont’d) days pre contract/ payment prescribed disclosure document warning/ advice to franchisee Malaysia 10  X Mexico 30 Romania not specified Russia no Spain 20 Sweden “well before” Taiwan USA federal (FTC Rule) state (UFOC) Vietnam 15 Unidroit Model Law 14

prior disclosure non-contractual issues Franchisor info/ experience/ litigation Start-up costs General sector info Australia  X Belgium Brazil Canada Model Law Alberta Ontario PEI China France Indonesia Italy litigation Japan Kazakhstan Korea Lithuania

prior disclosure non-contractual issues (cont’d) Franchisor info/ experience/ litigation Start-up costs General sector info Malaysia  X Mexico some Romania Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

prior disclosure non-contractual issues (cont’d) Existing franchise network. Non-renewals/ terminations/ transfers/ buy–backs/ceasing operation Earnings claims Franchisor financial statements Australia  justify if given Belgium X Brazil Canada Model Law Alberta Ontario PEI China France Indonesia Italy if requested Japan Kazakhstan Korea Lithuania

prior disclosure non-contractual issues (cont’d) Existing franchise network Non-renewals/ terminations/ transfers/ buy–backs/ceasing operation Earnings claims Franchisor financial statements Malaysia  termination X Mexico Romania Russia Spain justify if given Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law ceasing operation

prior disclosure: contractual issues fees & payments restriction on source/ supply of products & services franchisee’s obligations (consolidated) franchisor’s obligations (consolidated) Australia  Belgium X Brazil source Canada Model Law Alberta Ontario PEI China supply France Indonesia Italy Japan Kazakhstan Korea

prior disclosure: contractual issues (cont’d) fees & payments restriction on source/ supply of products & services franchisee’s obligations (consolidated) franchisor’s obligations (consolidated) Lithuania X Malaysia  Mexico Romania Russia Spain Sweden source Taiwan USA federal (FTC Rule) some state (UFOC) Vietnam Unidroit Model Law

prior disclosure: contractual issues (cont’d) territory IP participation in franchise business operation renewal/ termination/ transfer/ dispute resolution other contract conditions Australia  Belgium X some Brazil Canada Model Law copy of agreement Alberta Ontario PEI China France Indonesia Italy Japan Kazakhstan Korea

prior disclosure: contractual issues (cont’d) territory IP participation in franchise business operation renewal/ termination/ transfer/ dispute resolution other contract conditions Lithuania X Malaysia  Mexico Romania Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

the franchise agreement Mandatory content Prior disclosure of specific provisions Australia X  Belgium  some Brazil  few Canada Model Law + copy of agreement Alberta Ontario PEI China France Few Indonesia Italy copy of agreement Japan Some Kazakhstan Korea

the franchise agreement (cont’d) Mandatory content Prior disclosure of specific provisions Lithuania X Malaysia  Mexico franchisee obligations Romania Russia Some Spain Sweden few Taiwan  + copy of agreement USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

the franchise agreement (cont’d) Cooling off Certification re-independent advice Australia  Belgium X Brazil Canada Model Law Alberta Ontario PEI China France Indonesia Italy Japan Kazakhstan Korea

the franchise agreement (cont’d) Cooling off Certification re-independent advice Lithuania X Malaysia  Mexico Romania Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

conduct / relationship issues General standards of conduct Prescribed rights and obligations (consolidated) Australia X Belgium Brazil Canada Model Law fair dealing Alberta Ontario PEI China  France Indonesia Italy loyalty, fairness, good faith Japan Kazakhstan Korea good faith

conduct / relationship issues (cont’d) General standards of conduct Prescribed rights and obligations (consolidated) Lithuania X  Malaysia best business practice Mexico Romania Russia Spain Sweden Taiwan USA federal( FTC Rule) state (UFOC) Vietnam Unidroit Model Law

conduct / relationship issues (cont’d) Specific relationship issues (of general application) termination term/ renewal transfer other Australia  X right to associate/ general release from liability Belgium Brazil Canada Model Law right to associate Alberta Ontario PEI China France Indonesia encroachment Italy term Japan vertical restraints Kazakhstan Korea unilateral amendment/ unfair trade practices

conduct / relationship issues (cont’d) Specific relationship issues (of general application) termination term/ renewal transfer other Lithuania  renewal Malaysia X confidentiality/ post termination restraints Mexico Romania general Russia trade practices Spain Sweden Taiwan USA federal( FTC Rule) state (UFOC) 19 states 18 states 10 states 7 states Vietnam Unidroit Model Law

dispute resolution Mediation of disputes Australia  Belgium X Brazil Canada Model Law Alberta Ontario PEI China France Indonesia Italy Japan Kazakhstan Korea

dispute resolution (cont’d) Mediation of disputes Lithuania X Malaysia Mexico Romania Russia Spain Sweden Taiwan USA federal (FTC Rule) state (UFOC) Vietnam Unidroit Model Law

the regulatory future The balance of informed opinion throughout the franchising world is that in the special circumstances of franchising there are elements sufficiently different to normal business development to justify regulation. Clear trend to regulation Australian experience is positive: Wide sector acceptance Stronger relationships Increased certainty Reduced disputation More effective dispute resolution Better sector/government and media cooperations Focus for sector education, research, networking Catalyst for strong sector body

The experience in Australia under the mandatory Franchising Code of Conduct provides comfort to those franchising sectors facing regulation that appropriate and balanced regulation can have a beneficial effect on the franchising sector and encourage its orderly development for the benefit of all stakeholders.