Penny Ward
Baker & McKenzie
Australia

Joycia Young
Clyde & Co LLP
Dubai

Who’s Who Legal: Has franchise proved to be recession-proof, both for participants and their law firms?

Stewart Germann: Because good franchising minimises the risks, franchising has not suffered as much, in my opinion, during the recent tough economic times. However, during 2009 it was much harder for franchisors in New Zealand to find franchisees but I am told that during the last six months it has got a lot easier.

Penny Ward: Franchising, as with all business, has suffered with the recession. Access to capital was significantly tighter for a period and investors were more conservative. Having said that, businesses in good financial shape have had acquisition opportunities and not all industries and jurisdictions have been affected to the same extent. While franchises in the recruiting and travel sectors suffered, quick-serve food business has, in fact, increased. As the Australian economy has been more robust than most, we have seen increased interest from foreign franchisors whose home jurisdictions have been struggling.

Andrew Loewinger: Up until the “great recession” I would have emphatically said that franchising and its law firms were essentially recession-proof, but not this time around. It has certainly affected domestic US franchisors very significantly, for a variety of reasons. Most significantly, many franchisors have seen their franchisees’ gross sales drop, and most have also seen their sale of new franchises drop, some quite considerably. This is of course all very industry dependant. The drop-off in new franchise sales is very much due to the dearth of readily available credit in the US due to the US bank problems. There are however signs of life, as credit woes ease and creative new financing programmes are being developed. The international market has on the whole been quite different and is a relative bright spot. US franchisors have been very actively selling outside of the United States.

Leonard Polsky: Franchising has not proven to be recession-proof for the participants, which has a corresponding effect on their law firms. From a Canadian standpoint, and in many other countries as well, the largest source of new inbound franchises is the USA. As the economy in the USA has affected franchisors and slowed their growth and international expansion plans, this has had the effect of slowing down the number of US franchisors expanding their systems into Canada. In past recessions, franchising has seemed to be more recession-proof than during the current economic downturn. This time, the effects are more noticeable, which likely includes other international franchise expansion as well. It is expected that this slowdown effect will gradually recede in Canada, as more US franchisors take notice of the more stable economy and lending systems in Canada. This is expected to create an incentive for US franchisors to consider expansion into Canada, rather than being curtailed because of the slowdown in growth and expansion in the US. We are just beginning to see this start to happen now.

Joycia Young: The Middle East region continues to be a focal point for global franchisors seeking new opportunities for international expansion. Comparatively, the franchise market in the Middle East offers greater opportunities than in more established, saturated markets. While there is increasing potential in these markets, franchising has not proved to be recession-proof for any of the participants. Many existing franchisees are struggling to keep up with development schedules agreed in more buoyant economic conditions. Notwithstanding the economic downturn, the Middle East region is still considered an attractive proposition for franchising, and offers franchisors a means by which they can quickly gain traction in the market without establishing company-owned stores, which can be a difficult and costly process in many countries in the region.

Who’s Who Legal: Which industries are seeing high levels of franchise activity?

Stewart Germann: The industries which are exhibiting high levels of franchise activity are food, particularly healthy foods, leisure activities and home services. However, possibly the most active franchise industry has been coffee and more and more coffee franchises are opening up both from retail premises and mobile.

Penny Ward: I am seeing increased activity across the board: from foreign franchisors looking to enter Australia; from businesses that predominantly use other models (such as in the hotel sector); and from start ups. Many business sectors are seeing a “light at the end of the tunnel” and want to be at the front of the recovery curve.

Andrew Loewinger: There is increased activity in new food concepts and franchised businesses with lower entry costs.

Leonard Polsky: Although no particular industries are seeing high levels of franchise activity per se, the slowdown in the economy has meant that the smaller-investment franchises are being looked at most favourably. Generally, service businesses directed at the baby boomer population which do not require capital-intensive investments to establish are more likely to attract interest in an uncertain and down economy.

Joycia Young: At present, the Middle East region is seeing high levels of franchise activity in the healthy foods sector. For example, Naked Pizza has just launched in the United Arab Emirates and there is a high level of interest from franchisors seeking to provide healthy, fresh QSR alternatives.

Who’s Who Legal: Have there been any regulatory changes in your jurisdiction in recent months?

Stewart Germann: In June 2009 the New Zealand government announced that there was no need for franchising regulation at that time. However, there is currently a review of Consumer Laws and the government is looking particularly at unfair contract terms. This review has not been completed and will drift into 2011.

Penny Ward: Australia’s federal franchise law was amended (effective 1 July 2010) to increase the range of information required to be included in a franchisor’s disclosure document. Some of the additional items, such as the need to disclose a franchisee’s ongoing costs, are proving challenging for franchisors. More recently, the state of South Australia, and possibly Western Australia, are considering their own franchise legislation, focussing on fairness and good faith.

Andrew Loewinger: The most recent activity in the United States has been through the courts – for example, there has been a frontal assault on franchising by trying to make employment laws apply to franchising. There is a pending amendment to the Georgia constitution under a November 2010 ballot initiative to permit enforcement of non-competition covenants.

Leonard Polsky: There have been some regulatory changes in Canada in recent times. Specifically, there has been a rise in franchise disclosure regulation. In Canada, such regulation is a matter of provincial law. In addition to Alberta and Ontario, Prince Edward Island enacted franchise disclosure law in 2007; New Brunswick has enacted such a law which will become effective on 1 February 2011; and Manitoba has recently also passed a franchise disclosure law, but the Regulations have not yet been issued, and the effective date is not yet known. It may be expected to become law in Manitoba in late 2011 or early 2012, and possibly sooner. All of these laws call for pre-contract and pre-investment franchise disclosure, as a private matter between franchisor and franchisee. There are no government filings, reviews or registrations required, and franchisors’ disclosure documents are not available for public viewing in any depository. In addition, there is a possibility that amendments will be made in the next year to Ontario’s franchise disclosure law. A Bill is currently pending in the Ontario Legislature. There has also been a recent change to Canada’s federal antitrust law, the Competition Act. Resale price maintenance was formerly a criminal offence. The recent amendments have decriminalised price maintenance, meaning that the practice of price-setting by franchisors is now a civil matter, reviewable by the Competition Tribunal at the instance of the Competition Bureau or an affected party. The issue in such a review is whether or not the conduct has or will have or is likely to have an adverse effect on competition or in the marketplace. There is no defined test, but in the absence of market power or dominance, no remedy will be likely to be imposed. The remedies are limited to an order to cease and desist from the offending conduct.

Joycia Young: Most countries in the Middle East region do not have franchise-specific legislation and this is obviously an area which regulators are viewing with interest, particularly given the popularity of the franchise model. While there has been discussion of the United Arab Emirates and Egypt introducing franchise legislation, this has not yet occurred.

Who’s Who Legal: Have you noticed an increase in the number of franchise-related disputes?

Stewart Germann: I have noticed an increase. However, mediation in franchising has a very high success rate and from my observations during the past 12 months over 85 per cent of disputes are settled by mediation.

Penny Ward: It is inevitable that certain franchisees who are struggling in their businesses will seek to blame their franchisors for their difficulties. With more franchisees suffering financially in the past two years, we have seen more of these cases, in addition to franchisee insolvency. Mediation is always the first step in franchise disputes in Australia, and continues to help settle the majority of franchise disputes.

Andrew Loewinger: Yes, there has been a marked increase. Initially in this recession, there was no increase, but now there is, in a variety of matters.

Leonard Polsky: In Canada, franchise litigation has been quite common over the past few years, and remains so. Due to the length of time that a litigation matter takes to reach a reported court decision, it is still too early to know if the current recessionary times and economic downturn have had any significant increasing effect on franchise litigation in Canada. There has, however, been a gradually increasing and emerging trend towards more class actions in franchising in recent years. The Alberta and Ontario (especially Ontario) courts also appear to be hearing an increased number of cases involving franchise disclosure, directed particularly at deficiencies in the disclosure documents and franchisors’ disclosure processes. If successful, such actions have the effect of giving a franchisee a period of two years after signing the franchise agreement to seek rescission and damages for any losses.

Joycia Young: Franchise-related litigation remains a rarity in the Middle East region, particularly due to the complexity of the litigation process in general. In the economic downturn, the most obvious tension point is the ability of franchisees to comply with development schedules agreed during more buoyant economic times and we are seeing a number of interparty disputes around this issue. We would also expect that a number of more established franchisors whose agreements are approaching renewal may consider termination or non-renewal of their agreements, which may also give rise to franchise-related disputes.