On June 23rd, Britain voted to leave the European Union (EU) as soon as it invokes Article 50 of the Lisbon Treaty. Nearly three weeks later, David Cameron officially stepped down and Theresa May was appointed Britain’s new Prime Minister. Although some speculated that Britain could unwind the process or somehow put the toothpaste back in the tube, May has already appointed leading Brexit supporters to important governmental positions. May said she would need time before commencing Brexit negotiations, but also made it clear she will deliver the will of the British people to leave the EU.
Once Britain formally notifies the EU that it is leaving, the process of working through the changes in the relationship between Britain and the EU will take years. Although it is too early to determine Brexit’s impact on franchising, it is important to be aware of certain issues that might arise and otherwise be prepared for changes in the laws that affect franchising.
Franchise and Related Agreements.
An important step a franchisor should consider is a close review of the existing agreements with its franchisees (i.e., franchise agreements, development agreements and noncompetition agreements). The purpose of this review is to determine modifications the franchisor should consider making to such agreements due to the changes in the laws as a result of Brexit. For example, a franchisor should evaluate whether the choice of law and dispute resolution provisions in its current agreements will be problematic once Britain departs the EU. On a related note, a franchisor should determine the changes it should make to the franchise agreements that will be used in future transactions.
Franchisors should evaluate their trademark portfolios and begin to develop strategies to maximize their trademark protection. A franchisor might consider, for instance, how its trademark protection will be affected if it has an EU trademark, but has not used the trademark in Britain. Alternatively, a franchisor should consider the level of trademark protection that will exist if the franchisor has an EU trademark, but has not used the trademark outside of Britain. As the negotiations for Britain’s departure progress, a franchisor should consider the steps it can take to boost the protection of its trademarks. Further, a franchisor should anticipate an increase in the costs to protect its trademarks because of the need to obtain separate trademark registrations in Britain and the EU.
The effects on territorial provisions and restrictions in any existing agreements should be examined by a franchisor. For example, if a franchisee was granted development rights throughout the EU, the franchisor should determine how such rights are impacted as a result of Britain’s departure from the EU. Another item to examine would be the scope of customers a franchisee is allowed to service and whether Britain’s departure from the EU will impact the rights of any of its franchisees.
A franchisor should consider the potential impact on and complications related to the franchisor’s relationship with a franchisee in the EU as compared to a franchisee operating in Britain. A franchisor may need to consider whether it is necessary (for economic, competitive or other reasons related to Brexit) to modify its existing relationship with a franchisee in Britain as compared to its other franchisees in the EU countries. It is important to carefully navigate the process of making changes in existing franchisee relationships to avoid problems with other franchisees who believe they are not being treated fairly or equally.
Franchisors should prepare for Brexit’s potential impact on their supply chains. Once Britain ceases to be a member of the EU, the free movement of a franchisor’s products from Britain to other EU countries could come to the end. Depending on how negotiations progress, a franchisor may need to restructure its supply chain if high import duties are imposed on products made in Britain and distributed to EU countries. Franchisors should review their current supply agreements to determine the steps that can be taken now to provide flexibility and protection in the future.
Franchisor’s Company Operations.
A franchisor based in the EU will also need to thoroughly examine the impact of Brexit on its company operations. For example, a franchisor should carefully evaluate its ability to support its franchisees – Brexit may be the end of the free movement of the franchisor’s workers between Britain and the EU.
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We are currently in a situation where there are more questions than answers. Nevertheless, we know Brexit will impact franchising and now is the time for franchisors to begin communicating with franchisees about the potential impact and preparing for the changes to come. Franchisors are well advised to keep close tabs on the upcoming Brexit negotiations and to be ready to take the necessary steps to protect their business and the franchise system. Moye White’s Franchise & Distribution Group will keep an eye on the Brexit negotiations and provide updates on important developments.