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Tips for International Franchise Agreements

Following a boom in franchising in the United States around the 1950s and 1960s, there was a dramatic increase in international franchising activity.  Franchised businesses could be found in many of the major countries, and now franchising exists and is successfully utilized in over 150 countries across multitudes of business sectors.  In fact, many businesses use franchising as a method to expand internationally.

When franchising occurs between international parties, such as when a foreign entity purchases a United States franchise or a foreign entity wants to set up a franchise in the United States, understandings of both countries’ laws may be necessary.  A wide range of laws such as contract, intellectual property, or anti-trust may affect international franchise transactions, and the issues have recently grown to be more complex.

In expanding overseas or in franchising agreements involving international parties, the United States Federal Trade Commission has trade regulation rules on franchising.  These rules, similar to domestic rules, may require the franchisor to provide various documents and disclosures.  While the scope of the rules are fairly broad, at least one court has held that the rule does not apply to a transactions between foreign citizens and United States franchisors.

State franchise laws may also apply to international franchise transactions, especially if the sale, offer, or acceptance of franchise rights occurs in the state.  Some states similarly require the franchisor to provide various disclosures and even register their franchise offerings with the state.

Many countries regulate franchising, and may have additional disclosure requirements.  For example, Block Exemption Regulations (BER) may affect how franchises operate in Europe.  Some commentators have noted that the BER rules on competition for distribution of goods may make it more difficult for franchisors to ascertain whether the franchise agreements fall under safe harbor or block exemptions that affect how goods may be sold.

It is equally important to check the intellectual property laws of all countries involved.  Technology transfer laws that regulate the licensing of foreign technology may lead to possible regulatory barriers.  While some technology transfer laws have been repealed since many years ago, it is important to check with counsel in case there are any laws still in effect.  Regardless, it is essential to protect a franchisor’s trademarks and other intellectual property as the franchisor expands.  This may require the application of foreign and international trademarks, patents, or copyrights.

Finally, one should be aware of other barriers or laws that may affect the transaction.  Currency control restrictions may be a problem in some countries.  There may also be tax issues.  Another problem is figuring out dispute resolution, such as what method and where the dispute will be addressed.  Laws in other fields, such as anti-terrorism laws, corrupt practice acts, import/export laws, or anti-boycott regulations may come into play.  Regardless, numerous legal and business issues will present themselves when international franchises are involved, and it is important to conduct proper due diligence in complying with the laws and regulations.

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