Thinking of expanding your brand in Europe? Pinpoint the best territories for your franchise to head to next with the help of this legal guide.
Europe is predominantly composed of countries with developed, thriving economies that have large populations with disposable incomes. Despite the fact that 27 countries are in the EU, different languages, laws, and cultures mean that although Europe has huge market potential, it also represents challenges for franchisors looking to expand their concepts across the continent.
There is no overarching body of law that governs franchising in Europe’s many countries and most issues that will concern U.S franchisors are a product of national, not EU, legislation. We have used our international reach to create a bite-size guide of key considerations when franchising in Europe.
United Kingdom
The U.K. is a popular jurisdiction for American franchisors seeking to pilot test their brands before undergoing European expansion. There are no franchise regulations in the U.K., making it very franchise friendly and accessible. It is very easy for U.S. franchisors to set up and operate in the U.K. Moreover, the U.K. and U.S. share a language and a similar common law legal system.
Following the end of the Brexit transition period (currently, December 31, 2020, unless extended), EU Trade Marks (EUTMs) will no longer have effect in the U.K. The U.K. government has provided that at the end of the transition period, the U.K. will automatically create a comparable U.K. trademark for every registered EUTM, at no charge. However, this will not apply to pending EUTM applications, so U.S. franchisors with pending applications should apply to register a comparable U.K. trademark in the nine months after exit day to benefit from the same filing date as the related EUTM application.
France
Franchise agreements in France are subject to general commercial and contract law principles, which have been adapted by franchise-specific case law. Franchisors must produce a pre-contractual information document and be transparent with their franchisees in respect of their business and network. This document must be disclosed within a specific timeframe before a franchise agreement is signed.
The drafting of a franchise agreement must also reflect a genuine negotiation between the parties to avoid provisions being declared unenforceable under French law. This can occur if courts consider the terms to be significantly imbalanced.
Germany
American franchisors interested in Germany should ensure that their franchise systems are adapted for operation there. For example, franchisors must complete pre-contractual disclosure documents that comply with German law and do not include unnecessary items/exhibits (which are typical in standard U.S. disclosure documentation) to reduce the risk of false information being disclosed.
It is important to review template international agreements and personal guarantees for enforceability under German law and to review personal data transfer clauses for compliance with EU data protection laws to avoid large fines. Franchisors should also protect themselves through non-compete obligations and registration of trademarks in Germany/EU.
Italy
Franchising in Italy is regulated by Law 129/2004 and Ministerial Decree 204/2005. There are no specific regulatory implications for foreign businesses, but local registrations may be required.
All franchisors must provide pre-contractual disclosure information to potential franchisees at least 30 days before signing the franchise agreement. These pre-contractual requirements are simplified in situations where the franchisor has operated outside of Italy before entering into the franchise agreement.
“There is no overarching body of law that governs franchising in Europe’s many countries”
Establishing a franchising business in Italy requires a commercial formula that has been previously market-tested. Franchise agreements must have a minimum duration of three years and should include a method for calculating royalties and include details of the territorial exclusivity granted.
Spain
Franchise legislation in Spain obliges franchisors to disclose pre-contractual information. There is a ‘cooling-off’ period which means that a franchisor must deliver a full package of pre-contractual information 20 days prior to signing, or else the contract will be void and no payments may be made under it. Other important non-franchise specific regulations include EU-level competition laws.
There are also Spanish regulations that protect the “adherent” (franchisee) party in a “pre-formulated standard agreement” which could impact U.S. franchisors entering into standard- form franchise agreements with franchisees in Spain. These laws are likely to be deemed overriding mandatory provisions and therefore applicable regardless of the contractual choice of law.
Hungary
Setting-up in Hungary is an attractive option for U.S. franchisors to consider. Hungary benefits from EU membership status, a relatively cheap and skilled workforce, and the potential to deduct 50 per cent of royalties from a franchisor’s corporate income tax base.
There is no dedicated franchise legislation in Hungary, and so franchises are subject to the same laws which govern other businesses. There are no specific mandatory statutory clauses to be included in franchise agreements as franchisors and franchisees are not treated as agents or distributors.
Czech Republic
Generally, there are no restrictions on foreign franchisors seeking to enter the Czech market, nor are there franchise-specific laws. Franchise arrangements are typically governed by civil law (as far as the actual contract or establishment of the business is concerned) but other areas, including public law (for example, competition, employment, and tax), are equally important.
In respect of tax, the Czech system can be complex, and therefore good professional advice is essential. As a rule, license fees paid to Czech tax non-residents are subject to withholding tax which is reduced under a double-taxation treaty with the U.S. The Czech Republic and the U.S. cooperate on tax enforcement duties under the U.S. Foreign Account Tax Compliance Act.
Poland
There are no specific regulations under Polish law that govern franchise contracts, and so general contract principles apply. Companies that are not based in the EU must establish a branch or subsidiary in Poland to operate a business there. There are also certain legal restrictions regarding property ownership that apply for franchisors from non-EEA countries. Parties can choose between litigation or alternative dispute resolution for franchising disputes, and to this end, there are arbitration courts in Poland (for example, Court of Arbitration at the Polish Chamber of Commerce).
Belgium
Under Belgian law, a franchisor must provide its franchisee with a draft franchise agreement and pre-contractual information document at least one month before executing the franchise agreement. If this process is not followed, the franchisee may request that the franchise agreement be declared void over the following two-year period.
A franchise agreement may also be subject to the Belgian Exclusive Distribution Act. This legislation offers considerable protection to distributors in the case of termination by a principal where there is a quasi-exclusive distribution agreement or a distribution agreement with burdensome obligations and such agreement is for an indefinite duration or extended/renewed at least three times.
The Netherlands
In the Netherlands, new mandatory franchisee protections will come into force on January 1, 2021. The new Dutch Franchise Act implements rules which strengthen the position of franchisees through regulation of all phases of the franchise relationship (for example, prior to, during, and after the franchise agreement). The bill will cover, inter alia, exchange of information, mutual consultation obligations, goodwill and non-compete clauses.
“Establishing a franchising business in Italy requires a commercial formula that has been previously market-tested”
These legislative changes will lead to fundamental changes in international franchising practice, as franchisees in the Netherlands can invoke the protection of the act regardless of the choice of law in the franchise agreement.
Denmark
There are no regulations in Denmark specifically aimed at franchise arrangements and so franchisor/franchisee relationships are governed by general contract law principles. While the overriding doctrine of Danish contract law is freedom of contract, U.S. Franchisors should note that under the Danish Administration of Contracts Act, the courts may set aside or modify contracts that are held to be unconscionable.
Whilst these instances are rare when the parties have equal bargaining power, franchisees may receive protection if subjected to unfair terms. To reduce the risk of these claims, franchisors should fairly disclose any obligations to the franchisee prior to signing, and the franchisees should receive legal advice.
Finland
Like other European countries, Finland does not have franchise-specific legislation. The franchisor/franchisee relationship is governed by general contract law principles and the terms of the franchise agreement. Whilst Finnish contract law is based on freedom of contract, franchisors should note that the courts can set aside or modify contracts that are held to be unreasonable. The courts have used this right to protect franchisees (as a weaker party) in contracts considered to be materially unfair. To reduce this risk, franchisors should ensure (and document) that all obligations on the franchisee are fairly disclosed prior to signing. The franchisee should also have a fair chance to review the terms with its counsel.
Sweden
Franchise arrangements are subject to the Swedish Franchise Disclosure Act and general commercial contract law principles. Prior to entering the franchise agreement, the franchisor must provide the franchisee with written pre-contractual information regarding the implications of the agreement and any other necessary information. This information must also be clear and comprehensible. If the disclosure obligation is not fulfilled, the Swedish courts can order the franchisor to provide the required information and issue a fine. Franchisors should be aware that the Swedish Franchise Association has adopted the European Franchise Federation’s Code of Ethics, which includes provisions regarding good faith and fair dealings.
As you can see, the laws and regulations in each European country are very different and it is important for U.S. franchisors to obtain legal and tax advice from franchise specialists in each European country where they are intending to franchise.
THE AUTHORS
Graeme Payne, Shelley Nadler, and Sophie Stoneham all work for Bird & Bird. Bird & Bird is an international law firm with dedicated franchising experts across 29 international offices. The firm has taken some of the world’s best-known brands into new markets and continues to advise them on their ongoing expansion plans.
