Since the United Kingdom voted to leave the European Union on June 23 2016, 'Brexit' has dominated national conversation. The government will trigger the start of the exit process this year and on February 1 2017 the House of Commons voted emphatically in favour of triggering Article 50. Recent events have given the first real insight into the exit process and the likely direction of travel.
The Supreme Court recently rejected the government's appeal in R (on the application of Miller and Dos Santos) v Secretary of State and confirmed that Parliament must give its formal approval before the two-year exit process can be triggered. Before this, Prime Minister Theresa May confirmed that the final Brexit deal reached between the United Kingdom and the European Union will be put to a vote of both houses of Parliament. In the same speech, the prime minister suggested that the United Kingdom will be looking to leave the single market – referred to as the 'European Economic Area' (EEA) – and possibly some or all of the customs union, while trying to retain as much access as possible. At the time of writing, the bill to trigger Article 50 is passing through the legislative process and is very likely to succeed. This is no surprise; but perhaps the most telling development since June 2016 is Theresa May's approach to EEA membership and the customs union – businesses can and should take it as a cue to prepare for a 'hard' or 'clean' Brexit.
To help shed some light on what this means for franchising, this update identifies five key issues that all franchisors doing business in the United Kingdom and/or the European Union should be considering.
It is unclear what mechanism will operate in relation to successor rights to EU trademarks and registered community designs in the United Kingdom after Brexit. Although either scenario is unlikely, it is possible that:
- EU trademarks will simply stop being enforceable in the United Kingdom; or
- the EU trademark system will continue to cover the United Kingdom.
It is more likely that EU trademark owners at the time of Brexit will be granted successor rights under national UK trademark law one way or another, so that their priority is recognised (which might happen in various ways).
But where does that leave the surviving EU trademark? Assuming that the United Kingdom does leave the system, if an EU trademark is more than five years from registration, it will be vulnerable to cancellation from the EU trademark register and will not be enforceable if it is not in genuine use. If the only use is and has been in the United Kingdom, and the trademark is not in use in any other EU territory, it may eventually become vulnerable once the UK use is no longer maintaining it. Therefore, if keeping an EU trademark enforceable and maintaining its priority is important to a business, it might consider putting the trademark registration into use by way of licence or franchise arrangement in an EU member state. An interest in maintaining the trademark with genuine use in the European Union may affect plans or decisions about EU partners, whether the franchise business is based in the United Kingdom or elsewhere.
Franchise businesses which collect and use data from European citizens – whether established in the European Union or not – should already be aware that the legal landscape changed before Brexit with the implementation of the EU General Data Protection Regulation, which came into force on May 25 2016. Whether the regulation will still apply in the United Kingdom after Brexit has been greatly debated. This speculation was seemingly ended on December 21 2016, when the government released a report confirming its intention to apply the General Data Protection Regulation, despite Brexit.
The Brexit process is likely to be a protracted affair and – during the interim period at least – the United Kingdom will remain fully subject to EU laws, including EU data protection laws.
Businesses should still undertake their General Data Protection Regulation-readiness preparations. When it comes into effect in May 2018, the regulation will apply to every business – whether in the European Union or not – that offers goods and services to EU citizens or that monitors EU citizens' behaviour. UK businesses selling into the European Union will therefore remain subject to General Data Protection Regulation requirements, as will wider international businesses operating across the United Kingdom and the European Union; Brexit will not change this. If the United Kingdom leaves the EEA, it will effectively become a 'third country' for data protection purposes – meaning that data transfers from the EEA to the United Kingdom could be restricted in the same way as data exports from the EEA to the United States. Or, more accurately, they will be restricted unless the European Commission decides that the United Kingdom provides 'adequate' protection for data that it imports from the EEA, as is the case with countries such as Canada and New Zealand.
If the United Kingdom leaves the EEA (meaning that it will not be subject to the General Data Protection Regulation), it will need to adopt new national data protection laws (and might be tempted to adopt a 'General Data Protection Regulation-lite' regulation) or continue its reliance on the Data Protection Act 1998. The United Kingdom will need to tread carefully if it follows this path; while it might be tempted to adopt more relaxed data protection rules than the General Data Protection Regulation to attract investment from countries such as the United States, if these rules are not strict enough, it will also risk not achieving EU 'adequacy' recognition, seriously affecting data flows between the United Kingdom and the European Union.
The General Data Protection Regulation will apply to both data controllers and data processors ? which, in the franchising context, means both franchisors and franchisees. The franchisor will nearly always be the data controller of customer data, but a franchisee may be either a data controller or a data processor, depending on the arrangement between the parties. The franchisor and franchisee are usually independent data controllers (ie, they both have rights to access and use the personal data, but for their own separate purposes). A franchisee may be a data controller of customer personal data, even if the franchisor lays claim to IP rights in the data. Non-compliant businesses under the General Data Protection Regulation risk fines of up to 4% of global turnover.
EU competition law prohibits anti-competitive agreements and abuses of a dominant position. In the context of franchising, EU competition law mostly affects the following:
- Territorial and customer restrictions that franchisors wish to impose on franchisees – while franchisees can be protected within exclusive territories from active sales by other franchisees in their territories, franchisees cannot be prevented from engaging in passive sales (responding to unsolicited orders) from anywhere within the EEA. Online sales also cannot be restricted within the EEA.
- Pricing restrictions on franchisees – requiring franchisees to comply with fixed or minimum resale prices is strictly prohibited, except in very limited circumstances.
- In-term and post-term non-compete clauses – these are permitted in order to protect the know-how transmitted by the franchisor to the franchisee provided that, in the case of post-term restrictions, they are reasonable in duration and scope.
Post-Brexit, these rules will continue to apply to any franchising agreement that has or may have an effect on trade between the remaining EU member states. This could include agreements with a UK element if they cover, or could have effects in, multiple EU member states.
For UK agreements, the United Kingdom could depart from the strictures of EU competition law and adopt a more or less onerous regime. The government's intentions for competition law post-Brexit are as yet unknown. However, in the short term post-Brexit, significant change is unlikely. UK competition law, as embodied in the Competition Act 1998, is largely based on EU competition law and the case law that is based on that act draws heavily on EU case law. In the absence of major legislative change, it will take some time for any material changes of interpretation to feed through into case law once judges are freed from the need strictly to follow the EU approach.
Divergence is perhaps most likely to arise in relation to territorial and online restrictions. The EU competition law rules on territorial and online restrictions are driven by the overriding objective to promote and complete the EEA. Outside the EEA, such considerations will no longer be relevant to the United Kingdom. The UK would be open to take a more economically liberal approach and allow franchisors to offer greater territorial protection to franchisees or regain greater control over online activities. Whether this will occur remains to be seen.
The United Kingdom is party to various regulations and conventions that ensure that EU member state courts apply jurisdictional rules to determine:
- when they will accept jurisdiction over a dispute; and
- that a judgment given in one member state will, subject to certain exceptions, be enforceable in all other participating states.
Many UK-based franchisors elect for the English courts to have exclusive jurisdiction over their franchise agreements and for good reason; they are world-renowned for having a reputation of quality and for supporting the needs of modern commerce.
However, one result of Brexit could be that the United Kingdom must replace these arrangements or face the prospect of its courts' judgments becoming less effective across Europe.
It is too early and uncertain to consider whether Brexit should change franchisors' approaches to jurisdiction or forum clauses. Given the uncertainty over how Brexit will play out, it will take years for franchisors to attain any detachment from existing legal recognition or enforcement arrangements, even if that is the outcome of Brexit.
English law is likely to remain the dominant governing law for commercial contracts globally and will largely be unaffected by whether the United Kingdom remains part of the European Union. It will continue to be selected by businesses for certainty as the choice of law for most commercial arrangements.
One outcome of Brexit will be that franchisors must carefully examine the legal contracts which underpin their relationships with franchisees and suppliers.
Franchisors should audit their existing legal agreements in order to ascertain whether any express terms need to be amended or varied as a result of Brexit. For example, references to a defined territory of the European Union or the EEA will require updating to reflect the United Kingdom's new position. Equally, references to EU regulations may require amendment, depending on the application of such laws to the United Kingdom going forward.
However, perhaps of most significance is whether Brexit will frustrate areas of contractual performance or render the commercial bargain as unviable to either or both parties. This could apply to the imposition of trade tariffs on goods flowing between the United Kingdom and the European Union. It is unlikely that existing force majeure clauses could be relied on as means of terminating a contract on these grounds, but it poses the question of whether franchisors which have identified potential vulnerabilities should consider building in an express right of termination or re-negotiation to mitigate this risk. If so, careful drafting will be required around pricing mechanisms or the events which would activate the new contractual rights.
However, franchising is a long-term relationship which requires a high degree of contractual certainty – operating on shorter terms or building in unilateral or mutual early termination clauses is likely to have a detrimental impact on a franchisor's ability to attract and retain long-term franchisees which are willing to invest in its business concept. Introducing this type of flexibility is arguably more realistic in a franchisor's supply chain, which typically operates under shorter-term agreements.
This year has already brought some clarity on the process and likely look of Brexit, and – for better or worse – Brexit will undoubtedly continue to dominate the conversation over the coming months and years.
Franchise businesses should start preparing for the potential impact of Brexit by auditing their IP rights in the European Union and assessing their key contractual relationships with suppliers and franchisees. Preparations for the General Data Protection Regulation should continue and a watchful eye should be kept on events as they unfold – if the past 12 months have taught us anything, it is to expect the unexpected.
For further information on this topic please contact Gordon Drakes or Tim Rickard at Fieldfisher by telephone (+44 20 7861 4000) or email (email@example.com or firstname.lastname@example.org). The Fieldfisher website can be accessed at www.fieldfisher.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.