Stephen Giles of Norton Rose Australia traces the development of franchising culture in the Asia-Pacific region and the differing regulatory approaches adopted to cover trademarks, contracts, technology transfers, competition and investment restrictions.
The Asia-Pacific region has enthusiastically embraced franchising. Indeed many of the developing economies of the Asian region are experiencing the exponential growth of franchising seen in the United States in the 1980s and 1990s.
Population growth and economic development in the Asia-Pacific region is likely to drive high levels of demand for goods and services over the next decades. As has been the case in other Western countries, franchising is fast becoming the preferred means of establishing retail and distribution networks in the region. Indeed in Australia (1,100 franchise systems) and New Zealand (460 systems) it is already the dominant means of distribution, with those two countries able to lay claim to the most franchised nations in the world per head of population (source: the World Franchise Council. For more details see “Go East Young Franchisor: Franchising in the Asia Pacific Region”, Loewinger, Giles and Sakr, American Bar Association Forum on Franchising, October 2011). Franchising in China is in its infancy, yet China still reports currently having 4,000 franchise systems. South Korea has 2,400 systems and Indonesia 1,475 (source: the World Franchise Council). The phenomenal growth of franchising is illustrated by the fact that there are over 1.5 million franchised outlets in Asia Pacific (sourced from the World Franchise Council). Most franchise systems in each country are home grown rather than imported.
Early fears that franchise regulation would stifle the growth of franchising in Asia-Pacific have been unfounded. Indeed the specific regulatory frameworks established in many Asian countries have given franchising credibility, and appear to have avoided some of the excesses that led to the regulation of franchising in the US. In countries like Malaysia and Singapore, governments explicitly encourage franchising through a range of incentives, as they see franchising as an excellent mechanism to educate, train and empower local people.
There are a variety of models for franchise regulation in Asia. The regulatory environment runs the gamut from no regulation and a quite laissez-faire approach to franchise-specific legislation with stringent registration requirements. There is almost every permutation in between. There are conceptual similarities between most of the regulated markets, with prior disclosure a common element, but the detail as to the nature of disclosure and the other elements of the regulatory framework is remarkably different. No two countries are sufficiently alike to provide any real efficiency for a foreign franchisor, and few of the laws are sufficiently straightforward to obviate the need to obtain specific advice from local counsel on the practical application of the law.
India, Hong Kong, Singapore, New Zealand, the Philippines, Thailand and Japan have adopted a laissez-faire approach, but they are in the minority. And even in some of these markets, notably New Zealand, the Philippines and to a lesser extent Japan, industry codes of conduct have become a form of de facto regulation. Other countries have been quite prescriptive, with Australia, China, Indonesia, Malaysia, South Korea and Vietnam moving well beyond basic prior disclosure to regulating the franchise relationship and other elements in their legislative frameworks. Macau and Taiwan favour a disclosure-only model, whilst Kazakhstan stands alone as having franchise relationship requirements, but no disclosure obligations.
India, Hong Kong, Singapore and Thailand have no specific franchising regulation, and take a minimalist approach to legislative intervention in franchising matters, although India and Thailand have more restrictive foreign investment laws that can significantly impact international franchising. Franchising legislation is under consideration in Thailand. The Philippines and New Zealand have voluntary regimes conditional upon optional membership of the franchise associations, whereas Australia, China, Indonesia, Kazakhstan, Macau, Malaysia, South Korea, Taiwan and Vietnam have more comprehensive regulatory frameworks. Japan sits in between, with some regulatory requirements as well as having a code of ethics specified by the Japan Franchise Association. There are conceptual similarities among the regulatory regimes, but it is quite striking how each country has taken a different approach to the regulation of the franchise sector.
Nowhere is local counsel input more important than in the Asia-Pacific region. Although there are conceptual similarities with US franchise regulation, the detail can be quite different. It is usually not possible to use a franchisor’s US disclosure document, and there are often provisions in a typical US franchise agreement that will need to be modified before that document can be used in the Asia-Pacific region. In some countries, such as Indonesia, the franchise agreement must be in the Indonesian language. Registration requirements exist in China, Malaysia, Indonesia and South Korea. In countries such as Thailand there can be significant differences between franchising law and franchising practice. In China and South Korea there are quite prescriptive requirements before a franchisor can commence franchising. In Australia certificates concerning the obtaining of legal and business advice must be provided by a franchisee to a franchisor prior to signing the franchise agreement, and there is a mediation-based dispute resolution process that is mandatory once either party to a franchise agreement elects to use it. Malaysia and Australia have cooling-off periods where franchisees can change their mind and receive a refund of monies paid less reasonable costs. China has a very extensive registration and establishment process.
Trademark and intellectual property protection is an important first step for all franchisors contemplating international expansion. Although most countries have taken significant steps to improve their intellectual property regimes, enforcement can remain challenging in some parts of Asia. Perhaps more importantly, it is critical to understand that there are differences between applicable trademark regimes that need to be considered. The most critical distinction is between those countries that adopt a system that grants protection based on “first to register”, and those that base protection on the concept of “first to use”. Australia Hong Kong, India, Malaysia, New Zealand and Singapore have a first-to-use system, whereas China, Indonesia, Japan, Kazakhstan, Macau, the Philippines, South Korea, Taiwan, Thailand and Vietnam have a first-to-file regime. In first-to-register jurisdictions foreign owners of intellectual property need to more actively protect their intellectual property, as failure to register can be fatal to the use of the trademark in some countries.
There are a variety of laws other than franchise-specific laws that affect franchise arrangements in the Asia-Pacific region. Aside from trademark laws, these include technology transfer laws, competition laws, investment restrictions, laws affecting currency repatriation, tax laws, and dispute resolution laws. There is also a host of bilateral treaties and multilateral conventions that apply. (For more information, see Fundamentals of International Franchising, edited by Richard M Asbill and Steven M Goldman, ABA Press, 2001.)
Franchising throughout Asia has significant pitfalls. In many countries the franchise agreement will not be paramount, with franchise relationship laws or, in some cases, direct government intervention possible. Foreign franchisors need to appreciate that the legal systems throughout the Asian region can be fundamentally different not just in sophistication, but in underlying structure. For example Australia, Hong Kong, Singapore and New Zealand have legal systems based on the English common law, and underpinned by democratic principles and values. Some other countries in the region are not democracies, so the legal system and bureaucracy is an extension of the state. Alternatively, the legal system may be based on the European inquisitorial model, and give greater emphasis to substance over form. The judiciary may not always be as independent or unbiased as might be desired, and corruption can be a major problem.
There are numerous logistical challenges to doing business in some parts of Asia, and language and time differences and personal security concerns can add complexity to the franchise relationship. Currency fluctuations and foreign investment regulations may impact on financial returns. There are political and business challenges, cultural and religious differences and a raft of legislation and bureaucratic processes that require navigation. Each country is quite different, and it is not possible to take a homogenous approach to the region. Market entry needs to be considered on a country-by-country basis.
Despite these challenges, more and more franchise systems are expanding into the Asian region. There is little doubt that many of the major opportunities for franchising lie in the emerging markets of the Asia-Pacific region. While Europe and North America remain affected by the consequences of the global financial crisis, most of the Asian economies are growing strongly. The demand for goods and services from the increasingly affluent middle classes will fuel strong economic growth for the next decades. Although each Asian market has its regulatory challenges, all can be navigated without major concerns with the assistance of experienced legal counsel.