By Mark Abell, Bird & Bird
The decision of the United Kingdom on 23 June 2016 to leave the European Union will have a very real, but not yet fully known, impact upon all those franchisors around the world that have a presence in the UK and possibly many of those which have a presence in the rest of the EU. This will present challenges for franchise lawyers, who will need to understand the potential implications as they change and develop over the coming years and advise their franchise clients how best to deal with them.
Although the decision in the referendum was a close one, with 51.9 per cent of the voters in favour of leaving and to 48.1 per cent in favour of remaining in the EU, the new Prime Minister, Theresa May has made it clear that there will be no second referendum and that “Brexit means Brexit”.
This unexpected result has caught almost all franchisors on the hop and left them potentially exposed in respect of their business in the UK and perhaps the rest of the EU.
There is even a body of sentiment in Scotland that it should remain in the EU, and a suggestion that this could lead to another referendum on Scotland leaving the UK in favour of remaining in the EU.
However, the UK will not be leaving the EU immediately. There is a technical process under Article 50 of the Lisbon Treaty that needs to be complied with, and which will not begin until the UK gives formal notice of its intention to withdraw to the EU Council.
Wherever that process leads the UK and the rest of the EU in terms of both the process and the ongoing relationship between the EU and the UK, the withdrawal agreement must be agreed upon by a qualified majority of the Council, with consent of the European Parliament.
When Brexit does take effect, EU treaties will cease to apply to the withdrawing state from the date the withdrawal agreement comes into force or, failing such agreement being concluded, two years after the Council was notified of the withdrawal (unless the Council unanimously agrees to extend this period).
Although no one, including franchisors and their lawyers, has a crystal ball that enables them to predict exactly what will happen as a result of the Brexit decision, it is clear that when the UK leaves the EU certain things will happen that will have an impact upon franchisors in the UK and potentially the rest of the EU and franchisors.
Regardless of how the English legal system adapts to Brexit, it may provide grounds for termination of franchise agreements, depending on the specific facts and drafted terms (eg, the material adverse change or force majeure clauses in a contract). This is particularly relevant to franchise agreements that have the EU as the territorial scope. Parties might argue that a contract has become frustrated as a result of Brexit. This is of great relevance to any US franchisors that have granted master franchises for the European Union, rather than specifically named countries.
Although “Brexit will mean Brexit”, it does not mean that all of the laws impacting up franchisors in the UK will change overnight.
When the UK leaves the EU all directly applicable EU law (including treaty provisions and regulations), will cease to have legal force in the UK, unless Parliament passes equivalent domestic legislation. Directives (which are only effective once transposed into domestic UK legislation) will continue to operate, but the UK statute will no longer be required to comply with the Directive from which it derives: UK Parliament will be free to amend the legislation as it sees fit.
Secondary legislation introduced under the powers set out in European Communities Act 1972 (ECA 1972) to implement EU law will lapse when the ECA 1972 is repealed, subject to the enactment of saving provisions. Directives are likely to continue to be relevant to the interpretation of UK statutes that derive from them where there are ambiguities.
It is likely that even after Brexit the decisions of the Court of Justice of the European Union (CJEU) will continue to be persuasive in UK courts, particularly with respect to UK law derived from or harmonised with EU law. This influence will diminish over time as UK law diverges. Some UK statutes contain a requirement to interpret the legislation consistently with CJEU rulings: this requirement will remain effective after a Brexit unless and until the UK statute is amended. Depending on the UK’s new status in relation to the EU (which is to be negotiated), the UK may join the European Free Trade Association (EFTA) (and then also the Lugano Convention on Jurisdiction and Judgments) and possibly the European Economic Area (EEA).
If the UK joins EFTA and through it joins the EEA, the position in relation to many aspects of legal practice will remain unchanged. This must be a real possibility and if it is the outcome, there is likely to be less upheaval from a legal point of view.
If the more Eurosceptic vein of thought prevails, it is likely that the UK will negotiate a looser arrangement with the EU via a series of bilateral and multilateral trade agreements and/or reliance on the rules of the World Trade Association, OECD and G20, of which it will remain a member.
One thing that is clear is that if the European Parliament’s Directorate General for Internal Policy considers the need for further franchise regulation, resulting in some form of new franchise regulation in the EU, it will most probably not take effect in the UK.
However, EU competition rules will continue to apply to franchising post-Brexit although the Commission will have reduced powers, and block exemption measures at UK level will be needed. This is because the UK Competition Act currently relies on the EU block exemption regulations (which will no longer apply following a Brexit).
Disputes where the franchisor or franchisee is based in the UK and the other party is based in an EU member state are likely to be affected by a Brexit. However, there may be an even wider impact. A dispute between a franchisor and franchisee, both based outside the EU and the UK, may nevertheless be impacted by a Brexit if the subject matter of the dispute is in the UK.
The Brussels Regulation currently governs jurisdiction and the enforcement of judgments within the EU. The Lugano Convention sets out very similar rules, so if the UK becomes a signatory to this convention post-Brexit little will change. Otherwise, the position will depend on negotiated bilateral and multilateral agreements with other countries, or the possible ratification by the UK, in its own right, of the Hague Convention on Choice of Court Agreements (which the EU has ratified).
It is likely that EU rights, such as registered and unregistered community designs and EU trademarks (EUTMs) (formerly referred to as Community Trade Marks or CTMs), will no longer have effect in the UK and there will be questions about what will happen to the “UK portion” of such rights obtained before Brexit. If existing rights automatically reduce in geographical scope to exclude the UK their value will diminish, which will have a commercial impact on the rights holder. This is something that US franchisors with EUTMs need to keep an eye on as it may at some point mean that they have to reapply for some of their trade marks in the UK.
There is also the issue that some US franchisors have EUTM registrations but only use their marks in the UK. Once the UK no longer forms part of the EU these EUTM registrations could be vulnerable to attack for non-use. US franchisors in this situation would have to consider expanding their use in the EU to defend their EUTM registrations and/or consider filing independent national UK applications which would survive any possible future demise of their EUTM based on non-use.
Franchisors with a presence in the UK should audit their workforce in terms of immigration status, considering applications that could be made now (eg, for permanent residency), and communicate with concerned employees. In the longer term, if and when the government proposes that laws be amended or repealed, employers should also review employment contracts (with a view to addressing any unenforceability risks that might arise), policies, procedures and benefit schemes, and check any European Works Council arrangements.
Changes to immigration laws in relation to EU citizens currently living and working in the UK could have a substantial impact on your franchisee’s employees, particularly in the food and beverage and hospitality industries.
Various EU provisions are likely to come into force in the UK before a Brexit takes place. These include the General Data Protection Regulation (GDPR), due to come in force on 25 May 2018; the Network and Information Security (NIS) Directive (Cyber Directive), likely to be implemented by Spring 2018; and a new directive for the police and criminal justice sector that must be transposed by member states by 6 May 2018.
Post-Brexit, any US franchisor that processes or monitors EU citizens’ personal data in connection with its offer of goods, services or monitoring activities, or has a group company or staff operating within the EU, will still have to comply with the GDPR. The extent to which the GDPR will be adopted in the UK will depend heavily on the type of relationship the UK adopts with the EU. However, it seems likely that either the GDPR or a law that looks very like it will be required in the UK given that the UK’s current law is in need of refreshment (it is nearly 20 years old) and given the way that EU data transfer laws operate.
The UK will wish to continue to trade with the EU post-Brexit; therefore closely comparable data protection and cybersecurity laws in many areas will be necessary to avoid barriers to trade.
US franchisors with franchisees in other EU member states will need to be very careful to ensure that they comply with EU data protection and cyber security laws even after Brexit.
Franchisors with a large number of commercial contracts, particularly with entities within the EU, should consider in due course auditing these contracts to determine the effect Brexit will have on rights and obligations under these agreements.
The commercial impact of the cost of increased trade barriers between the EU and the UK could have an adverse impact for some franchisors with networks based in the UK and covering other EU member states due to, for example, the impact of the restriction of free movement of persons and monitoring of currency fluctuations.
The one thing that is certain about Brexit and its impact on franchisors at the moment is that nothing is certain. However, franchisors must keep a watching brief as various areas of law develop in response to the political changes that look likely to take place over the next two years or so. Bird & Bird will be providing an ongoing review of the impact of Brexit on franchising as matters develop. Any franchisor wishing to be kept appraised of relevant issues should contact email@example.com.