Research: Trends & Conclusions

With the benefit of over 17 years of research, encompassing tens of thousands of votes from clients and private practitioners, as well as hundreds of hours of interviews with legal professionals around the world, Who’s Who Legal offers an overview of the recent trends and developments in the global franchise legal market.

Franchising has become a worldwide phenomenon despite the ups and downs of the global economy in recent years. In fact, poor markets at home have resulted in many brands expanding farther afield into new markets in Asia, the Middle East and Africa, a trend that has continued over the past year. M&A activity has really picked up for franchisors and large multi-franchisee units, meaning that while overall volume of work for practitioners might still be below pre-recession levels, “there are definite spikes that are meeting those levels.”

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US lawyers reported the most notable uptick in M&A activity, which they directly link to their country’s rebounding economy. Many franchisors are now in “big growth mode”, seeking to expand via acquisitions, while others want to gain liquidity through selling. Franchise systems are going for more money than ever before due to low interest rates, cheap debt, the availability of bank financing and well-capitalised buyers. Strategic investors, buyers and private equity firms are all chasing deals and, as one practitioner explained, “If you have a strong brand it’s a sellers market; the money is there, it has to be spent, and legacy brands with good track records are appealing.” With competition for such brands becoming heated and a desire for better returns, investors are now also looking to less established brands that are poised for growth and large multi-unit franchisees.

Lawyers with transactional expertise are highly sought after for advice on the merging or expansion of systems. Those in full-service firms are working more closely than ever before with their M&A teams and specialist outfits have reported a stream of work, particularly in due diligence. More than ever, there is a realisation that individuals with franchise expertise are needed on deals and this has resulted in many firms growing the transactional side of their practice to cater to demand. This bodes well for franchise practices at larger corporate firms, which some had suggested might be dying out, as the need for their expertise and cross-referrals is making them “much more than just an add-on”. Practitioners at both full-service and specialist firms commented on the renewed vigour with which larger firms are embracing this area and the healthy competition this has created in the legal market.

Demand for outside counsel has also increased due to the involvement of private equity firms in this sector. Private equity is a “very different animal” to the traditional sources of financing, with different expectations and often a lack of understanding of the franchise model, notably regarding the strength that franchise agreements give the franchisee, which is often something private equity investors only realise once they try to instigate changes. Thus, alongside the many opportunities that private equity capital is providing – including sponsoring franchisors and providing them with cash to get off the ground or expand – it is also bringing more challenges. This is benefiting experienced franchise lawyers through increased demand for their advisory and dispute resolution expertise.

With deal flow up and improved economic conditions, levels of litigation are rising correspondingly. Since much of the time issues only come to the fore post-merger, practitioners are expecting to see the volume of contentious work continuing to increase over the next year. Those we spoke to cite “competition issues” when the buyer already owns a competing business, as the major source of contention arising from transactions. Non-compete, termination and performance-related problems also continue to yield solid levels of litigation. More recently IP, technology, advertising and marketing issues are increasingly being disputed, with the latter largely originating from the franchisee side with claims of mismanagement or misrepresentation. A burgeoning use of contractual limitations periods in agreements, which limit the time in which a franchisee must assert claims that it may have against the franchisor, is also partly responsible for this uptick as the time pressure incites franchisees to act on issues that otherwise might have worked themselves out. 

The trend for the elimination of “exclusive territory” in agreements is also resulting in more complexity in the drafting and negotiation of contracts; it is also having an impact on litigation levels. Franchisors are increasingly reserving the right to market, distribute and sell their brand through alternative distribution channels (for example, online or in supermarkets) and in captive markets (airports, hotels, hospitals, etc). As they are peddling the same goods as the franchisee, this is eroding the notion of exclusive territory for the franchisee and is resulting in more complex and protracted negotiations when it comes to drafting agreements. This in turn is resulting in a greater demand for legal counsel by both sides and also in some cases in disputes work. Succession planning is another matter on which practitioners report increased levels of consultation; as populations (and thus franchisee owners) age and begin to “cash in their nest eggs” lawyers are being called upon to create smooth succession strategies so that the individual franchisee can be removed from the business and their rights transferred to a new owner; however, so far this has not been a source of contentious work.

Overall franchisee-driven litigation appears to be growing, with the US and Canadian franchisee bars becoming ever more sophisticated. However, in Canada we have heard reports of a “cooling down” of class actions following a flurry of attempted cases in the past few years. According to our sources franchisors are now fighting back with greater force rather than settling. The impact of the Tim Hortons case, where the franchisor “decimated the group and won on everything” has further dampened the enthusiasm of the franchisee bar and resulted in very few new class actions being launched. However, the General Motors class action regarding disclosure agreements is scheduled to go to trial in September and everyone is watching with huge interest as the outcome will undoubtedly resonate in the market and could potentially re-invigorate the franchisee bar.

In the US, the rapid pace at which franchisee associations have sprouted up over the past couple of years has certainly resulted in more work for franchisee practitioners as many have been called upon to represent them. Unsurprisingly, many franchisors still prefer to deal with the franchisor-controlled franchise advisory council, where members can advise but have no right to make changes in the system or veto franchisor decisions. In contrast, independent franchise associations are not subject to control and have the legal standing to perform certain actions, including bring lawsuits. According to our sources, this development has increased the strength of the franchisee with regard to the franchisor, allowing them to “talk with them from a position of strength and make themselves heard”. In many instances this results in an improved relationship between the two; however, it also presents another opportunity for litigation, as shown by the Edible Arrangements Independent Franchisee Association’s filing of a lawsuit against their franchisor.

In the UK and certain European countries we have also heard reports of an uptick in cases instigated by franchisees as they have become aware of their rights and more proactive in seeking legal counsel. However, given the much smaller size of these jurisdictions in comparison with those in North America, lawyers are representing both sides, though obviously not in the same system, and the development of a separate franchisee bar is not expected. This bodes well for pre-existing franchise practices as the area is hard to break into, according to those already active in it, and thus work emanating from this side is likely to go to established players.

Litigation levels could be set to increase further if the trend of franchisors “falling out of love with arbitration” continues. According to our US sources, franchisors are put off by the fact that decisions in arbitration are binding and class suits are not necessarily being avoided as class arbitrations can be bought in some instances. This development has been highlighted by the Fantastic Sams case, which has demonstrated the importance of “no class action” clauses or explicit phrasing indicating that arbitration should be of “individual claims only” in agreements. Previously the Stolt-Nielsen decision implied that silence in an agreement provided protection, whereas now this is no longer a given. This is one reason why, more than ever, outside counsel is being sought when drawing up franchise agreements, and the agreements themselves have become more complex and comprehensive. As one individual explained, “Previously clients might update or tweak agreements used before, in some cases with the original document drawn up several years earlier; however, there is the dawning realisation that doing it yourself without specialist legal advice can be disastrous.”

The hot regulatory topic of the past year was undoubtedly the ongoing debate in the US as to whether a franchisee should be regarded as an employee and the degree of liability of the franchisor for the franchisee’s actions and employees. Those we spoke to stated their dismay at the ignorance or disregard of judges and authorities towards the basic nature of the franchise relationship. Some recent decisions, notably the Coverall and Jani-King cases where the Massachusetts’ court found that franchisees should be deemed employees, have shaken the sector. With further cases pending in this state and California practitioners are hoping that “the courts get it right” or else the repercussions could be profound.

The most recent case drawing attention to this issue was the National Labor Relations Board (NLRB) recent decision against McDonald’s. The NLRB held the franchisor accountable as a “joint employer” for violating the rights of the franchisees’ employees and this ruling demonstrates the dangers for franchisors of becoming too involved in union or labour-related activities. There is very real concern among practitioners that the franchise model is being undermined, with negative consequences for both sides. There would be additional expenses and obligations on the franchisor and the possibility of unionisation which would radically alter the relationship. For the franchisee it would affect their control of their business and could overall negatively impact the economy, with fewer new businesses under the franchise model being launched, which would result in reduced job growth across the country as franchisees are key providers of employment. Therefore, the implications of this debate are far-reaching.

Practitioners in jurisdictions around the globe are watching to see how this issue plays out as more cases and decisions are expected in the year ahead. In the short term these cases are resulting in a steady stream of work for practitioners at both the franchisor and franchisee bar; however, there is huge concern that if the notion of the franchisee as an employee becomes widely accepted, franchise will no longer be a preferred model of expansion and the landscape of this whole sector, and its legal market, would radically alter.

International expansion and the adoption of the franchise model in new industries were two notable positive trends for this sector and for the legal market, as growth both geographically and into less traditional sectors has naturally resulted in a higher demand for franchise lawyers. With the saturation of the US and European markets by many well-known brands, especially in the food and beverage industry, franchisors have been looking further afield in recent years. South East Asia, the Middle East, South America and Africa are particular regions of interest; in short, anywhere with a growing middle class and GDP and/or those countries that particularly embrace Western brands. Entering new jurisdictions can be challenging with local laws, lack of infrastructure and supply chains, political instability and corruption all potentially posing problems. Corporate counsel we spoke to all emphasised their awareness of the importance of strong local legal knowledge as soon as they have identified their new target market.

This move into unchartered territories has benefited both international outfits that boast extensive global coverage and practitioners in local markets. As one international expert explained “Our added value to clients is that we have specialists in multiple jurisdictions around the world.” Bird & Bird is an example of one such firm; for the first time, it is singled out in this area due to the high number of lawyers it has listed, with two new inclusions this year from its Warsaw and Singapore offices. Following its appointment of London lawyer Mark Abell to the newly created position of head of franchising, licensing and multi-channel strategies, the firm has focused on building an international team with practitioners in its offices around the world in order to cater the increasingly global nature of franchise work and clients’ moves into new markets. Similarly, other heavyweights such as DLA Piper and Dentons have maintained their market-leading positions in this field, which is in no small part due to their worldwide coverage.

However, specialist outfits have their own advantages: they are more competitive on pricing as they do not have the overheads of their larger counterparts, and they can select their own local counsel. Many we spoke to feel that this freedom of choice of local counsel is key as they can go to someone who has genuine franchise experience and in-depth knowledge of local regulations, language and customs. As one source explained, “Very few full-service firms have franchise experts at all their outposts as it is not a big enough area in terms of revenue and workload for this to be viable, and often their lawyers might be foreign rather than local practitioners. We feel we have an edge by being able to select whoever we know to be the best, rather than someone who dabbles.” This approach by the specialist firms in the US and Europe has undoubtedly resulted in a growing franchise bar in certain jurisdictions as it becomes more sophisticated to meet their demands and the needs of their clients. 

 

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This is borne out in our research as the percentage of lawyers that we recognise from the Asia-Pacific and Middle East and Africa regions has increased year-on-year since 2012, as shown in the chart. Furthermore, the proportion of lawyers from the Asia-Pacific region is potentially on track to equal or even overtake those from Europe if this development continues.

Another factor benefiting the Asian franchise legal market is that several countries have implemented more onerous regimes regarding registration and disclosure in recent years. China adopted new filing and disclosure rules in 2012 and this year Korea bought in major amendments to its Fair Transactions in Franchise Business Act. This tighter regulatory environment has not put franchisors off the lucrative Asian market; rather, it means that the demand for those with international franchise expertise, as well as local counsel with experience of navigating issues in this sector, is greater than ever before. As a result, we are expecting the number of lawyers from this region to continue growing for the foreseeable future as global firms boast their presence here and more domestic players enter the arena.

Similarly, we are expecting more individuals from the Middle East and perhaps for the first time a strong contingent from Central and West Africa to develop. With the United Arab Emirates considered a regional hub, Qatar hosting the 2022 World Cup and Saudi Arabia’s large population, all three hold great appeal. Western brands across the food and beverage, hotel and retail sectors have all proved popular so far and practitioners are forecasting that more brands will enter and expand across the region. Practitioners in these countries also reported a strong interest in more flexible systems of expansion by franchisors, with combinations of master franchising, direct licensing and/or area development agreements also being used.

This shift away from “Mom and Pop” franchisees is resulting in highly sophisticated franchisees that are in many cases playing an increasingly integral role in the growth of the system. We have even heard reports of joint ventures between franchisors and franchisees or franchisees buying shares in the parent company, which is a real change from the traditional franchise concept. As one Middle East source explained, “Often the franchisees in this region have more money and more influence than the franchisor, so it is not surprising they are having a greater impact on the system’s development than we are used to seeing in North America or Europe.” This potential blurring of the lines in the relationship calls for much more sophisticated legal counsel on both drafting agreements and disputes within the relationship.

Africa has emerged over the past few years as “the new frontier for franchise”. Although South Africa has been a popular jurisdiction for some time, it is increasingly being seen as a stepping stone to the “huge unlocked potential” of the rest of the continent. Currently it is home to five of the world’s top 12 fastest-growing economies and boasts a developing consumer market due to an emerging middle class – thus, unsurprisingly “Afro-optimism” is hitting franchisors. Yum! Brands has been eyeing up Ethiopia as a potential new market for KFC following its very strong performance in Zimbabwe, while Angola, Ghana, Nigeria and Zambia are also areas of focus. Practitioners we spoke to expect more brands to follow suit, with those already in South Africa expanding across the continent and those with no African presence launching in South Africa and/or Middle East and then going on from there.

However, despite Africa’s huge potential it also presents sizeable challenges, not least due to the global nature and increasingly strict enforcement of the UK Bribery Act and US Foreign Corrupt Practices Act. Top-quality legal counsel is in high demand and international outfits have increased their presence on the continent in recent years through new offices, mergers and associations. There has also been a maturing of local legal markets in jurisdictions such as Nigeria and Ghana, with practitioners becoming increasingly specialised in particular practice areas, including franchise. Those embracing the opportunities and risks of the continent are well catered for and we expect the presence of lawyers from this region in our research to grow.

With the traditional franchise-friendly industries seeking out fresh markets, new concepts and industry sectors are utilising the franchise model in the more mature jurisdictions of North America and Europe. The current hot sectors include fitness and health, driven by the ageing population on both continents. With the youngest section of the baby-boomer population now over 50, there has been an uptick in concepts relating to companion care, assisted living, in-home care and transportation in order to meet demand. There is also increased concern with fitness, health and longevity, which has translated into franchises such as fitness classes, 24-hour gyms and massage services. These new areas, alongside a more general rebound in franchising due to recovery from the financial crisis, has meant that domestic work continues to keep practitioners busy.

The legal market in the established franchise jurisdictions of the US and Canada remains largely stable, with a good mix of both international and specialist firms. In the UK there has been quite a lot of movement in recent years although the individuals doing the work have not significantly changed. There has always been healthy competition in the more sophisticated legal markets, with both those at boutiques and global firms believeing this is positive as it “keeps everyone on their toes and all our practices vibrant”. As with every other area, there is pressure on legal fees and clients are keeping more “mundane” work in-house. This has been a trend for some time, though; leading lawyers and firms have long adopted a more flexible approach to fees and improved their efficiency. The realisation that they need to emphasise where they can bring value to clients in order to remain competitive is nothing new for top-tier firms.

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For the moment franchising remains the preferred model of expansion for many businesses, and with established brands seeking new markets while new concepts expand in more mature markets, private practitioners remain in high demand. However, the debate in the US regarding the franchisee as an employee and franchisor liability has the potential to radically alter this area. Brands and lawyers around the world are waiting to see how this will play out as the next few years will be crucial for the future of this sector. 

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Nominees have been selected based upon comprehensive, independent survey work with both general counsel and private practice lawyers worldwide. Only specialists who have met independent international research criteria are listed.

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