International
Franchising
Newsletter of the International Bar Association Legal Practice Division
VOL 19 NO 2 SEPTEMBER 2015
IN THIS ISSUE
From the Co-Chairs
4
From the Newsletter Editors
5
Committee officers
6
IBA Annual Conference, Vienna,
4–9 October 2015, International Franchising
Committee sessions
Contributions to this newsletter are always welcome
and should be sent to the Newsletter Editors,
Jeffrey Brimer and Luciana Bassani, at
[email protected] or lbassani@
dannemann.com.
International Bar Association
7
4th Floor, 10 St Bride Street
London EC4A 4AD, United Kingdom
Tel: +44 (0)20 7842 0090
Fax: +44 (0)20 7842 0091
Conference reports
www.ibanet.org
31st Annual IFA/IBA Joint Conference, Chicago,
5–6 May 20159
Plenary sessions
© International Bar Association 2015.
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or transmitted in any form or by any means, or stored in any
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copyright holder. Application for permission should be made to the
Director of Content at the IBA address.
• Plenary I – Tax Issues in International Franchising
for Dummies9
• Plenary II – News from Around the World11
• Plenary III - Supply Chain Issues12
Luncheon Panel Discussion – New Challenges for
Outside Counsel in the Client Relationships14
Workshops
• Workshop I – Good Faith in Franchising16
• Workshop II – Corporate Counsel Focus:
Hot Topics in International Franchising17
• Workshop III – International Mergers and
Acquisitions of Franchise Companies18
Articles
The implied duty to act in good faith in franchise
agreements: the takeaways from the Canadian case
Bertico Inc v Dunkin’s Brands Canada Ltd20
Franchising in Japan26
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Advertising
Should you wish to advertise in the next issue of the
International Franchising Committee newsletter please
contact the IBA Advertising Department.
[email protected]
A collision course? Navigating the intersection of
franchisor controls and joint employer liability28
This newsletter is intended for lawyers interested in
the field of international franchising. Views expressed
are not necessarily those of the International Bar
Association.
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
3 FROM THE CO-CHAIRS
From the Co-Chairs
IBA Annual Conference, 4–9 October 2015,
Vienna, Austria
You are receiving this newsletter before the
IBA Annual Conference, which will be taking
place from 4–9 October 2015 in Vienna,
Austria. The beauty and the historical and
cultural interest of the city will undoubtedly
attract a large number of attendees to the
Conference. The IBA expects that it will be,
as has been the case for a number of years, a
great success. Please check the IBA webpage
www.ibanet.org/Conferences/Vienna2015
for full information on the Conference,
including programme, registration,
accommodation and social activities. Please
remember that it is not easy to find last
minute accommodation at the IBA Annual
Conference so, if you have not done so
already, register as soon as possible.
The officers of the International
Franchising Committee have worked hard
to organise what we believe should be
very interesting programmes during the
Conference. We will start with the ‘Hot
topics’, a joint section programme (along
with the International Sales Committee and
Product Law and Advertising Committee)
that is very popular and allows attendees
to participate in three (out of seven)
lively roundtable discussions. This year
we wanted to discuss franchising together
with commercial agency and distribution
agreements and we will do that in two
plenaries: the first one focuses on the age-old
question of applicable law and jurisdiction,
and the second one deals with the three types
of agreements as potential alternatives when
structuring business expansion in Europe.
We will also have a plenary session on joint
liability for franchisors where we will discuss
employment, vicarious and other scenarios
of potential liability for franchisors. We
thank the Litigation, International Sales and
Employment Committees for supporting
our Committee on these plenaries. We find
that cooperating with other committees
in our programmes is a great way to bring
knowledge and networking possibilities into
our programmes. And, of course, we will
have our perennial ‘News from around the
world’ session which focuses on Argentina,
Austria, Canada, China and the Netherlands.
4 Members of the audience will be invited to
provide short updates on developments in
their countries.
We will have the Committee Open
Business Meeting on Monday 5 October,
right after our afternoon session. We
welcome all the Committee members to
attend this meeting and encourage you to do
so. We will discuss any ideas that you would
like to share regarding the format and topics
of our sessions, as well as any suggestions
regarding our present and possible future
activities. The input from our members is
essential to make sure that the Committee
leadership is working in line with you and
to find new ways to satisfy our members’
expectations and to help you obtain more
benefits from your membership.
Please note that the Committee dinner will
be on Wednesday 7 October, at the charming
Artner restaurant. Our dinner is a wonderful
opportunity for business networking but
also a way to enjoy friendship and wonderful
Austrian food during a lovely evening. Don’t
miss it! Note also that the International Sales,
Franchising and Product Law Section dinner
will be on Thursday 8 October at the Hansen
Restaurant, another fantastic event to meet
and strengthen personal connections.
Please contact any of the officers of the
International Franchising Committee if you
would like to have any specific information
on our activities during the IBA Annual
Conference. Our Vice-Chair Karsten Metzlaff
is the Conferences Quality Officer and he
would like to hear your ideas and comments
regarding ways to improve the conferences
that we organise every year.
The IBA/IFA Conference, which this year
took place in Chicago last May under the title
‘New Frontiers in International Franchising’,
was well attended and we are proud to
have received very good feedback from the
attendees. You can read the reports about our
sessions in this newsletter.
Please get in touch with our Co-Editors,
Luciana Bassani and Jeff Brimer, if you would
like to contribute to a forthcoming issue of
this newsletter. They may also contact you to
ask for your cooperation in reporting about
our sessions during the Annual Conference
or to provide ideas for articles. Contributing
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Andrew
Loewinger
Nixon Peabody,
Washington, DC
aloewinger@
nixonpeabody.com
Rocío Belda
de Mergelina
J&A Garrigues, Madrid
rocio.belda@
garrigues.com
FROM THE NEWSLETTER EDITORS
to the newsletter is a good way to become
involved in our activities.
If you are not a member of the
International Franchising Committee,
please contact our Membership Officer, Jane
LaFranchi, for information on how to join.
And, finally, on a bittersweet note, this
will be Andrew’s last newsletter for the
International Franchising Committee as he
completes his term at the end of the 2015
Luciana Bassani
Dannemann
Siemsen Advogados,
Rio de Janeiro
lbassani@
dannemann.com.br
Jeffrey Brimer
Law Office of Jeffrey
A Brimer, Denver
jeff.brimer@
jabrimerlaw.com
calendar year. Andrew has found his work
for the Committee extremely rewarding,
particularly from meeting so many wonderful
members and participating in so many highly
stimulating discussions on international
franchise issues. He is heartened by the strong
Committee leadership that has been assumed
by Rocío Belda de Mergelina, Karsten
Metzlaff and Larry Weinberg.
We look forward to seeing you in Vienna.
From the Newsletter Editors
In this edition of the IBA International
Franchising Committee newsletter
This edition includes reports on the
programmes presented at the 31st Annual IBA/
IFA Joint Conference, entitled ‘New Frontiers
in International Franchising’, which was held
on 5–6 May 2015, in Chicago, Illinois. Rocio
Belda de Mergelina and Andrew Loewinger,
the Co-Chairs of the International Franchising
Committee, chaired the Conference. We have
also included three feature articles.
We begin with Terry Kim’s report on the
first plenary session: Tax issues for international
franchising for dummies. Terry’s report notes
the importance of tax issues in structuring
international franchise agreements. Ted
Pearce reports on the second plenary session
– News from around the world. Ted’s report
covers recent developments in Argentina,
Australia, the United States, Canada and the
Ukraine. Shannon McCarthy reports on the
third plenary session – Supply chain issues.
Shannon noted the differences in purchasing
issues in Canada, the European Union and
the United States. Cristobal Porzio reports
on the luncheon session – New challenges for
outside counsel in the client relationship. The
Conference also included three concurrent
interactive workshops. The workshop reports
were prepared by the Session Chairs: Melissa
Murray reported on Workshop I – Good faith
in franchising; Jane LaFranchi reported on
Workshop II – Corporate counsel focus: hot topics
in international franchising; and, Jeffrey Brimer
reported on Workshop III – International mergers
and acquisitions of franchise companies.
Our feature articles focus on several
developments in Canada, Japan and the United
States. Jean-Philippe Turgeon and Stéphanie
Destrempes prepared an article entitled
The implied duty to act in good faith in franchise
agreements: the takeaways from the Canadian
case Bertico Inc v Dunkin’s Brands Canada Ltd.
This article discusses the background and
implications of the Quebec Court of Appeals
unanimous decision upholding claims by
Dunkin’ Donuts franchisees in Quebec that
their franchisor owed explicit and implied
obligations to provide franchisees with the
continuous collaboration and support that
they legitimately expected to protect and
enhance the brand, maintain high and uniform
standards within the franchise system and
generally preserve the integrity of the franchise
system as a whole.
Aoi Inoue’s article, Franchising in Japan
– relevant legislation and disclosure obligations,
discusses the growth and impact of franchising
on the Japanese economy and the legislative and
disclosure obligations imposed on franchisors.
Our final article, by Kerry Bundy and
Nick Rotchadl, A collision course? Navigating
the intersection of franchisor controls and joint
employer liability, discusses the challenges to
the franchise model resulting from litigation
brought by franchisees and regulatory actions
taken by the US federal government trying
to assert that certain franchise relationships
are actually employment relationships. They
note how some of the very core concepts
in franchising – the need for controls and
uniformity – are being used to assert joint
employer liability on franchisors.
Finally, we want to thank Andrew
Loewinger, whose term as Chair ends at the
end of this year, for his contributions to the
International Franchising Committee. In
addition to serving as Chair and Co-Chair,
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
5 COMMITTEE OFFICERS
which involved chairing the programmes
sponsored by the Committee at the IBA
Annual Conference and the IBA/IFA Joint
Conferences, Andrew has also served as
Vice-Chair of the Committee and Editor of
this newsletter. He led the effort to move
the Committee to a Co-Chair format and
agreed to serve an extra year as Co-Chair
to make sure that process worked smoothly.
Andrew will continue to be one of the
leading international franchise attorneys. I
am sure we will continue to see him at our
programmes and conferences and that he will
continue to contribute to the Committee in
many ways.
We look forward to seeing you at the IBA
Annual Conference in Vienna, Austria. Our
next edition of the Newsletter will be published
before the 32nd Annual IBA/IFA Joint
Conference, which returns to Washington, DC
on 17–18 May 2016. Please reach out to us in
Vienna or send us your ideas and suggestions
for articles for the next edition of the newsletter.
We appreciate your suggestions, even if you do
not want to write the article. If it is a good topic,
we will find an author. We especially welcome
articles on new developments in your country
and the impact of new or amended franchise
regulations. Our contact information is below.
Committee officers
Co-Chairs
Andrew Loewinger
Nixon Peabody, Washington, DC
Tel: +1 (202) 585 8855
Fax: +1 (202) 829 9262
[email protected]
Rocío Belda de Mergelina
J&A Garrigues, Madrid
Tel: +34 (91) 514 5200
Fax: +34 (91) 399 2408
[email protected]
Vice-Chair and Conference
Quality Officer
Karsten Metzlaff
Corporate Counsel Forum
Liaison Officer
Tao Xu, DLA Piper, Reston
Tel: +1 (703) 773 4181
Fax: +1 (703) 773 5086
[email protected]
Membership Officer
Jane LaFranchi
Marriott International, Bethesda
Tel: +1 (301) 380 9072
Tel: +1 (301) 380 6727
[email protected]
Website Editor
Jae Hoon Kim
Lee & Ko, Seoul
Tel: +82 (2) 772 4440
[email protected]
[email protected]
Publications Officer
Wun Lap (‘Dominic’) Hui
Ribeiro Hui, Shanghai
Tel: +86 2160 3202
Fax: +86 2537 7636
[email protected]
Vice-Chair
Larry Weinberg
Cassels Brock & Blackwell, Toronto
Tel: +1 (416) 860 2987
Fax: +1 (416) 640 3043
[email protected]
Newsletter Editors
Luciana Bassani
Dannemann Siemsen Advogados,
Rio de Janeiro
Tel: +55 (21) 2237 8943
[email protected]
Noerr, Berlin
Tel: +49 (30) 2094 2067
Fax: +49 (30) 2094 2094
Secretary
Francesca Turitto
Roma Legal Partners, Rome
Tel: +39 (06) 323 2170
Fax: +39 (06) 3212 0199
francesca.turitto@
studiolegalerlp.com
6 Treasurer
Kathie Lee
Union Square Hospitality Group,
New York
Tel: +1 (646) 237-5039
[email protected]
Jeffrey Brimer
Law Office of Jeffrey A Brimer,
Denver
Tel: +1 (720) 360 1675
Fax: +1 (720) 360 1685
[email protected]
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
World Organisation Liaison
Melissa Murray
Bird & Bird (MEA), Abu Dhabi
Tel: +971 2659 4032
[email protected]
IBA ANNUAL CONFERENCE, VIENNA, 4–9 OCTOBER 2015: OUR COMMITTEE’S SESSIONS
International Franchising Committee sessions
Monday 0930 – 1230
Joint International Sales and International Franchising
Committees table
Hot topics in the International Sales,
Franchising and Product Law Section
Data handling in international sales
Presented by the International Sales, Franchising and Product
Law Section
Session Co-Chairs
Christopher Blake Hahn Loeser & Parks, Cleveland, Ohio, USA;
Membership Officer, International Sales Committee
Merril Keane Miller Nash Graham & Dunn, Portland, Oregon, USA;
Newsletter Deputy, International Sales Committee
Jae Hoon Kim Lee & Ko, Seoul, South Korea; Website Editor,
International Franchising Committee
This session will comprise a series of roundtable discussions on various
topics presented by the International Sales, Franchising and Product
Law Section.
International Franchising Committee
1. When international sanctions, embargos imposed against
a country, how does a franchisor deal with franchisee/area
developer, what are the issues to consider, and what are the
contractual provisions to protect the parties?
Moderators
Katharina Köklü PF&P Rechtsanwälte, Munich, Germany
Julien Rivet Berthezene Nevouet Rivet, Paris, France
2. Distinctions between civil and common law jurisdictions on
treatment of franchise
Moderators
Aoi Inoue Anderson Mori & Tomotsune, Tokyo, Japan
Babette Marzheuser-Wood Dentons, London, England
3. How does a franchisor handle social media? What are the
rules around websites, Facebook, Twitter etc?
Moderators
Damian Humphrey AshtonKCJ, Norwich, England
Terry Kim Lee & Ko, Seoul, South Korea
Moderators
Kathie Lee Union Square Hospitality Group, New York, USA;
Treasurer, International Franchising Committee
Barton Selden Taulia, San Francisco, California, USA; Co-Chair,
International Sales Committee
International Sales Committee
1. FIFA and other instances of international corruption
Moderators
Judith Alison Lee Gibson Dunn & Crutcher, Washington, DC, USA;
Membership Vice Officer, International Sales Committee
Stephan Mueller Oppenhoff & Partner, Cologne, Germany
2. International sales, the Transatlantic Trade and Investment
Partnership and the Trans-Pacific Partnership
Moderators
Arthur Davis Addisons, Sydney, New South Wales, Australia
Nicole Van Crombrugghe LVP Law, Brussels, Belgium
3. Unintended consequences of terminating international sales
agreements
Moderators
Alexander L De Zordo Borden Ladner Gervais, Montreal, Quebec,
Canada ; Senior Vice Chair, International Sales Committee
John Eastwood Eiger Law, Taipei, Taiwan
Product Law and Advertising Committee
Consumer activism and collective actions – the new regulators
transforming global product, advertising and privacy law
Moderators
John Doherty Pennington Manches, London, England; Vice Chair,
Product Law and Advertising Committee
Gregory Fowler Shook Hardy & Bacon, Kansas City, Missouri, USA;
Co-Chair, Product Law and Advertising Committee
HALL G1
Continued overleaf

INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
7 IBA ANNUAL CONFERENCE, VIENNA, 4–9 OCTOBER 2015: OUR COMMITTEE’S SESSIONS
Monday 1615 – 1730
The age-old question – applicable law and
jurisdiction in franchising, commercial
agency and distribution agreements
Presented by the International Franchising Committee and the
Litigation Committee
Session Moderator
Luciana Bassani Dannemann Siemsen Advogados, Rio de Janeiro,
Brazil; Newsletter Editor, International Franchising Committee
This session will explore the effectiveness of choosing a foreign law
to govern transnational/multinational franchising, distribution and
commercial agency agreements and choice of jurisdiction, taking into
consideration specific commercial regulations and procedural laws
and the differences related to such agreements; new trends on the
enforcement and recognition of foreign judgments and related case
law in connection with the mentioned commercial arrangements
in different countries; the arbitrability of franchising, distribution
and commercial agency agreements in different countries and the
recognition and enforcement of foreign arbitration awards.
Speakers
Rebecca Bedford Minter Ellison, Melbourne, Victoria, Australia
Arthur L Pressman Nixon Peabody, Boston, Massachusetts, USA
Jean-Philippe Turgeon Lavery de Billy, Montreal, Québec, Canada
Dagmar Waldzus Buse Heberer Fromm, Hamburg, Germany
HALL M2
Monday 1730 – 1830
Open committee business meeting
liability under different common law and civil law jurisdictions and
how joint liability might arise. Risk management techniques in certain
jurisdictions will also be examined.
Speakers
Michael G Brennan DLA Piper (US), Chicago, Illinois, USA
Babette Marzheuser-Wood Dentons UKMEA, London, England
Raphaël Mellerio Aramis Avocats, Paris, France
Professor Martin Reufels Heuking Kühn Lüer Wojtek, Cologne,
Germany; Newsletter Editor, International Sales Committee
HALL G1
Wednesday 1115 – 1230
News from around the world
Presented by the International Franchising Committee
Session Chair
Rocío Belda de Mergelina J&A Garrigues, Madrid, Spain; Co-Chair,
International Franchising Committee
This session will present the main legal developments in franchising
around the world.
Speakers
Martine de Koning Kennedy Van der Laan, Amsterdam,
the Netherlands
Wun Lap Hui Ribeiro Hui, Hong Kong SAR; Publications Officer,
International Franchising Committee
Osvaldo J Marzorati Allende & Brea, Buenos Aires, Argentina
Benedikt Spiegelfeld Cerha Hempel Spiegelfeld Hlawati, Vienna,
Austria
Larry Weinberg Cassels Brock & Blackwell, Toronto, Ontario,
Canada; Vice Chair, International Franchising Committee
Presented by the International Franchising Committee
HALL G1
An open meeting of the International Franchising Committee will be
held to discuss matters of interest and future activities.
HALL M2
Wednesday 0930 – 1045
Blurring the line: joint liability for
franchisors – employment, vicarious liability
and other liability
Presented by the International Franchising Committee and the
Employment and Industrial Relations Law Committee
Session Chair
Francesca R Turitto Roma Legal Partners, Rome, Italy; Secretary,
International Franchising Committee
What is the status of current issues about vicarious liability that
franchisors need to take into consideration? Have employment
cases alleging joint employer liability against franchisors increased
in the past few years or has the approach of the labour authorities
changed? This session will explore how joint liability can be imposed
on franchisors and franchisees despite the independence of their
businesses. It will discuss the possible sources and legal basis of joint
8 INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Wednesday 1430 – 1545
Structuring European expansion: use
of agency, distribution and franchising
arrangements
Presented by the International Franchising Committee and the
International Sales Committee
Session Chair
Professor Karsten Metzlaff Noerr, Berlin, Germany; Vice Chair,
International Franchising Committee
This session will discuss the advantages and disadvantages of agency,
distribution and franchising as proper tool: for an expansion to
Europe, inter alia, with regard to disclosure, compensation claims
upon termination, resale price maintenance and standard terms law.
Speakers
Monika Essers Busch Essers Rechtsanwälte, Cologne, Germany;
Programme Officer, International Sales Committee
Edward Miller Reed Smith, London, England
Donald Wray Jr Little Caeser Enterprises, Detroit, Michigan, USA
HALL G1
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
CONFERENCE REPORTS
31st Annual IFA/IBA Joint
Conference, Chicago,
5–6 May 2015
Terry Kim
Lee & Ko, Seoul
[email protected]
Plenary I – Tax issues for
international franchising
for dummies
Session Chair
Tao Xu DLA Piper, Reston, VA
Speakers
Kenneth Levinson Faegre Baker Daniels,
Minneapolis
Edward (Ned) Levitt Dickinson Wright,
Toronto
Hans Van Walsem Loyens & Loeff, New York
T
his session provided an invaluable
primer on the fundamental concepts
that give shape to the various tax
issues that inevitably arise in international
franchising. Despite their importance, it is
not infrequent that many franchise lawyers
look at tax issues at the tail end of structuring
a franchise transaction. However, in the
increasingly competitive and challenging
environment in which franchisors must now
operate, it is important that franchisors
consider what tax benefits can be attained
and what pitfalls can be avoided from the
outset. Such tax planning is necessary to help
ensure a successful international expansion
for the franchisors.
The panel began the discussion by
highlighting the ‘five prisms’ that a
franchisor should take into account to avoid
being locked into a structure that could
be economically disadvantageous. The
five prisms are: (1) US international tax
consequences; (2) local or foreign country
tax consequences; (3) effect of the tax
consequences to the franchisor; (4) effect
of the tax consequences to the individuals,
agents or local representatives of the
franchisor; and (5) existence of applicable tax
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
9 31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
treaties. By considering these ‘five prisms’, a
franchisor would be in a position to address,
from a US perspective, many of the tax
issues that could arise in an international
franchising context.
With this overview, the panel emphasised
that the United States is unique in the sense
that it taxes on a worldwide basis, while
the majority of other countries tax on a
source-based (ie, territorial) basis. For US
franchisors receiving income stream from
local franchisees, this creates a situation of
potential double taxation in which the same
income stream is taxed locally, and again in
the US. To minimise the tax burden imposed
by double taxation, US franchisors can receive
a tax credit, and the amount of the credit
depends on the withholding tax rate of the
source country – that is, the country of the
local franchisees. The panel discussed, in
detail, how the tax credit is calculated, and
also, emphasised the importance of working
with local experts to understand the local
franchisees’ tax law, and in case there is a tax
treaty, the relevant rules and regulations.
Next, the panel addressed how US
franchisors could potentially minimise
their tax burdens. A franchise is essentially
a ‘bundle of rights’ that a franchisor gives
to its franchisees. This ‘bundle of rights’
includes not only the rights to the intellectual
property and franchise system, but also
‘service’ concepts related to training, support,
education, etc, that are designed to benefit
the franchisees. US franchisors may receive
payments, in the form of royalty, for this
‘bundle of rights’ in its entirety. But it is also
possible to offset certain amounts associated
with the ‘service’ concepts from the royalty,
especially if such ‘service’ is rendered
outside the country of the local franchisees.
Structured in this way, the offset amounts
could be excluded from the scope of ‘royalty’,
as the applicable tax treaty defines that term,
and the offset amounts will not be subject to a
withholding tax.
10 On the topic of minimising tax burdens,
the panel further explained how a grossup provision can be used to maximise the
amount of royalty received by US franchisors.
While a gross-up provision can provide extra
profitability for US franchisors, the panel
noted that a gross-up provision could be unfair
to the local franchisees depending on the
applicable withholding rate. The dynamics
of how a gross-up provision could affect the
bottom line profitability for US franchisors was
illustrated using various examples.
The panel also touched on the topic of
permanent establishment (PE). Specifically,
the panel noted the importance of
recognizing that the definition of PE varies
between and among different tax treaties.
Depending on the applicable definition,
the local presence of a franchisor could
unintentionally, and sometimes unknowingly,
become a separate taxable entity subject to
local tax. The panel warned against such
unintentional PE as the ‘worst of all worlds’
because: (1) the PE must pay tax on a
standalone basis; (2) the US franchisor would
be responsible for the full liability of the PE’s
obligations; and (3) PE could trigger transferpricing issues (eg, whether or not there was
arms-length negotiation).
Lastly, the panel described how
sophisticated tax planning could be used to
avoid double taxation by taking advantage
of the tax treaties. The panel provided an
example in which a US franchisor could set
up a structure of streaming the income from
the local franchisees through an affiliate of
the US franchisor located in another country
that does not impose a withholding tax on
such income. The panel emphasised, however,
that it will be important for the affiliate to
have at least a certain presence – or substance
– in the country, such as performing minimal
business activities and controlling risks
associated with those activities, in order to
claim the benefits of the tax treaty.
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
Ted P Pearce
Nexsen Pruet,
Charlotte, NC
Plenary II – News from around
the world
Australia
Session Chair
Andrew Loewinger Nixon Peabody,
Washington, DC
Speakers
Luciana Bassani Dannemann Siemsen, Rio de
Janeiro
Phillip Colman MST Lawyers, Mt Waverley
Lee Plave Plave Koch PLC, Reston
Peter Snell Gowlings, Vancouver
Volodymyr Yakubovskyy Nobles, Kiev
T
his year’s session at the IBA/IFA
Conference on News from around the
world provided a full array of legislative,
administrative and judicial issues, that
when viewed together illustrate the further
evolution of the franchise model – some for
the perceived good of franchising, while other
issues seem to produce problematic results for
both franchisors and franchisees.
Argentina
Luciana Bassani presented the franchise
news from Argentina. Luciana concentrated
her remarks on the new franchise provisions
in the Argentine Civil Code that will become
effective in August 2015. For the first time
in Argentina, the new Code addresses
common franchise issues that are seen in
many western jurisdictions, including the
United States and Europe. Included in these
issues are post termination covenants against
competition, which are considered to be
enforceable if not greater than one year,
and what constitutes a minimum term for a
franchise contract, which is deemed to be
three years.
The Code also addresses exclusivity of a
franchisee’s territory and a limitation on the
rights accorded to a franchisee in which to
operate its franchised unit. One provision of
the new Code that should put franchisor’s on
edge is Article 1521, which holds a franchisor
to be liable for system defects that causes
damages to the franchisee.
Philip Colman presented the franchise
news from Australia. The first point he
made about Australia is that its franchise
sector is thriving, with close to 30 per cent
of Australian franchise systems entering
international markets. On the legal front,
there have been two significant legal
developments in Australian, namely the
creation of a new franchising code of
conduct and the recent announcement of
the extension of unfair contract laws to cover
the small business sector.
The 2015 Franchising Code of Conduct
amends the 1998 original code and imposes
new obligations on both franchisors and
franchisees, including mandated good
faith obligations, a varied pre-contractual
disclosure regime and a limitation on the
enforceability of restraint of trade clauses
in certain circumstances. The revised Code
also introduces civil penalties for violations
of key provisions of the Code, which includes
violations of the 1998 Code.
Ukraine
Volodymyr Yakubovskyy reported on the latest
changes to the Ukraine franchise law. He
reported that franchising is a relatively new
notion to the Ukraine business community
and the concept and the laws are a work
in progress. The historical problem for
franchisors in the Ukraine was their inability
to register their franchise agreements, which
led to the unenforceability of franchise
agreements. To finally remedy this problem,
in February 2015 the legislature passed
the law of Deregulation, which repeals the
registration requirements. This change
will make franchising in the Ukraine less
bureaucratic for franchisors.
Canada
Peter Snell reported on the burgeoning
franchise legislation and case law coming
out of the provinces of Canada. On the
legislative front, Peter reported that the
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
11 31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
government of British Columbia announced
that it was seeking public consultation with
respect to proposed franchise legislation
that would include detailed disclosure
obligations. If this province adopts the new
disclosure requirements, it will be the sixth
province in Canada to adopt disclosure
requirements for franchisors.
Peter also discussed two important
decisions from the Canadian courts that
cause pause in the franchise community. One
case, Bhasin v Hrynew, recognised for the first
time a ‘general organising principle’ of good
faith and a duty of honesty in contractual
relations in common law Canada. The other
case, Bertico v Dunkin Brands Ltd, awarded a
franchisee damages and gave a franchisee
lease and franchise agreement termination
rights for breach of the franchise agreement
by the franchisor for failing to protect its
brand in a franchisee’s market within the
province of Quebec. The impact of this case
will cause franchisors pause in establishing
or retreating from specific markets. JeanPhilippe Turgeon and Stéphanie Destrempes
provide a more detailed discussion of this case
in another article in this newsletter.
United States
Lee Plave provided the group with a summary
of key franchise issues that have emerged
in the US during the past year. Top of mind
for most US franchise attorneys is the recent
pronouncement from the general counsel of the
National Labor Relations Board (NLRB) alleging
there to be a joint employment relationship
between McDonald’s and its franchisees. The
impact of this conclusion would be to find
that both the franchisor and its franchisees
are jointly responsible for the alleged unfair
labour practices that the NLRB claim exists in
the McDonald’s system. If the conclusion were
to stand, it is thought that it would upset the
franchise model as the franchise community
currently knows it. As the case winds its way
through the administrative agencies and possibly
the courts, both franchisors and franchisees
will wait to see how this decision will impact
the way that they do business.
The other issue that faces US franchisors
is what will be the impact of the general
thawing of relations between the US and
Cuba. The big question will be whether the
thaw will produce a ready-made market for
US franchisors.
Plenary III – Supply chain issues
Session Chair
Larry Weinberg Cassels Brock & Blackwell,
Toronto
Speakers
Martine de Koning Kennedy Van der Laan,
Amsterdam
Jeffrey Kolton Franchise Market Ventures,
New York
I
n this plenary session, Larry Weinberg
led a panel discussion of supply chain
issues with Martine de Koning and Jeffrey
Kolton of Franchise Market Ventures. The
panellists discussed common practices and
legal issues arising in Canada, the United
States and Europe.
Because the general goal of franchising
is to present a uniform brand, franchisors
12 often require their franchisees to offer
specific products or services at their outlets
to ensure consistency of the customer
experience. In the United States and
Canada, franchisors frequently include
provisions in their franchise agreements
mandating that the franchisee may only
sell products and services approved by the
franchisor. Foreign concepts expanding
into the EU typically use provisions similar
to those used in North America, where
the franchisee is obligated to sell only
approved products or services. Franchisors
in the European Union and the European
Economic Area (EEA) may be limited in this
regard by EU competition law or national
civil laws. The scope of the presentation was
limited to discussion of Canada, the United
States, and the EU/EEA countries.
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Shannon
McCarthy
Miller Nash Graham &
Dunn, Seattle
shannon.mccarthy@
millernash.com
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
Contractual rights to control the supply
chain
Franchisors must decide what level of
control they will retain over the sourcing of
products and services purchased by their
franchisees. In the United States, there are
four common levels of franchisor control
over product sourcing: (1) high level of
control where the franchisor designates
suppliers for all or most items purchased by
the franchisee; (2) moderate control where
the franchisor designates suppliers for core
products, but allows the franchisee to source
the remaining products; (3) reservation of
rights where the franchisor does not currently
designate suppliers, but may choose to do so
in the future; and (4) no control, where the
franchisee can purchase from any supplier.
In Canada, franchisors typically exert more
control over the supply chain than those in
the United States. They rely on this control to
maximise revenue by charging a markup on
products sold to their franchisees.
Franchisors operating in the EU market
must consider their supply chain strategy
in connection with EU competition laws.
Both international and European domestic
systems require some obligations of
franchisees to purchase goods and services
from the franchisor or its designated
suppliers. If the franchisee is obligated
to purchase 80 per cent or more of their
products and services from the franchisor or
their designated suppliers, it is considered a
single-brand system and the non-competition
clause may be limited. However, a franchisor
can designate suppliers for virtually
every aspect of the franchisee’s business,
including items that are not sold to the
end customer, such as cleaning products,
furnishings, advertising materials, and
even the accountant the franchisee uses for
bookkeeping. Where a lot of competition
exists between brands, this level of control
by the franchisor is acceptable to remove
competition between franchisees. The
franchisors can guaranty quality by requiring
specific sourcing for food products.
Suppliers
As discussed above, a franchisor may
designate or authorise certain suppliers.
In Canada, it is acceptable for franchisors
to make a profit on the sale of products to
franchisees. It is also common for franchisors
to not permit franchisees to suggest
alternative suppliers. This limits franchisee
claims of franchisors acting in bad faith by
not approving alternative sources of products
if there is no contractual right for the
franchisee to suggest the alternative sourcing.
It is more common in the United States for a
franchisor to require the purchase of products
or services from designated or approved
suppliers. Franchise agreements typically allow
the franchisees to suggest alternative sources;
but, the products and the supplier are subject
to franchisor’s quality control review process.
The franchise agreement needs to specify who,
either the franchisor or franchisee, will pay for
the initial inspection of the products and the
supplier’s factory. As in Canada, a franchisor can
charge a markup on products sold to franchisees,
but the franchisor is required to disclose the
amount of revenue received from its franchisees’
required purchases of goods and services.
Rebates
In the US, transparency about rebates is
required and the franchisor is required to
include in its franchise disclosure document
the amount or method for calculating the
rebate. A rebate system that only flows to
the franchisor can often create tension with
the franchisees. So, many franchisors direct
rebates or benefits into cooperative advertising
programs or pass the savings along to the
franchisees to increase their purchasing power.
In Canada, it is common for the franchisor
to retain all rebates, although some do use
them to fund promotions or other advertising
campaigns. Franchisors are required to
disclose the existence of rebate programs,
but not the amounts they receive. In the EU,
a franchisor does not have an obligation to
disclose rebates it receives or profit it makes
from them; however, the franchisor does have
a duty of care to its franchisees because it is
viewed as the larger party.
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
13 31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
Report of the Luncheon Panel Discussion
The new challenges for
outside counsel in the client
relationships
Session Chair
Rocío Belda de Mergelina Garrigues, Madrid
Speakers
Igor San Juan Swarovski, Amsterdam
Penny Ward Baker & McKenzie, Sydney
Sandra Wall McDonald’s Corporation, Chicago
A very interesting discussion took place
under the format of a Luncheon with Panel
Discussion. The subject matter and the
quality of the panellists provoked a very well
attended meeting, a concentrated audience
and an interesting number of questions
from the audience, with a final discussion
after the coffee.
Rocio Belda de Mergelina chaired the
panel that was composed of three panellists,
two from industry – Sandra Wall from
McDonald’s Corporation and Igor San Juan
from Swarovski – and one partner of a law
firm, namely Penny Ward from Baker &
McKenzie Australia.
When the audience – composed of a
large number of lawyers from very different
jurisdictions – was ready to start with the first
course of lunch, Rocio Belda de Mergelina
challenged all of us with the following statements:
‘The profession is changing very rapidly…
in spite of the very good atmosphere
of these conference, the competition is
fierce… the technology has entered into
the profession and into our day to day
professional life, adding therefore on one
hand, an impression of freedom and a
possibility to multiplicate time, and on the
other hand a need to reply to our clients
very quickly… even sometimes without
taking the time to reflect before clicking
on the “send” button.’
Thereafter, Rocio proposed to the audience to
divide the subject matter into questions for the
panellists. The following were the main questions
discussed during the luncheon programme.
14 Are there new challenges for attorneys
in the creation of value for their clients,
value that clients are expecting and
that may provoke a difference with the
attorney’s competitors?
Sandy Wall appeared to start with a rather
normal statement by saying that the company
she works for today – after having spent
many years as partner of a very prestigious
law firm – looks, typically, for rates, timely
advice, quality and match with budget
constraints. What appeared to be a ‘rather
normal statement’ that we lawyers face on a
day-to-day basis was very rapidly seasoned by
Sandy with the following ideas that captured
the audience: ‘I want an outside counsel to
understand my business and know where my
company is going… I need, of course, legal
advice but also and especially, practical and
business solutions to face a legal problem I may
have, a legal problem that is first, a practical
problem for my company’. Once the audience
was able to incorporate these two points,
Sandy added that ‘when I find an attorney
able to do the latter, it allows me to build with
such attorney a relationship that is based on
trust, that is not given only by a newsletter
nor by a repetition of normal services, but
by something additional, which is not legal
knowledge only, but also knowledge of
practical and factual matters and capability to
solve problems and give concrete opinions.’
How are new technologies affecting the
client-attorney relationship? Are new
technological products useful for clients?
Igor San Juan took the lead on this matter:
‘No doubt that most lawyers tend not to be
super-technological people… with some
exceptions. However, there is no doubt that
technology can be a very useful and necessary
tool, but also a method to work better, to
use time in a more efficient manner, and to
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Cristobal Porzio
Porzio, Rios &
Asociados, Santiago
[email protected]
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
devote the most precious time to matters
that need more time to reflect.’ At that
moment, Rocio asked Igor: ‘Can we say that
lawyers should embrace technology instead
of resisting it?’ Igor replied that possibly the
answer could be yes, since the good use of
technology would allow the lawyer to have
useful information online, good models
and clauses in his or her database and
consequently would allow that same lawyer to
devote more time to add value to their work,
value that would make the difference at the
time of serving a client.
In addition, and going one step further,
the panellists appeared to agree on the fact
that technology could also permit clients, in
many cases, to directly access their attorney’s
database – or, more precisely, the part of the
database containing ‘his particular matters
and cases’ – which could be useful for the
gathering of evidence used in past cases,
models of contracts used, details on a dayto-day basis of every single piece of litigation
entrusted by such a client to the attorney, etc.
Role of the in-house counsel and sizes
of the legal departments/outsourcing
legal issues
At some periods of time, legal departments
of companies grow and the companies tend
to absorb as much legal work as possible,
while in other periods, the legal groups are
reduced dramatically and somehow replaced
by outside counsels. Penny focused this
discussion on a practical point, showing
not only practical knowledge of the matter
but also indicating precisely that ‘in-house
counsel are not called to give legal advice
only, nor to have a complete knowledge of
the recent case law… but in-house counsel
need to show political and commercial
criteria and, in consequence, give useful
commercial and practical advice together
with legal advice, in order to allow the
company to make the best choices and take
the best possible decisions.’
Igor added that, in the same vein, ‘the
in-house counsel is not only called to be
the head of the in-house legal department,
but also a manager of legal issues, a bridge
between the company and outside counsel,
and, sometimes, also a bridge between
different managers/departments within the
company’. Sandy Wall disagreed on that
point, stating that she was of the opinion
‘that in-house counsel’s main task was to raise
the correct question, to build relationships
and trust with the outside counsel, to
review outside counsel work/assignments,
and finally… to be responsible for outside
counsel’s work’.
Desserts and coffee were served, which was
the perfect time for a number of questions,
which in view of the hour and the need to
move forward with the afternoon sessions,
meant that a group of lawyers – some of them
in-house counsel and some outside counsel
– continued the discussion in the corridor
outside the meeting/dining room.
The discussion is to be continued,
hopefully in Vienna.
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
15 31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
Workshop I – Good faith in
franchising
Session Chair
Melissa Murray Bird & Bird, Middle East
Speakers
Paula Mena Barreto Pinheiro BMA Law,
Rio de Janeiro
Silvia Bortolotti Buffa, Bortolotti & Mathis,
Turin
Josh Simons Thomson Geer, Adelaide
Cristobal Porzio Porzio, Rios & Asociados,
Santiago
This interactive workshop discussed the
concept of good faith, how it may be defined
and case examples of the application of the
concept in franchising case law in Brazil, Italy,
Australia and Chile.
Paula discussed the statutory definition
within the Brazilian Civil Code, Consumer
Code and how the concept applies in various
franchising documentation (especially its
importance within the initial disclosure
document). Paula went on to discuss three
specific franchise case examples, noting
however that, in some cases, the concept
can be seen by litigating parties to be a
‘catch all’ solution and is often being used
as such. The three case examples discussed
are covered in the workshop’s accompanying
paper, however the case of Sonia Carlotti –
Comércio de Colchões Ltda v Centro de Produção rio
Grandense de Espumas Industriais Ltda1 raised
the most debate amongst audience members
in relation to issues such as damages, moral
damages and the types of claims that can
be raised in the Brazilian courts given the
interesting decision of the courts in light of
the specific facts of that case.
Silvia discussed the Italian perspective and
specifically noted that, although litigants
often raise it, such a claim is rarely accepted
by the courts; and, not many cases under
Italian law specifically deal with good faith
in relation to franchise agreements. Silvia
discussed the importance of good faith
throughout the franchise relationship
(covering pre-contractual negotiations,
disclosures, in performing the contract and
16 upon termination). Silvia cited five cases (all
of which are covered in the paper prepared
for the conference), with the audience taking
particular interest in the case example of
where the franchisee was held to have acted
contrary to the obligation of good faith (as
opposed to the franchisor who is often the
party who is claimed to have acted in bad
faith).2 There was also interesting discussion
with audience members (especially those
practising in the United States) in relation
to the high burden of proof on the party
claiming a breach of good faith and the
restricted amount of damages that can be
recovered for such a claim.
Given Australia’s new Franchising Code
of Conduct (‘Code’), Josh reviewed the
history of the concept in Australian case
law (which had not be consistent and was
often based on concept of unconscionable
conduct) to explain how it has developed
into the new statutory concept under the
Code. He went on to explain, however, that
the Code does not provide a definition and,
therefore, the concept is still somewhat
unclear. Josh went on to explain Burger
King Corporation v Hungry Jack’s Pty Ltd,3
given the strong judicial support for the
obligation to act in good faith together
with the 2014 case of RPR Maintenance Pty
Ltd v Marmax Investments Pty Ltd,4 where the
franchisor was specifically found to have
breached the obligation of good faith. Josh
went on to discuss the civil penalties that
can be imposed by either the Federal Court
of Australia or the consumer regulatory
authority (the ACCC). There was also
discussion with various audience members
regarding the issuance of ‘infringement
notices’, which can be issued by the ACCC
for breaches of the good faith obligation
contained within the Code separate from
civil case proceedings.
Cristobal discussed the Chilean perspective,
noting that although the Chilean Civil
Code covers the concept of good faith,
there is little case law relevant specifically to
franchise relationships.
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Melissa Murray
Bird & Bird, Middle East
melissa.murray@
twobirds.com
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
In both sessions there was lively debate as to
the definition of ‘good faith’, with Josh noting
that some commentators have stated it is hard
to define, ‘but I know it when I see it’. The
case examples given by all speakers showed
that the concept can be very much dependant
on the specific facts of the case before the
courts. A particular distinction was noted
between civil law and common law systems,
especially in relation to the remedies available
when the court finds that the obligation of
good faith was breached. Audience members
gave helpful perspectives relative to their
Jane LaFranchi
Marriott International,
Bethesda
jane.lafranchi@
marriott.com
jurisdictions such as in Canada, the UK and
the US with Australian practitioners adding
comments and insights given the new Code.
Notes
1 Rio Grande do Sul State Court of Appeal, 9th Civil
Chamber, Civil Appeal 70061266201. Reporting: Jurge
Miguel Angelo da Silva, published on 24 September 2014).
2 PAOLA. Leonardo Sperbde, Sobre a denúncia dos contratos
de distribuição, concessão comercial e franquia, Revista
Forense, 137.
3 [2001] NSWCA 187.
4 [2014] FCA 409.
Workshop II – Corporate
counsel focus: hot topics in
international franchising
Session Chair
Jane LaFranchi Marriott International,
Bethesda
Speakers
Grégoire Toulouse Taylor Wessing, Paris
Jorge Mondragón Gonzalez Calvillo,
Mexico City
This workshop, hosted by Jane LaFranchi,
Grégoire Toulouse and Jorge Mondragón,
discussed several topics that had been
highlighted by members of the International
Franchising Committee that would be of
particular interest to corporate counsel who
represent franchisors with international
franchise systems or franchisees of those
systems. The paper prepared for the workshop
addressed five topics. The discussions at the
workshop focused primarily on three of those
topics: (1) tortious interference concerns;
(2) ‘foreign’ franchisee associations; and (3)
as a follow-up to the plenary tax programme
(‘Tax issues in international franchising for
dummies’), unbundling of services provided
by the franchisor from the trademark licence
royalty fee.
Jane explained that the tortious
interference concerns to be discussed
would be those that can arise in ‘conversion
franchising’, which is most common in quick
service restaurants, real estate brokerage
companies, hotels and other concepts in
which the franchise structure does not involve
a lease and in which there are no in-term
or post-term covenants against competition.
Franchisees may wish to explore a change
in brands for economic or other reasons. In
the US, franchisors must be aware of state
case laws applicable to their actions when
negotiating and entering into a franchise
agreement with a franchisee that has an
existing agreement with another brand.
Generally, the laws require that the new
franchisor would have had to commit some
improper act to induce the franchisee to
breach its existing agreement to be held
liable for the wrongful interference. However,
the payment of money to the franchisee
in connection with entering into the new
franchise agreement may be considered
as an inducement to breach the existing
contract. Most US franchisors that engage
in conversions with potential conversion
franchisees generally have policies and
guidelines in place to mitigate the risk of a
claim of tortious interference.
Grégoire explained that French law has
a similar concept that holds a franchisor
that interferes with an existing contract
and incites a franchisee to leave its network
responsible for damages. In Mexico, however,
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
17 31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
Jorge explained that there is no concept
similar to tortious interference in the law or
jurisprudence. The discussion focused on
whether guidelines in place for franchisors
in the US should be applied to situations in
other countries – recognising that even if
the country where the franchise would be
located has no prohibitions, when the existing
franchisor is based in a country with such
laws, the new franchisor should proceed with
extreme caution.
All participants in the workshop indicated
that they were not aware of any brand-specific
franchisee associations in existence outside
of the US and Canada (though franchisees
in other countries have been known to
participate in ‘global’ associations that have
their origins in the US or Canada). That
being the case, the discussion then turned
to franchise trade associations, highlighting
the activities undertaken by organisations
such as the European Franchise Federation,
the French Franchise Federation, the
Mexican Franchise Association, etc,
in particular the creation of codes of
conduct or ethics and lobbying activities
in connection with any proposed franchise
regulation. In France, the French Franchise
Federation has been very active in the
review of the Macron Law (‘law for growth,
activity and equal economic opportunities’).
Jorge explained the tax issue that may
affect many international franchise systems
which charge a substantial royalty fee that
includes payment for the trademark license
and services provided by the franchisor to the
franchisee, such as training, procurement or
other technical services. To take advantage of
the international tax treaties that may come
into play given the domiciles of the franchisor
and franchisee and to minimise the amount
of withholding tax required to be paid under
local law when there is payment of a royalty
fee, care should be taken to ‘unbundle’ any
services provided by the franchisor from the
royalty fee and to make it clear in the franchise
agreement that there will be other charges
for such services. Additionally, if there is a
disclosure document required or provided, that
document should describe such services and
the fees for them. In Mexico, for example, there
is no withholding on payments for technical
assistance, but withholding on royalties for
the use of trademarks is 35 per cent (reduced
to ten per cent under the tax treaty with the
US). Various participants concurred that this
is a very important aspect of tax planning for
international franchise agreements.
Workshop III – International
mergers and acquisitions of
franchise companies
Session Chair
Jeffrey A Brimer Alexius, Denver
Speakers
Beata Krakus Greensfelder, Hemker & Gale,
Chicago
Gilles Menguy GM Avocats, Paris
This workshop discussed the ‘international’
aspects of mergers and acquisitions of
franchise companies. The discussions
and accompanying paper addressed the
traditional forms of mergers and acquisition
– where one company, which may or may
18 not use franchising as a format for growth,
acquires a company that franchises its
business concept. It also addressed less
traditional forms, such as the acquisition by
a franchisor of a unit or master franchised
business operated by its own franchisee.
The primary focus of the workshop,
regardless of the format of the transaction,
was the issues and factors that the parties
should address when they are located or
operate in different countries.
The workshops began with an overview
of these issues, including anti-corruption
laws, data privacy, and merger control laws.
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Jeffrey A Brimer
Alexius, Denver
[email protected]
31ST ANNUAL IFA/IBA JOINT CONFERENCE, CHICAGO, 5–6 MAY 2015
The speakers discussed the importance
of recognising international issues so the
parties can achieve their objectives – to
complete a transaction where both parties get
what they are expecting to receive, be that
compensation to the seller for the value of
the franchise it built or an operating business
to be run by the buyer that can continue into
the future.
Gilles then reviewed formats for M&A
transactions that were discussed. These
included: (1) a franchisor acquiring its foreign
master franchisee or franchisee; (2) a private
equity company acquiring a foreign franchise
company; and (3) a franchisor acquiring a
foreign competitor franchise company.
Beata lead the discussions of due
diligence. Subjects covered included: (1)
intellectual property; (2) disclosure and
registration compliance; (3) ownership of
foreign modifications and innovations; and
(4) relationships with foreign franchisees.
The participants engaged in an extensive
discussion of the scope and depth of due
diligence investigations. They noted the
importance of the acquiring party’s need
to understand the culture of the company
it wants to acquire and the countries where
it operates. They also noted the difficulties
of performing due diligence when there
are language and cultural differences about
the nature of information that is disclosed
in these transactions. For example, in the
US, parties engaging in M&A transactions
are accustomed to full disclosure, subject to
comprehensive confidentiality agreements.
In other countries, however, the type of
due diligence investigations undertaken
by US buyers may be considered intrusive
and not warranted. Reconciling these
conflicting cultural issues is key to obtaining
the information necessary for the parties to
make informed decisions. The participants
also discussed using warranties and
representations in the M&A agreement and
the need to synchronise these with the due
diligence that has been performed. The cost
and time necessary to perform due diligence
in other countries, reliance on local counsel
performing some of this work to reduce cost
and the use of checklists was also discussed.
Gilles concluded the workshop with a
discussion of risk factors. He discussed
the ‘iceberg factor’ – off balance sheet
information that comes to light after the
transaction is closed. He also lead a discussion
of change mismanagement that can occur
when the target company’s founders are no
longer involved in the management of the
company and a new group of managers, who
do not have the same type of relationship with
the franchisees, are running the company.
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
19 THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
ARTICLES
The implied duty to act
in good faith in franchise
agreements: the takeaways
from the Canadian case
Bertico Inc v Dunkin’s Brands
Canada Ltd
Dunkin’ Brands ordered to pay nearly
$18M to some of its Quebec (Canada)
franchisees
On 15 April 2015, in a unanimous decision,
the Court of Appeal of Quebec has issued an
important judgment in Bertico Inc v Dunkin’s
Brands Canada Ltd 1 (hereinafter ‘Dunkin’)
pertaining to a franchisor’s duty to act in
good faith and its related implied obligations
to its franchisees.
In a unanimous decision released on
15 April 2015, the Court of Appeal confirmed
the judgment of the trial court and ordered
Dunkin’ Brands Canada Ltd (hereinafter
‘Dunkin’ Donuts’) to pay a total of
CA$10.9m (plus interests and costs) to a
group of franchisees for lost investments
and profits. The Court found that the
franchise agreements between Dunkin’
Donuts and its franchisees included
both explicit and implied obligations to
provide franchisees with the continuous
collaboration and support that they
legitimately expected in order to protect
and enhance the brand, maintain high and
uniform standards within the franchise
system and generally preserve the integrity
of the franchise system as a whole.
However, on 15 June 2015, Dunkin’ Donuts
filed an application for leave to appeal to
the Supreme Court of Canada. According to
Dunkin’ Donuts, this appeal raises an issue
of public importance that must be addressed
20 by the Court, that is, whether the general
obligation of good faith imposes on franchisors
duties to enhance their brands and stave off
competition.2 Therefore, the highest court of
the land might shortly discuss the issue of the
implied obligations imposed on a franchisor
under a franchise agreement. Should it
agree to do so, the upcoming judgment will
undoubtedly rank among the most significant
franchise law decisions in Canada.
Background and decision of the trial court
Up until the mid-1990s, Dunkin’ Donuts
was a leader in the fast-food industry in
Quebec with more than 200 stores across
the province. The decline in the fortunes of
Dunkin’ Donuts began when Tim Hortons
– which also was in the quick-service coffee
and doughnuts market – started asserting
its presence in Quebec. During a meeting
convened in 1996 in response to this new
challenge, Dunkin’ Donuts franchisees
complained about insufficient support
and collaboration from their franchisor,
as well as its inappropriate tolerance of
underperforming franchisees. Facing
a worsening situation in early 2000, a
group of these franchisees wrote a formal
letter reiterating their previous concerns
and complaining about a breach of the
franchisor’s obligations to them, including
the failure to invest the required money,
time and resources as appropriate to
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Jean-Philippe
Turgeon
Lavery, De Billy
[email protected]
Stéphanie
Destrempes
Lavery, De Billy
[email protected]
THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
protect and increase the brand’s image and
value in Quebec.
The key feature of Dunkin’ Donuts’
response was a renovation programme
pursuant to which the franchisees that
committed to investing CA$200,000 to
renovate their restaurant and comply
with some others conditions would in
return receive a CA$46,000 subsidy from
the franchisor. However, the renovation
programme did little to stave off the
increasing competition from Tim Hortons.
By 2003, Dunkin’ Donuts’ market share in
Quebec had plummeted to 4.6 per cent from
its peak of 12.5 per cent in 1995. Tim Hortons
captured the lion’s share of the growth in the
coffee and doughnut fast food market, going
from 60 stores in 1995 to 308 by 2005.
In May 2003, a group of 21 franchisees
operating 32 locations filed a lawsuit against
their franchisor claiming, among other
things, damages for breach of contract. The
franchisees alleged that the franchisor had
failed to meet its contractual obligations to
adequately protect and enhance the Dunkin’
Donuts brand in Quebec. The judge of
the Superior Court of Quebec agreed and
awarded damages totalling CA$16.4m to
the franchisees for lost investments and lost
profits under the agreements.
Highlights of the Court of Appeal’s decision
In a unanimous decision, the Court of
Appeal agreed with the trial judge but
reduced the total award to CA$10.9m, in
addition to costs and interests. The Court
found that the terms of the franchise
agreements expressly and implicitly imposed
an obligation to protect and enhance the
Dunkin’ Donuts brand in Quebec.
The decision outlined key elements to be
considered by franchisors in developing the
infrastructure of their franchise system and
establishing a collaborative relationship with
their franchisees as more fully discussed below.
The duty to act in good faith and its
related implied obligations
The franchise agreements in Dunkin’ Donuts
contained performance provisions referring
to ‘efforts’ that Dunkin’ Donuts had to
undertake for ‘protecting and enhancing the
reputation’ of the brand. The agreements
also contained provisions pursuant to which
the franchisor was undertaking to assist and
support the franchisee for the entire term of
the franchise contract, including an ongoing
advisory relationship, operational revisions
and the administration of the franchise
owners advertising fund. In connection with
the long-term and collaborative relationship
that the parties had established, these explicit
provisions demonstrate that Dunkin’ Donuts
agreed to make sustained and continuous
efforts to protect and enhance the brand.
However, and as is often the case in longterm arrangements, not all of the terms need
to be spelled out in the franchise agreement.
In Dunkin’ Donuts, in addition to the above
mentioned explicit performance obligations,
the long term nature of the franchise
agreement, along with the legal duty of the
franchisor to act in good faith as provided
by section 1375 of the Civil Code of Québec,
implicitly established ongoing cooperation
and collaboration between the franchisor
and its franchisees. This relationship not only
imposes on franchisors a duty to assist their
franchisees and ensure adequate supervision
of the franchise system, which occasionally
requires terminating the contractual
relation with the weaker links in the chain of
franchisees, as underperforming franchisees
who fail to meet uniform standards may
tarnish the brand and negatively impact the
franchise system.
Based on the franchisor’s ongoing
obligation to assist and support its franchisees
for them to succeed in their operations, the
franchisees were entitled to rely on Dunkin’
Donuts to take reasonable measures to
protect them from the market challenge and
competition presented by Tim Hortons.
The obligation is one of means
While rejecting Dunkin’ Donuts’ arguments,
the Court of Appeal noted that the
franchisor’s obligation to its franchisee is
one of means, not of result. In other words,
a franchisor does not have an obligation to
outperform the competition or guarantee the
profitability of its franchisees; however, it does
have an obligation to take positive actions to
protect its franchisees from competitors. Had
Dunkin’ Donuts taken reasonable measures
to counter Tim Hortons’ expansion, even
if ‘Tim Hortons or another competitor had
encroached on some of the Franchisees’
market’,3 the franchisees would have had no
basis to complain.
The Court found that Dunkin’ Donuts’
breach was not the result of a single act or
omission, but rather failures over the course
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
21 THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
of a decade. During the crucial period when
Tim Hortons was increasingly gaining a
foothold in Quebec, Dunkin’ Donuts’ strategy
was essentially one of ‘business as usual’,
with only minor adjustments being made.
For the Court, this was not enough and the
evidence supported a finding of fault. The
Court found that Dunkin’ Donuts’ inaction
caused the group of franchisees to lose a
significant amount in profits and investments
and awarded them a total of CA$10.9m, in
addition to interests and costs.
The implied obligations of assistance and
support
The Dunkin’ decision does not create new
obligations for franchisors in Quebec. It is
the logical follow‑up to the 1997 Court of
Appeal decision in the Provigo case,4 which
is recognised as the leading authority in
franchise law in Quebec. As provided by
the Court of Appeal in Provigo, due to its
obligation of good faith and loyalty to its
franchisees, a franchisor must offer them
technical assistance and collaboration and
find ways to maintain the relevance of
the contract binding them to ensure that
the considerations which motivated the
affiliation at first are not rendered obsolete
and ineffective.5 Therefore, the Court of
Appeal in Dunkin’ was well founded to point
out that this case was ‘merely an application
of established law to a new set of facts’. It is
nevertheless an important decision insofar as
the Court of Appeal clarifies the extent of the
implied obligations of a franchisor.
Like many other law jurisdictions, section
1375 of the Civil Code of Québec has,
since 1994, been imposing on franchisors
a duty to act in good faith and, as ruled
in Provigo, an obligation to assist and
support the franchisee in its operations.
While a franchisor is justified in imposing
on its franchisees significant restrictions
as to how to operate and administer their
franchise business for the purpose of
maintaining uniform standards of quality
and a strong brand across the franchise
system, the franchisor must, in return,
provide its franchisees with the appropriate
infrastructure to support the performance
of these requirements. Accordingly, the
franchisor’s obligation to take reasonable
measures to protect and enhance the
brand constitutes an implied term in most
franchise agreements.
22 The decision in context
Although the Dunkin’s decision has great
significance for franchisors in Quebec, it is
important to remember that the ruling by
trial judge, supported by the Court of Appeal,
was very fact-specific and based on the
particular terms of the franchise agreements.
The facts demonstrated that the franchisor
needed to take significantly more positive
actions to counteract the increasing threat of
a competitor. Failing to do so made it liable
for damages.
As such, the extent of the obligations
imposed on other franchisors will not
necessarily be the same as the one of Dunkin’.
The context of each case and the language of
each agreement will dictate the actions that a
franchisor is required to take in order to meet
its explicit or implied contractual obligations.
Duty of good faith worldwide
Quebec is not the only jurisdiction where
legislative principles and case law governing
good faith exist. In the rest of Canada
and in others countries, this is an area
undergoing constant evolution. The duty of
good faith in Québec is clearly established
under Articles 6, 7 and 1375 of the Civil
code of Québec. This concept has been the
essence of many decisions of importance in
the past.6 Without overlooking the impact
of the Provigo decision on the franchise
industry, franchise law experts can see the
impact of the Dunkin’ decision in the rest of
Canada and in foreign countries, especially
common law jurisdictions.
Rest of Canada (common law provinces)
As recently stated by Cromwell J in the
latest decision of the Supreme Court of
Canada dealing with the concept of good
faith, Bhasin v Hrynew,7 ‘the notion of good
faith has deep roots in contract law […]
Nonetheless, Anglo-Canadian common law
has resisted acknowledging any generalized
and independent doctrine of good faith’.8
Thus, Cromwell J ruled it was time to take two
steps forward to make Canadian common law
more coherent. On one hand, it had to be
acknowledged that good faith in contractual
performance is a general organising
principle of the common law of contract
and on the other hand, there is a common
law duty which applies to all contracts to act
honestly in the performance of contractual
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
obligations.9 As such, while performing its
obligations under the contract, a party must
consider the legitimate interests of the other
party and refrain from undermining those
interests in bad faith.
Although the Court in Bhasin v Hrynew
ruled on the duty of good faith in the
context of performing a contract, it
remained silent as to how much such
duty may apply in the context of the
pre‑contractual period. As recognised
by authors in regards civil law: ‘In the
common law, the contract is based on
offer, acceptance and consideration and no
contract exists until these elements are met.
As a result, the common law does not import
good faith obligation in pre-contractual
relationships […] because […] no legal
relationship exists until there is a contract’.10
Therefore, the duty of good faith in precontractual relations remains an issue to be
resolved by common law courts.
Nonetheless, and as so eloquently
expressed in the decision in Bhasin, the
concept of good faith (including statutory
duties of good faith and fair dealing)
has been recognised in the Canadian
franchise legislation.11 Consequently,
the decision in Bhasin has no immediate
impact on the current state of franchise
law.12 Furthermore, the duty of fair dealing
is defined in the Arthur Wishart Act,13 an
Ontario franchise disclosure law, as a duty
to act in good faith and in accordance
with reasonable commercial standards.14
Every franchise agreement, under section
3 (1) of the Wishart Act, should impose
on each party a duty of fair dealing in
the enforcement and performance of the
contract15. Such duty of fair dealing can
also be found in franchise statutes adopted
in other Canadian provinces. However if
some Canadian provinces16 prescribed a
definition of the duty of fair dealing similar
to that in the Wishart Act, other provinces,
such as Alberta, have not and therefore
rely on common law principles. Despite
the adoption of these franchise statutes, it
remains that, contrary to the situation under
civil law in Quebec, the duty of good faith
does not apply to pre-contractual relations.
Nonetheless, and in view of the foregoing,
we believe that the courts will in the near
future demonstrate willingness to broaden
the scope of the duty of good faith in
long-term contractual agreements, such as
franchise contracts.
France
The concept of good faith is well
established in the Civil Code of France,
which provides in Article 1134 that
agreements lawfully entered into shall
constitute the law between the parties and,
as such, must be performed in good faith.
If at a certain time the interpretation of
this provision imposed a duty to act in good
faith in the performance of the contract
only, the French courts have since gradually
imposed a duty to act in good faith in
the pre-contractual negotiations, when
entering into the contract itself and upon
its termination.17
Section L330-3 of the Code de Commerce
of France (formerly first section of the
Loi Doubin of 31 December 1989) and its
implementation decree (4 April 1991),
originates from this principle of good faith
in pre-contractual negotiations between the
franchisor and the franchisee, by codifying
an obligation for the franchisor to provide a
pre‑contractual information document prior
to entering into a franchise contract with its
potential franchisee.
The French courts have also recognised,
based on the theory of the implied
obligation of good faith, that the terms of
section 1134 should not only be interpreted
in a literal manner, but that the franchisor
has from the training of the franchisee up
until the end or termination of the franchise
agreement, the continuous obligation to
support the franchisee with technical and
commercial assistance.18
United Kingdom
Traditionally, English law has not recognised
a general duty of good faith in contracts,
particularly because of the uncertainty that
such a concept might bring into contractual
relations, as well as for fear of undermining
the commercial liberty of the parties, who
are free to negotiate the written terms of
their contract. The concept of good faith is
underlying a certain standard of commercial
morality and then is inherently inconsistent
with the belief that a party is free to pursue its
own interest.19
However, the Yam Seng case20 was a
significant decision and a tremendous step
for ward for English courts in the evolution
of the concept of good faith in contractual
matters. This judgment may become the
key decision for franchisees wishing to
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
23 THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
assert a franchisor’s obligation to act in
good faith during the performance of the
franchise agreement.
In Yam Seng, Leggatt J explained how English
law imposes an implied duty of good faith in
the context of ‘relational’ contracts, which
establish long term contractual relations
between the parties, based on cooperation,
loyalty and trust, and a high degree of
communication as found in franchise and
distribution agreements. Leggatt J also stated
that the test of good faith is an objective rather
than subjective one, such as an honest person
placed in the same circumstances would
consider the conduct of the defaulting party as
commercially unacceptable.
Since the Yam Seng case, some other
decisions have recognised the existence of
an implied duty of good faith under specific
circumstances, especially in the case of
Emirates Trading Agency LLC.21 The Bristol
Groundschool Ltd’s case22 also followed the
analysis of Leggatt . in Yam Seng and agreed
with the test of the honest person in similar
circumstances, as well as to the implied duty
to act in good faith existing in the presence of
a relational contract (or a relationship of trust
between the parties).
Despite these recent decisions, which
may suggest an important turning point in
the traditional trend of English courts as to
the application of an implied duty of good
faith underlying the terms of a contract,
the United Kingdom nonetheless seems
to keep ‘swimming against the tide’.23 For
now, English courts resist turning away from
the traditional and restrictive approach
respecting good faith, which is implied only in
complex commercial agreements, in specific
circumstances where there is an absence of
bad faith or dishonesty by a defaulting party,
and only as long as the implied duty of good
faith does not contradict the explicit terms of
the agreement.24
Australia
Until recently, Australia did not have
legislative instrument forcing parties to
negotiate in good faith in the context of
commercial contracts, namely, franchise
agreements. However, section 51AC of
the Trade Practices Act 1974 (now the
Competition and Consumer Act 2010)
was allowing a party to raise a good faith
‘standard’ in order to assess whether a
person or corporation conducted itself
in an unconscionable manner during the
24 negotiation of the agreement. As such, the
parties had the opportunity to include in the
agreement an express disposition forcing
them to act in good faith among themselves
in the performance of the agreement.
The essence of the problem was then the
absence of such express disposition, and how
Australian courts could infer from the terms
of the agreement an implied duty of good
faith since the law was remaining unclear in
that respect.
Even the Franchising Code of Conduct
(hereinafter the ‘FCC’) made under the
Competition and Consumer Act 2010,
which regulated the conduct of the parties
in the context of franchise relations, did
not stipulate a duty of good faith in the
franchisor/franchisee relation.
It was only in 2013 that the Australian
government requested an independent report
as to how the FCC could be amended to
reflect the best practices of this flourishing
industry, which is very profitable to the
Australia economy.
In response to the recommendations of
the report, on 1 January 2015 the FCC was
replaced by an amended Franchising Code
of Conduct25 (hereinafter the ‘Amended
Code’), a mandatory code made under
section 51AE of the Competition and
Consumer Act 2010, which is introducing a
statutory duty of good faith and fair dealing
and, more importantly, financial penalties
and infringement notices to franchisors
for serious breaches to the Amended Code
imposed by the Australian Competition and
Consumer Commission.26 Those financial
penalties, which may reach AUS$51,000 per
breach, will no doubt constitute a powerful
incentive for franchisors to comply.
Notwithstanding the fact that the Amended
Code does not clearly specify what a duty
of good faith is, it does however reflect
the historic evolution of common law on
the duty to act in good faith in contractual
matters by establishing certain determining
standards as to whether a party acted honestly,
cooperatively and not arbitrarily to achieve
the purpose of the agreement. Moreover,
the statutory duty to act in good faith now
applies to every aspect of the franchisor/
franchisee relationship, particularly: (1)
during the pre‑contractual period, (2) while
performing the agreement, (3) during
dispute resolution, and (4) at the end or
termination of the agreement. However,
although the parties cannot waive (either
contractually or otherwise) their duty to act in
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
THE IMPLIED DUTY TO ACT IN GOOD FAITH IN FRANCHISE AGREEMENTS
good faith, the Amended Code does prevent
the franchisor and the franchisee from acting
in its commercial legitimate interests.
Of course, only the passing of time will
make it possible to assess the true impact
of the provisions of the Amended Code in
Australia, and its influence in other countries.
United States
Generally the duty of good faith is implied in
every agreement in the United States.27 First,
section 1-203 of the Uniform Commercial
Code (UCC) provides that every contract
or duty – falling under its scope – imposes
an obligation of acting in good faith in its
performance or enforcement, and secondly,
the Restatement (Second) on Contracts
section 205, a legal treatise on general
principles applicable to contracts and
commercial transactions which is routinely
used by lawyers and the courts, provides that:
‘Every contract imposes upon each party
a duty of good faith and fair dealing in its
performance and its enforcement’.
Despite these general principles,
franchising law in the United States is a
complex matter. The franchise industry is
governed by federal and state laws. Although
the Federal Trade Commission (FTC)
Franchise Rules apply everywhere in the
United States, it does not impose a duty to
act in good faith. Each state is, in turn, free
to put its own version of the duty to act in
good faith into law, which inevitably results
in inconsistencies. As mentioned by Justice
Alito, in the Northwest v Ginsbert decision,28
‘while most States recognize some form of
the good faith and fair dealing doctrine, it
does not appear that there is any uniform
understanding of the doctrine’s precise
meaning’. Furthermore, as stated in the
Norwest case,29 states like Minnesota, Alabama,
Arizona, Connecticut, Delaware and New York
prevent a party from waiving an obligation
of good faith and fair dealing without facing
the risk of seeing the contract being void for
absence of mutuality. However there are some
other states, such as California, South Dakota
or Idaho that allow a party to contractually
exclude itself from implied covenants such as
good faith. Justice Alito especially states that
‘while some States are said to use the doctrine
to ‘effectuate the intentions of parties or to
protect their reasonable expectations’ […],
other States clearly employ the doctrine
to ensure that a party does not violate
community standards of decency, fairness,
or reasonableness’.30 To that extent, if a
party benefits from a certain discretion to
act it may not exercise such discretion in bad
faith, unreasonably or in a manner that is
inconsistent with the reasonable expectations
of the parties. However, this implied
obligation does not create an independent
legal duty in itself.31
Thus, it is possible to conclude that there
is the existence of an implied duty of good
faith in the performance and enforcement
of the franchise agreement32 in the United
States. If not specifically provided for in state
legislation, an analogy may be drawn from the
Restatement (Second) on Contracts section
205 and the provisions of the UCC (if the
particular franchise agreement is not directly
falling under the scope of the UCC).33
A look ahead
In light of the clarifications made by the Court of
Appeal respecting the concept of assistance and
support to franchisees, we may reasonably expect
that other components of the infrastructure
generally required from a franchisor – such as
adequate protection of trademarks, qualification
and initial training of franchisees, efficiency
of the supply chain and ongoing operational
support – will also be challenged in the future.
As such, and beyond the evolution of the
implied duty to act in good faith theory,
franchisors will be required to draft franchise
agreements that clearly define their duties
and obligations to their franchisees in respect
of the integrity of the franchise system as
a whole. A franchisor should review any
performance covenants provided in its
franchise agreement with respect to explicit
obligations and make sure it can live up to the
standards it has imposed upon itself.
Notes
1 Dunkin’ Brands Canada Ltd v Bertico Inc, 2015 QCCA 624
(CanLII).
2 Application for leave to appeal on behalf of the applicant
Dunkin’Brands Canada Ltd in the Supreme Court of Canada,
15 June 2015, 2.
3 See n1 above, at para 93.
4 Provigo Distribution Inc v Supermarché ARG Inc, 1997 CanLII
10209 (QC CA).
5 Ibid, at 31.
6 Houle v Canadian National Bank, [1990] 3 SCR 122; National
Bank v Soucisse et al, [1981] 2 SCR 339.
7 Bhasin v Hrynew, [2014] 3 SCR 495.
8 Ibid, at para 32.
9 Ibid, at para 33.
10 Paul-André Crépeau Center for Private and Comparative
law, McGill University, ‘Good Faith’ [online]: www.mcgill.
ca/centre-repeau/fr/terminology/guide/good-faith
<viewed on 13 July 2015>.
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
25 FRANCHISING IN JAPAN – RELEVANT LEGISLATION AND DISCLOSURE OBLIGATIONS
11 See n7 above, at para 46.
12 Edward Levitt, Good Faith in Franchising, Lexpert
conference on Implied Obligation of Good Faith, 2 June
2015.
13 Arthur Wishart Act (Franchise Disclosure), 2000, SO
2000, c 3.
14 Ibid, at s3 (3).
15 Fairview Donut Inc v The TDL Group Corp, 2012 ONSC
1252, at para 500.
16 Manitoba, New-Brunswick, Prince-Edward Island.
17 Dr Mark Abell, Victoria Hobbs, ‘The Duty of good faith
in franchise agreements – a comparative study of the
civil and common law approaches in the EU’ (2013) 11
International Journal of Franchising Law 5: www.iflweb.
com.
18 Philippe le Tourneau, Les contrats de franchisage (2nd edn,
Litec 2007) No 89 ; L’âge d’or Expansion, Cour d’appel,
Reims, Chambre civile, s 1, No 2000-152146.
19 See n17 above, at 9.
20 Yam Seng Pte Limited v International Trade Corporation
Limited [2013] EWHC 111 (QB).
21 Emirates Trading Agency LLC v Prime Mineral Exports Private
Ltd [2014] EWHC 2104.
22 Bristol Groundschool Ltd v Intelligent Data Capture Ltd and
others [2014] EWCH 2145.
23 See n20 above, at para 124.
24 See n17 above, at 15.
25 Competition and Consumer (Industry Codes—
Franchising) Regulation 2014, Select Legislative
Instrument No 168, 2014.
26 Competition and Consumer Act 2010 (Australia), s
51ACD.
27 See n20 above, at para 125.
28 Northwest Inc et al v Ginsbert, 572 US ___ (2014).
29 Ibid, n2 above.
30 Ibid, at 11.
31 Edward Levitt and Georges J Eydt, ‘The Devil is in the
Details: How Canadian and U.S. Franchise Legislation
Differs’ (2013) 32(4) Franchise Law Journal.
32 Ibid.
33 Alexander M Meiklejohn, ‘Redressing harm caused by
misleading franchise disclosure: a role for the Uniform
Commercial Code’ (2009) 3(2) Entrepreneurial Business
Law Journal 495–498.
Franchising in Japan –
relevant legislation and
disclosure obligations
Introduction
Japan is one of the more mature franchise
markets of those states that have embraced
franchising as a means for business growth.
Japan began to introduce franchise systems
in earnest in the 1960s. With the growing
popularity of franchising by foreign
franchisors in the 1970s, entry into the
Japanese market by international franchising
became common. Currently, franchising
covers various industries, such as the eatingout industry (including restaurants, fast-food
chains and coffee shops), retail businesses
(including convenience stores, drug stores
and clothing shops) and service business
(including hotels, private preparatory schools,
entertainment facilities and fitness clubs).
The statistics show continuing expansion
of franchising in Japan. By the end of March
2014, there was a total of 1,304 franchise
systems in Japan, an increase of 1.8 per
cent (18 new franchisors) over the previous
year, for the fourth consecutive year-onyear increase; there was a total of 252,514
units in Japan (the sum of franchisors’
26 directly owned stores and franchisees’
stores), an increase of three per cent (7,251
units) over the previous year, for the fifth
consecutive year-on-year increase; and sales
revenues by franchised business amounted
to approximately ¥23.5tn, an increase of 5.6
per cent (approximately ¥1.25tn) over the
previous year, for the fourth consecutive year
of positive growth.1
In Japan, there is no specific ‘franchise act’.
However, there is various legislation and rules
governing franchise businesses in Japan. This
article mainly deals with this legal framework
and the disclosure obligations in Japan.
Relevant legislation and rules governing
franchise transactions in Japan
There is no statutory definition of the term
‘franchise’ in Japan. Nevertheless, there are
relevant definitions with regard to franchise
businesses. For instance, the Guidelines
Concerning the Franchise System (the
‘Franchise Guidelines’) under the Act on
Prohibition of Private Monopolisation and
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Aoi Inoue
Anderson Mori &
Tomotsune, Tokyo
[email protected]
FRANCHISING IN JAPAN – RELEVANT LEGISLATION AND DISCLOSURE OBLIGATIONS
Maintenance of Fair Trade (Act No 54 of 1947,
the ‘Antimonopoly Act’) provide as follows:2
‘The franchise system is defined in many
ways. However, the franchise system is
generally considered to be a form of
business in which the head office provides
the member with the right to use a
specific trademark and trade name, and
provides coordinated control, guidance,
and support for the member’s business
and its management. The head office
may provide support in relation to selling
commodities and providing services. In
return, the member pays the head office.’
Also, the Medium and Small Retail Commerce
Promotion Act (Act No 110 of 1973, the
‘MSRCPA’) is the main piece of legislation
governing franchises. It primarily targets
medium and small retailers and defines a
‘chain business’ as a business that, pursuant
to an agreement with uniform terms and
conditions, continuously sells or acts as an
agent to sell products and provide guidance
regarding management. In addition, a
‘specified chain business’ is defined as a
chain business where the agreement includes
clauses permitting its members to use certain
trademarks, trade names or other signs, and
collects joining fees, deposits or other money
from the members when they become a
member. If a certain franchise business falls
under this definition, the MSRCPA applies.
Since to be a ‘specified chain business’
requires continuously selling or acting as an
agent to sell products, the MSRCPA does not
apply to a chain business unrelated to the sale
of products.
Additionally, the Antimonopoly Act is
relevant to most typical franchise agreements.
The Franchise Guidelines and the Guidelines
concerning Distribution Systems and Business
Practices under the Antimonopoly Act3
describe what kinds of activities or restrictions
are problematic under the Antimonopoly Act.
The Fair Trade Commission (the ‘FTC’) has
overall responsibility in this regard.
If the restrictions on unfair trade practices
under the Antimonopoly Act are violated,
the FTC can order the breaching party to
cease and desist from the activity, to delete
the relevant clauses from the agreement
and to take any other measures necessary
to eliminate problematic activities (Article
20 of the Antimonopoly Act). Some of the
categories, such as abuse of a dominant
bargaining position and resale price
restrictions, could be subject to surcharges
(Article 20-5 of the Antimonopoly Act).
Pre-contractual disclosure obligations
In many countries, pre-contractual disclosure
is the most common form of franchise-specific
regulation. In Japan, the MSRCPA imposes
the following obligations regarding pre-sale
disclosure on franchisors.
When a franchisor intends to negotiate
a franchise agreement with a prospective
franchisee, the MSRCPA obliges the
franchisor to provide written documentation
to the prospective franchisee describing the
prescribed items and explaining the contents
of the written documents. Specifically,
the franchisor must disclose information
concerning the following points to the
franchisee:
• the initial fee, security deposit or any
other fee to be paid when the prospective
franchisee becomes a franchisee;
• the conditions of selling goods to a
franchisee;
• the assistance over operations of the
franchisee;
• the trademark, the trade name or any other
signs to be licensed;
• the term of the contract as well as its
renewal and termination; and
• other information which is more specific,
required by an Ordinance of the Ministry of
Economy, Trade and Industry (the ‘METI’).
The Ordinance of the METI provides more
details as to the points of disclosure.4
Whether pre-sale disclosure obligations
apply to sales to sub-franchisees depends on
the specific case. The relationship between
the sub-franchisor and the sub-franchisee
needs to be analysed; if it is considered to be a
‘specified chain business’ under the MSRCPA,
the sub-franchisor owes an obligation to
disclose information relating to itself. The
relationship between the franchisor and the
sub-franchisor must also be analysed; if it
too falls within the definition of a ‘specified
chain business’, the franchisor is also under a
disclosure obligation.
In addition, the Franchise Guidelines
require franchisors to disclose sufficient and
accurate information in soliciting prospective
franchisees, otherwise the franchisors’ actions
can be deemed to be a deceptive customer
inducement which is illegal, as it is considered
an unfair trade practice.
Conclusion
This is a summary of the relevant legislation
and rules governing franchise transactions
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
27 A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
and pre-contractual disclosure obligations.
Franchisors must comply with the precontractual disclosure obligations in order to
avoid disputes with franchisees or potential
franchisees appropriately.
Notes
1 Japan Franchise Association, ‘Franchise Chain Statistics
Investigation 2013 (from April, 2013 to March, 2014)’.
The report is available at the following website: www.jfa-fc.
or.jp/folder/1/img/20141028102114.pdf.
2 The English translation of the Franchise Guidelines is
available at the following website: www.jftc.go.jp/en/
legislation_gls/imonopoly_guidelines.files/franchise.pdf.
3 The English translation is available at the following
website: www.jftc.go.jp/en/legislation_gls/imonopoly_
guidelines.files/150330distribution.pdf.
4 Arts 10 and 11 of the Ordinance of the METI.
A collision course?
Navigating the intersection
of franchisor controls and
joint employer liability
Introduction
Franchisors across the United States are
fighting to preserve the legal separation
between them and their franchisees.
Employees of franchisees are filing lawsuits
against franchisors, alleging that they should
be held liable under the joint-employer
doctrine for the tortious actions of their
franchisees. As seen in Betts v McDonald’s,1
plaintiffs (employees of a McDonald’s
franchisee) are asserting that the franchisor
is their joint employer because it ‘has control
over nearly every aspects of its restaurants’
operations’.2 In the complaint, the Betts
plaintiffs list a daunting 75 paragraphs of
factual allegations of control by McDonald’s.3
This litigation coincides with increased
efforts by regulators to transform franchisors
into joint employers based on the system
controls they exercise over their franchisees.
In 17 consolidated cases, the National
Labor Relations Board (NLRB) charged
McDonald’s USA, LLC as a ‘joint employer’
with its individual franchises in a series of
unfair labour practice complaints.4 The
NLRB’s general counsel has argued that
franchisors’ pervasive controls over the daily
operations of franchised locations effectively
make franchisors the employers of staff at
franchised restaurants.5
28 What the Betts v McDonald’s complaint
and others fail to acknowledge, however,
is that franchisor system controls are
inherent in franchising. Franchisors
have an obligation under the Lanham
Act to impose controls on franchisees
that prevent the deceptive use of their
trademarks and ensure uniformity in their
franchise systems. Uniformity in delivering
the franchised product or service to the
consumer is the linchpin of the modern
business format franchise. Decisions that
undermine a franchisor’s ability to exercise
system controls also undermine franchising
as an alternative method of distribution.
This article will discuss how courts in
recent cases are construing certain controls
exercised by franchisors, and what strategies
franchisors may want to consider to mitigate
their exposure to joint employer liability.
Controls are inherent in franchising
A ‘franchise’ is a commercial relationship
where a franchisee has the right to operate
a business associated with a franchisor’s
trademark. As articulated by the Federal Trade
Commission – the federal entity that regulates
franchising – inherent in granting a franchisee
a licence to operate is the franchisor’s right to
‘exert a significant degree of control over the
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Kerry Bundy
Faegre Baker Daniels,
Minneapolis
kerry.bundy@
faegrebd.com
Nick R Rotchadl
Faegre Baker Daniels,
Minneapolis
nick.rotchadl@
faegrebd.com
A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
franchisee’s method of operation, or provide
significant assistance in the franchisee’s
method of operation.’6
Control has always been an integral part
of franchising because the ‘cornerstone
of a franchise system’ has always been
the trademark licence.7 Pursuant to the
Lanham Act, a franchisor must supervise and
control its franchisee’s use of the licensed
trademarks in order to prevent deception of
the public.8 This control requirement stems
from the Lanham Act, as originally enacted
in 1946, providing that a trademark can be
legitimately used by ‘related companies’
only so long as the mark is not used by the
related companies ‘to deceive the public’.9
As one early influential decision explained,
‘the only effective way to protect the public
where a trademark is used by licensees is to
place on the licensor the affirmative duty of
policing in a reasonable manner the activities
of his licensees.’10 In fact, a franchisor
that fails to control its franchisee’s use of
licensed trademarks may have its trademark
registration cancelled.11
To comply with the Lanham Act,
franchisors rightly impose requirements
and system standards to assure uniformity
in the franchise system and protect their
trademarks and the goodwill associated
with those trademarks. This is particularly
true in business format franchising, where
the franchisor is licensing not only its
trademarks, but also a complete plan – or
format – for managing and operating the
business.12 The standards in a business
format franchise are ‘comprehensive
and meticulous’13 because the public has
substantial expectations for uniformity at
each and every franchise location: exterior
and building characteristics, interior trade
dress, the products and services offered, the
means of payment accepted, the amenities
offered, typical price points for goods/
services, the time it takes to consummate
transactions, accommodations, and other
characteristics.14 And franchisees like the
business format model because it gives them
an established business plan that they can
independently operate.
The intersection of franchising and the
joint employer doctrine
The Lanham Act’s control requirement was
not intended to saddle the franchisor with
widespread liability for the actions of its
franchisees or its franchisees’ employees.15
Nevertheless, litigants (and some
courts and regulators) mis-characterise
reasonable trademark-related controls
to conclude that franchisors exercise the
controls of joint employers.
The tension between the Lanham Act’s
control requirement and the joint employer
doctrine arises because the joint employer
tests focus on the alleged employer’s
controls. For instance, a franchisor’s joint
employer liability under the federal Fair
Labor Standards Act (FLSA) is based on the
‘economic reality test,’ meaning whether
the franchisor has ‘operating control
over employees’.16 Generally, ‘all factors
relevant to the particular situation must
be considered in evaluating the economic
reality of an alleged joint employment
relationship.’17 Many jurisdictions will
analyse a non-exhaustive list of factors
such as if the franchisor: (1) possessed the
power to hire and fire the employees; (2)
supervised and controlled employee work
schedules or conditions of employment;
(3) determined the rate and method of
payment; and (4) maintained employment
records.’18 The factors are not exhaustive
and no single factor is determinative.19
Similarly, a franchisor’s joint employer
liability under the National Labor Relations
Act (NLRA) is currently based on whether
its control of employment is ‘direct
and immediate’.20 The franchisor must
‘meaningfully affect matters relating to the
employment relationship such as hiring, firing,
discipline, supervision, and direction.’21 The
franchisor must ‘share or codetermine those
matters governing the essential terms and
conditions of employment.’22
However, the NLRB’s general counsel wants
to broaden the definition of joint employment.
In 2014, the NLRB’s general counsel took
the position that the current joint employer
standard under the NLRA is too narrow.23
The NLRB’s general counsel advocates that
an entity is a joint employer if it has ‘direct,
indirect, and potential control over working
conditions’ or ‘where ‘industrial realities’
make an entity essential for meaningful
bargaining.’24 Indeed, the NLRB’s general
counsel’s push for the expansive ‘indirect’
and ‘potential’ control standard is targeted to
transform franchisors into joint employers.25
At least one opinion from the NLRB has
attempted to temper the fear that a change
in the NLRA test will not vitiate franchising
as a business model. On 28 April 2015, the
NLRB’s general counsel issued an Advice
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
29 A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
Memorandum that concluded that the
franchisor Freshii Development, LLC was not
a joint employer with its franchisee under
the current joint employer standard or the
NLRB’s proposed ‘indirect’ and ‘potential’
joint employer standard.26
Taken together, franchisors now more than
ever need to take caution in designing or
articulating controls in a way that factfinders
would support as reasonable trademark
protection controls.
Navigating which controls are vulnerable
to joint employer liability
Although the landscape of liability under the
joint employer doctrine is rapidly evolving
and jurisdictional differences do exist, there
are some key takeaways that can be gleaned
from recent cases. Namely, franchisors that
can tie the controls at issue to system standard
controls, that is, quality control, brand
uniformity, and non-employment operational
control, are having success in avoiding
joint employment liability. Conversely,
if franchisors are involved in day-to-day
personnel controls, such as the hiring, firing,
and supervising of a franchisee’s employees,
courts have found such allegations sufficient
to allow the joint employer claims to proceed,
at least past the motion to dismiss stage. The
material below shows some of the current
trends on how fact-finders are drawing the
line between controls that do or do not
trigger joint employer liability.
Quality control and inspections
There are several cases holding that routine
inspections of a franchised location should
not create joint employer liability.27 In
Singh v 7-Eleven, Inc, a franchisor was not a
joint employer even if the franchisor’s field
consultant inspected the employees’ uniforms
and equipment and instructed employees to
check customer’s identification when selling
alcohol and cigarettes.28
types of conversations that should be had with
a client.30
Non-employment operational controls
Courts have held that a franchisor may
provide non-employment operational
controls without automatically becoming a
joint employer.31 For example, the fact that a
franchisor’s founder ordered the franchisee
to purchase a radio did not demonstrate
that the franchisor’s founder was a joint
employer.32 Similarly, a franchisor was not a
joint employer for requiring the franchisee to
obtain vehicles, equipment, supplies, cleaning
products, uniforms, and computer hardware
and software that satisfied the franchisor’s
standards.33 In addition, the NLRB’s general
counsel recently determined that the
franchisor Freshii was not a joint employer
when Freshii provided an operations manual
with ‘mandatory and suggested specifications,
standards, operating procedures and rules
that Freshii periodically prescribes for
operating a Freshii Restaurant.’34
Limited training
The type, timing, and scope of training
prescribed by a franchisor may have different
implications over whether a franchisor is a
joint employer. There is case law supporting a
franchisor’s ability to provide initial training
to new franchisees without invoking joint
employer liability.35 Courts have also upheld a
franchisor’s ability to provide manager training
or training aimed squarely at protecting
the brand name, such as training on how
to serve, store, and present the franchisor’s
trademarked products, without creating joint
employer liability.36 But in Myers v Garfield &
Johnson Enters, the court held that the plaintiff
(an employee of the franchisee) alleged
sufficient facts on joint employment because
the franchisor not only required managers
to submit to training, but also required the
plaintiff to undergo specific training, and
monitored that plaintiff’s training.37
Brand uniformity policies
Generally, courts hold that policies to enforce
brand uniformity (such as uniforms and store
hours) do not give rise to joint employer
liability.29 For example, a massage franchisor
was not a joint employer when it had brand
uniformity policies on attire, the types of
massages offered, what types of products
could be used during a massage, and the
30 Background checks for brand-protection
reasons
To protect the brand, a franchisor might
require its franchisees to conduct background
checks on the franchisee’s potential
employees. At least one court has found
this to be ‘simply one of the quality control
standards [the franchisor] requires as a
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
condition to granting a franchise for the
use of its system, trade name, service marks,
trademarks, etc.’ 38
Recommendations versus requirements
A franchisor can also help protect itself
from joint employer liability by providing
franchisees with recommendations rather than
requirements.39 Franchisors have successfully
argued that recommendations on topics such
as improving store profitability, menu changes,
vendor contracts, and advertising plans should
not result in joint employer liability.40 And
the NLRB’s general counsel recently found
that non-mandatory guidance on human
resource matters such as hiring and scheduling
employees, including a sample employee
handbook, was not sufficient to make the
franchisor a joint employer.41
control over hiring or firing, rate of pay, work
hours and conditions.44 Although promising
precedent, given that the role of a payroll
processor involves continual access and
involvement with a franchisee’s personnel
information, franchisors should not disregard
that joint employment liability might exist
under a slightly different fact pattern or in a
different jurisdiction.
Rate of payment and method of payment
A franchisor that controls the rate or
method of payment to a franchisee’s
employees faces a risk of being deemed
a joint employer.45 In denying a motion
to dismiss, a court held that allegations
that a franchisor ‘exercised control over
their franchisees’ timekeeping and payroll
practices’ are sufficient to state a claim of
joint- employer liability.46
Franchise agreement provisions
Appropriate franchise agreement provisions
can also help protect a franchisor from joint
employer liability. The franchise agreement
may expressly declare that any required
standards exist to protect the franchisor’s
interests in the system and the trademarks
and not for the purpose of establishing any
control or duty to take control over those
matters that are reserved to the franchisee.
The franchise agreement may reiterate
within particular subject areas such as
employment-related provisions, technology,
training, and elsewhere, that any particular
standard is not intended to exercise control
and that the franchisee is responsible for
such control and the day-to-day operations
of the business. While franchise agreement
provisions are not dispositive of joint
employment, courts routinely cite to the
franchise agreement in finding that a
franchisor is not a joint employer.42
Knowledge of payroll or limited payroll
activity
The Fifth Circuit Court of Appeals has
held that a franchisor’s knowledge of an
employee’s salary did not make a franchisor
a joint employer.43 More delicate is whether
a franchisor might serve an administrative
function as payroll processor without invoking
joint employer liability. Two courts have
held that 7-Eleven’s conduct as a payroll
processor did not make it a joint employer
of its franchisees because it did not exercise
Hiring and firing of franchisee employees
A franchisor that controls the hiring or firing
of employees at franchised locations has a high
risk of being sued as a joint employer. Both the
FLSA and NLRA joint employer tests consider
whether the franchisor possesses the power to
hire or fire employees.47 For example, courts
have denied a franchisor’s motion to dismiss as
a joint employer because of allegations that the
franchisor had the power to hire employees48
or because its code of conduct required that
franchisees terminate their employees in
certain circumstances.49
Employee supervision
A franchisor that supervises its franchisee’s
employees risks being sued for joint
employer liability. Several courts presented
with these facts have denied a franchisor’s
request to dismiss the case. For example,
allegations that a franchisor required all
franchisee employees to follow ‘Guiding
Principles’ and a ‘Code of Conduct’ were
sufficient to assert a claim for joint employer
liabilty.50 Similarly, another franchisor that
allegedly had authority to ‘promulgate
work rules’ and ‘set the conditions of
employment’ and allegedly participated
in ‘daily supervision’ may be considered
a joint employer.51 Finally, allegations
that a franchisor monitored employee
performance and specified how customer
orders were prepared were sufficient to
withstand a motion to dismiss.52
INTERNATIONAL FRANCHISING NEWSLETTER SEPTEMBER 2015
31 A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
Conclusion
The distinction between controls that are
sufficient or insufficient to trigger joint
employer liability is not always easy to
ascertain. Even today, courts sometimes
fail to appreciate the unique nature of the
franchising business model and thereby
blindly cite to a franchisor’s legitimate
trademarks controls as evidence for joint
employer liability.53 Many cases addressing
the intersection between joint employment
and franchising are either in their infancy, or
on appeal. And, the NLRB general counsel’s
position on the joint employer test adds
another level of unpredictability. While the
law continues to evolve, franchisors should
continue to be vigilant that their operation
manuals, franchise agreements, and actual
practices ensure that the controls reserved
and/or exercised are closely aligned to
controlling system standards rather than a
personnel or supervisory controls.
Postscript
On 27 August 2015, the NLRB expanded
the standard for joint employment under
the NLRA in its Browning-Ferris Industries
of California, Inc decision. Now, instead of
requiring the actual exercise of direct and
immediate control to find joint employment,
the NLRB will consider the mere right to
control (even if that right is never exercised)
and indirect control as relevant to the joint
employer inquiry. Given this decision, it is
more important than ever for a franchisor to
examine the controls reserved and exercised
within its system.
Notes
1 Complaint in Betts v McDonald’s Corporation, Case No 4:15cv-00002 (ED Va).
2 Ibid, at para 2.
3 Ibid, at paras 28–103.
4 Order Consolidating Cases, Consolidated Complaint,
and Notice of Hearing, Case Nos 02-CA-093893,
02-CA-093895, 02-CA-093927, 02-CA-094224, 02-CA094679, 02-CA-097305, 02-CA-097827, 02-CA-098009,
02-CA-098604, 02-CA-098659, 02-CA-098662, 02-CA098676, 02-CA-103384, 02-CA-103726, 02-CA-103771,
02-CA-106094, and 02-CA-112282 (19 December 2014),
available at: http://apps.nlrb.gov/link/document.
aspx/09031d4581a24ee5.
5 Amicus Brief of the NLRB General Counsel, Case 32-RC109684 (26 June 2014), available at: http://apps.nlrb.
gov/link/document.aspx/09031d45817b1e83.
6 Federal Trade Commission Franchise Rule, 16 CFR
436.1(h)(1)-(2).
7 Susser v Carvel Corp, 332 F.2d 505, 516–517 (2d Cir NY
1964).
32 8 Mini Maid Servs Co v Maid Brigade Sys, Inc, 967 F.2d 1516,
1519 (11th Cir 1992); United States Jaycees v Philadelphia
Jaycees, 639 F.2d 134, 140 (3d Cir 1981); Oberlin v Marlin
American Corp, 596 F.2d 1322, 1327 (7th Cir 1979); Dawn
Donut Co v Hart’s Food Stores, Inc, 267 F.2d 358, 367 (2d Cir
1959). See also 15 USC s 1127 defining ‘related company’
as ‘any person whose use of a mark is controlled by the
owner of the mark with respect to the nature and quality
of the goods or services on or in connection with which
the mark is used’).
9 15 USC s 1055.
10 Dawn Donut Co, 267 F.2d at 367.
11 Mini Maid Services Co, 967 F.2d at 1519.
12 See William L Killion, The History of Franchising,
Franchising: Cases, Materials, and Problems (2013) 4 (‘Under
the business format model, the franchisor licenses the
franchisee to use both the franchisor’s trademark and
its ‘system.’ ‘System’ is broadly defined in most franchise
agreements as a set of fairly detailed methods and
procedures established by the franchisor and followed by
the franchisee in the operation of its business.’)
13 Brunner v Liautaud, 2015 US Dist LEXIS 46018, at *16 (ND
Ill 8 April 2015) (‘A franchisor, which may have thousands
of stores located throughout the country, often imposes
comprehensive and meticulous standards to protect its
brand and operate the franchises in a uniform way in order
to maintain a consistent customer experience’).
14 David J Kaufmann, et al, ‘A Franchisor is Not the
Employer of Its Franchisees or Their Employees’ (Spring
2014) 34 Franchise L J 439, 461.
15 ‘The purpose of the Lanham Act... is to ensure the
integrity of registered trademarks, not to create a federal
law of agency... It does not automatically saddle the
licensor with the responsibilities under state law of a
principal for his agent.’ Oberlin v Marlin American Corp,
596 F.2d 1322, 1327 (7th Cir 1979).
16 Orozco v Plackis, 757 F.3d 445, 448 (5th Cir. 2014).
17 Courtland v GCEP-Surprise, LLC, 2013 US Dist LEXIS
105780 (D Ariz 29 July 2013), appeal filed, Case No 1317182 (9th Cir)
18 See n16 above, at 448.
19 See n13 above, Brunner, at *12.
20 Airborne Express, 338 NLRB 597 fn 1 (2002) (citing TLI,
Inc, 271 NLRB at 798–799).
21 TLI, Inc, 271 NLRB 798 (citing Laerco Transp, 269 NLRB 324).
22 Ibid (citing NLRB v Browning-Ferris Indus. of Pa, Inc, 691
F.2d 1117 (3d Cir 1982)).
23 See n5 above.
24 Ibid.
25 Ibid.
26 NLRB General Counsel’s Advice Memorandum, Case
Nos 13-CA-134294, 13-CA-138293, and 13-CA-142297,
available at: http://apps.nlrb.gov/link/document.
aspx/09031d4581c23996.
27 Vann v Massage Envy Franchising LLC, 2015 US Dist
LEXIS 1002, at *20 (SD Cal 5 January 2015); Courtland,
2013 US Dist LEXIS 105780, at *14 (franchisor’s
periodic inspections did not result in joint employer
liability), appeal filed, Case No 13-17182 (9th Cir); Singh
v 7-Eleven, Inc, 2007 US Dist LEXIS 16677, at *14-15 (ND
Cal 7 March 2007). But see Olvera v Bareburger Group
LLC, 2014 US Dist LEXIS 94401, at *13 (SDNY 10 July
2014) (denying franchisor’s motion to dismiss joint
employer claim because it ‘enforced requirements for
the operation of franchises’ and ‘had the right to inspect
the facilities and operations of franchises’); Owens-Presley
v MCD Pizza, Inc, 2015 US Dist LEXIS 16430, 3-4 (ED
Pa 10 February 2015) (denying franchisor’s motion to
dismiss joint employer claim because it ‘authorized the
use of its trade name at the location, including on the
signs, menus and uniforms’).
28 See n27 above, Singh, at *14-17.
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
A COLLISION COURSE? NAVIGATING THE INTERSECTION OF FRANCHISOR CONTROLS AND JOINT EMPLOYER LIABILITY
29 See n13 above, Brunner, at *16 (‘actions done in the
context of quality control and brand uniformity does not
manifest an employer-employee relationship’)
30 See n27 above, Vann, at *20
31 A franchisor with operational controls may still be vicariously
liable on matters related to the operational controls.
32 See n16 above, Orozco, at 451.
33 Reese v Coastal Restoration & Cleaning Servs, 2010 US Dist
LEXIS 132858 (SD Miss 15 December 2010).
34 NLRB General Counsel’s Advice Memorandum at 2, Case
Nos 13-CA-134294, 13-CA-138293, and 13-CA-142297,
available at: http://apps.nlrb.gov/link/document.
aspx/09031d4581c23996.
35 See n16 above, Orozco, at 451.
36 See n17 above, Courtland, at ** 13, 23, 25.
37 Myers v Garfield & Johnson Enters, 679 F Supp 2d 598, 610
(ED Pa 2010) (denying franchisor’s motion to dismiss
joint employer claim).
38 See n33 above, Reese, at *9-11 (granting motion for
summary judgment to franchisor on joint employer claim
and finding that the contractual provision on background
checks ‘does not give SERVPRO the power to hire/fire
Coastal employees, nor can it reasonably be inferred to
do so’).
39 See Hong Wu v Dunkin’ Donuts, Inc, 105 F Supp 2d 83, 89
(EDNY 2000) (‘In deciding whether the franchisor’s actions
give rise to a legal duty, courts typically draw distinctions
between recommendations and requirements’).
40 See n16 above, Orozco, at 449–450.
41 NLRB General Counsel’s Advice Memorandum at
2–3, Case Nos. 13-CA-134294, 13-CA-138293, and 13CA-142297, available at: http://apps.nlrb.gov/link/
document.aspx/09031d4581c23996.
42 See n17 above, Courtland, 2013 US Dist LEXIS 105780, at
*13–14; see n27 above, Singh, at *9-11.
43 See n16 above, Orozco, at 451.
44 Aleksick v 7-Eleven, Inc, 205 Cal App 4th 1176, 1190
(Cal App 4th Dist 2012); see n27 above, Singh, at
*9–11(holding that providing a payroll service to a
franchisee’s employees does not make the franchisor a
joint employer).
45 See n16 above, Orozco.
46 See n27 above, Olvera, at *14 (denying franchisor’s
motion to dismiss joint employer claim).
47 See n16 above, Orozco, at 448; TLI, Inc, 271 NLRB 798
(citing Laerco Transp, 269 NLRB 324).
48 See n27 above, Olvera, at *13 (denying franchisor’s
motion to dismiss joint employer claim).
49 See n37 above, Myers, 679 F Supp 2d at 610 (denying
franchisor’s motion to dismiss joint employer claim).
50 Shupe v DBJ Enters, LLC, 2015 US Dist LEXIS 22284
(MDNC 25 February 2015) (denying franchisor’s motion
to dismiss joint employer claim).
51 See n37 above, Myers, 679 F Supp 2d at 609–610(denying
franchisor’s motion to dismiss joint employer claim).
52 See n27 above, Olvera, at *13 (denying franchisor’s
motion to dismiss joint employer claim).
53 Owens-Presley v MCD Pizza, Inc, 2015 US Dist LEXIS
16430, 3–4 (ED Pa 10 February 2015) (holding that the
franchisor may have been a joint employer because it
‘authorized the use of its trade name at the location,
including on the signs, menus and uniforms’)
Magna Carta
The Foundation of Freedom 1215-2015
(IBA Special Edition)
As the global voice of the legal profession, the IBA is proud to mark the upcoming 800th anniversary of
Magna Carta with this beautiful new book from Third Millennium Publishing.
ORDER YOUR COPY TODAY
Magna Carta has resonated through the centuries and across the globe like no other legal text. The 800th
anniversary of its first issue at Runnymede in 1215 presents an opportunity to reflect on the importance of a
text that enshrines the individual’s right of access to due process in law.
Magna Carta
The idea that all are subject to the law, including kings and presidents, had its origin in Magna Carta. As the
basis of the rule of law, this historic document was instrumental in the development of the principle aims
and objectives of the International Bar Association.
(IBA Special Edition)
For this richly illustrated volume, Nicholas Vincent, Professor of Medieval History at the University of East
Anglia, is joined by a range of leading experts on Magna Carta from across the world to reflect on the
circumstances of its genesis and its enduring importance through subsequent centuries.
This special edition will contain an introduction by the Master of the Rolls, Lord Dyson.
A significant percentage of every copy sold will go to the Magna Carta Trust, a non-profit body which
promotes and supports the principles of Magna Carta and its associated historical sites.
Author:
Nicholas Vincent
Professor of Medieval Hostroy at te
University of East Anglia
Published by: Third Millennium
Publishing
hardback, 192 pages
270 x 230mm, portrait
printed in colour throughout
c60,000 words
up to 250 illustrations in colour &
black and white
publication August 2014
The Foundation of Freedom 1215-2015
www.magna-carta-book.com
Price: £50 (plus £12.50 post and packaging)
THE IBA’S HUMAN RIGHTS INSTITUTE
20TH ANNIVERSARY GALA
Tuesday 1 December, 7pm
Lord’s Cricket Ground, London
For 20 years the IBA’s Human Rights Institute (IBAHRI) has been
working with the global legal community to promote and protect
human rights and the independence of the legal profession worldwide.
Join legal colleagues for an evening in support of the IBAHRI and
its work advocating for legal colleagues around the world.
To find out more or book a table today, visit:
www.tinyurl.com/IBAHRI20th
New eyeWitness mobile app
captures verifiable images to aid
prosecution of human rights atrocities
On 8 June 2015 the International Bar Association (IBA), with support from LexisNexis Legal &
Professional, launched the eyeWitness to Atrocities app – a new tool for documenting and
reporting human rights atrocities in a secure and verifiable way so the material can be used
as evidence to bring perpetrators to justice.
Every day, around the world, human rights defenders, investigators, journalists and ordinary
citizens capture photos and video of atrocities committed by violent and oppressive states
and groups. eyeWitness provides these individuals with a tool to increase the impact of the
footage they collect by ensuring the images can be authenticated and, therefore, used in
investigations or trials.
With the eyeWitness mobile camera app, users can capture photos
or videos with embedded metadata showing where and when
the image was taken and verifying that the image has not been
altered. The images and accompanying verification data are
encrypted and stored in a secure gallery within the app. The user
then submits this information directly from the app to a storage
database maintained by the eyeWitness organisation, creating a
trusted chain of custody. Users retain the ability to upload the now
verifiable footage to social media or other outlets.
eyeWitness will become an advocate for the relevant footage
it receives, ensuring it is used to promote accountability for
the atrocities filmed. Behind eyeWitness is an expert legal
team that will analyse the received images and identify the
appropriate authorities, including international, regional or
national courts, to investigate further. In some cases, eyeWitness
will bring situations to the attention of the media or other advocacy
organisations to prompt international action.
eyeWitness offers a solution to the evidentiary challenges of mobile phone footage. The
eyeWitness app, virtual evidence locker, and support offered by a team of legal experts will
empower those courageous individuals who are capturing footage with the ability to use
these images to bring the perpetrators of serious international atrocity crimes to justice.
The eyeWitness to Atrocities app is available to download for free on all Android
smartphones. For more information, visit www.eyewitnessproject.org, follow @eyewitnessorg
on Twitter, or watch the eyeWitness YouTube channel.
ANNUAL CONFERENCE OF THE INTERNATIONAL BAR ASSOCIATION
WASHINGTON MARRIOTT WARDMAN PARK, WASHINGTON DC, USA
T
he 2016 IBA Annual Conference will be held in Washington
DC, home to the federal government of the USA and the
three branches of US government – Congress, the President
and the Supreme Court. Washington DC is also an important centre
for international organisations and is home to the International
Monetary Fund and the World Bank. As well as being the political
centre of the USA, Washington DC is home to some spectacular
museums and iconic monuments clustered around the National Mall.
Washington DC will give the 2016 IBA Annual Conference the perfect
blend of opportunities for business, cultural exploration and to develop
a unique set of new contacts. This mix makes Washington DC an ideal
location for the world’s leading conference for international lawyers.
WHAT WILL WASHINGTON DC 2016 OFFER YOU?
• Access to the world’s best networking and business development event
for lawyers – with over 6,000 lawyers and legal professionals attending
from around the world
• Up-to-date knowledge of the key developments in your area of the law
– with nearly 200 working sessions covering all areas of practice
• The opportunity to generate new business with the leading firms from
around the globe
• Up to 25 hours of continuing legal education and continuing
professional development
• A variety of social functions providing ample opportunity to network
and see the city’s famous sights
TO REGISTER YOUR INTEREST:
Visit: www.ibanet.org/Form/IBA2016Washington.aspx
Email: [email protected]
OFFICIAL CORPORATE SUPPORTER