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