The Franchise Law Review: E-Commerce and Franchising
Whereas in the previous millennium e-commerce was something akin to science fiction, it is now a fundamental part of any franchise business and the franchise agreement must deal with the way in which it affects the franchisor–franchisee relationship in some detail. For nearly every multichannel retail operation, e-commerce is a key sales channel, and is increasingly the main sales channel. This transformation from science fiction to viable sales channel began with the dot-com boom of the mid to late 1990s when new and existing retailers began exploiting and developing internet-enabled technologies to market and sell their goods and services to consumers. The intervening years have witnessed correspondingly revolutionary changes in consumer behaviour and in the way that retail businesses operate.
The current e-commerce retail market is also increasingly driven by the proliferation of mobile devices and their usage by consumers. At the end of 2019, there were 5.5 billion smartphone subscriptions worldwide (accounting for 70 per cent of all mobile phone subscriptions) that could be used to carry out e-commerce activities and this is forecast to grow to 7.5 billion by 2025.2 Transactions completed on mobile devices accounted for 67.2 per cent of digital sales in 20193 and this exponential growth has been underpinned by advances in wireless technologies. Analysts predict that there will be more than 2.8 billion 5G subscriptions globally by the end of 2025,4 giving consumers rapid, round-the-clock access to digital services.
The emergence of the covid-19 pandemic in 2019–2020 has also disrupted consumer behaviour, with mandatory closures of bricks-and-mortar businesses, to varying degrees, across the globe. The result has been an increased uptake in e-commerce among consumers, and the emergence of new customer segments, such as the elderly. While some of these demand shifts in e-commerce may be temporary, others are likely to have long-lasting effects on bricks-and-mortar retailers.5
A further challenge for franchisors, however, is that e-commerce continues to develop apace. With franchise agreements being granted for periods of up to 15 or 20 years it is essential that they are sufficiently flexible to accommodate the further changes that lie ahead. Although the past 25 years have seen a rapid development in internet-enabled technologies and an equally rapid increase in internet usage by consumers,6 the next 25 years are likely to see even more far-reaching changes.
The outlook is that internet-enabled marketing and selling of goods, services and digital content will be even more widespread in future. This means that all retailers – even retailers currently operating as traditional bricks-and-mortar businesses – need to understand e-commerce from a range of perspectives, including technological, operational, commercial and legal.
The purpose of this chapter is both to reflect on the key contracting issues that confront franchisors when they seek to agree the e-commerce components of franchising and development agreements and to help franchisors gain a broad overview of the general legal landscape that they will need to deal with when operating e-commerce businesses.
II WHAT IS E-COMMERCE?
The expression 'e-commerce' is used to refer to a wide range of commercial activities, which can involve different combinations of consumers, businesses and other organisations. The common link is that these activities are conducted over computer networks and, more usually, the internet.
In this chapter, e-commerce will refer to commercial activities between consumers and business retailers that take place over the internet and in which the retailers market or sell goods, services or digital content to consumers who are using networked devices – such as personal computers, tablets, smartphones and internet-enabled televisions.
In this sense, as previously indicated, e-commerce is a fast-moving territory. Retailers now routinely use social networks such as Facebook, Twitter and Instagram to market their products, and consumers are increasingly buying goods and services marketed to them on social networks. Retailers are also tending to optimise their operations so that consumers can learn about and buy goods and services through dedicated applications (apps) installed on their mobile devices (such as smartphones or tablets) rather than through more traditional websites. This allows retailers to learn more and more about their customers through location-based technologies and other marketing automation technologies.
Near-field technologies (and related security functions) now feature in most mobile devices and these are being leveraged to allow consumers to make payments directly through the devices themselves, a practice that looks likely to disrupt the credit and debit card industry. In future, consumers may also make more use of cryptocurrencies such as bitcoin to buy goods and services. For example, in 2019, e-commerce website Etsy began accepting purchases in bitcoin. If cryptocurrencies are adopted as a method of payment this will have profound implications for financial regulators and central banks.
III E-COMMERCE SOLUTIONS
Most owners of major international retail brands now operate a business strategy in which e-commerce activity forms one or more of several channels through which the goods or services associated with the brand are marketed and sold. This involves the brand owner operating a portfolio of e-commerce platforms that, at a minimum, generally include websites, mobile apps and social media platforms. Each channel generally forms an integral part of the brand owner's business, with the objective of increasing brand exposure and, ultimately, revenue and profits. Responsibility for operating each e-commerce platform tends, to a greater or lesser extent, to be allocated among the brand owner itself, specialist digital media marketing agencies, e-commerce platform providers or third-party stakeholders (such as franchisees and joint venture partners). Depending on their circumstances, brand owners and retailers are therefore able to outsource responsibility for parts of their overall e-commerce offerings to third-party providers.
The problem that brand owners face when operating this type of strategy is that e-commerce channels have an inherent tendency to conflict with other, more traditional channels, such as bricks-and-mortar channels operated by third parties. This conflict arises because of the borderless nature of the internet, which makes it difficult to impose territorial restrictions on the marketing and sale of goods, services and digitised content through e-commerce channels.
For example, an international UK fashion brand might have long-standing franchising agreements in place with a bricks-and-mortar franchisee in France. If, separately, the UK brand were to implement a website and mobile app that offer French consumers goods at cheaper prices or with better returns policies than those being offered by the franchisee's bricks-and-mortar shops, this would be problematic.
This type of scenario challenges the brand owner and the franchisee to find a way of operating their potentially competing and conflicting channels in harmony. Of course, in essence, this is a commercial challenge that will be resolved through a commercial agreement. Ultimately, however, the contractual documentation that underpins that agreement will have to show a full understanding of the different channels and how they interrelate. For example, the brand owner may wish to allow its franchisees or joint venture partners to take responsibility for operating some or all of the brand's local e-commerce platform or social media presence. If this is agreed, then the franchise agreement or joint venture documentation will have to specify what the franchisee or partner is permitted to do or is restricted from doing online. Current market practice is for either the contract itself or any handbook that is incorporated into the contract to address the following types of points:
- E-commerce platforms: franchisees and joint venture partners often want to control local landing pages and subdomains. To effect this, the contractual documentation will have to expressly set out the franchisee's or joint venture partner's rights and obligations in relation to the local landing pages and subdomains, as well as any controls to be retained by the brand owner.
- Social media: if a franchisee or joint venture partner is entitled to use its own social media accounts to promote the brand owner's products, the brand owner will usually want the contractual documentation to include obligations and restrictions that control such social media activity.
- Third parties: brand owners often also seek to control how the franchisee or joint venture partner contracts with third parties. This is aimed at helping the brand owner protect its brand or to help a franchisee or joint venture partner benefit from any potential economies of scale that the brand owner already enjoys. For example, the brand owner may wish to control how its brand is used in an online brand concession store or by third-party aggregators.
IV E-COMMERCE LEGAL LANDSCAPE
It is clearly very important for e-commerce platform operators to ensure they have a comprehensive understanding of the legal framework that applies to their activities in all jurisdictions in which they are using e-commerce to market and sell their products and services.
Broadly speaking, the types of legal issues that arise will be the same in all jurisdictions. In essence, they flow from the fact that the retailer needs to enter into contracts with consumers that it is marketing or selling to, but in a way that complies with local law. Of course, the overall commercial importance to the retailer of each contract that is generated by the retailer's e-commerce platforms can vary enormously, but such contracts tend to fall into two broad categories:
- contracts that govern the supply of the relevant goods, services or digital content; or
- contracts that govern the use by the consumer of the retailer's e-commerce platform (e.g., website and mobile apps), including contracts that incorporate acceptable use and privacy policies.
If a retailer operates internationally, it will often want to operate identical or near-identical e-commerce platforms across multiple jurisdictions. If so, then the retailer will need to design its platforms and supporting operations so that, when consumers' use of the platforms generates contracts, there is a high probability that those contracts are enforceable and on terms that the retailer can predict. This is important even if the retailer is seeking to specify that its e-commerce contracts have the same governing law irrespective of the country in which they are selling. The reason for this is that, notwithstanding the governing law chosen by the retailer, in many jurisdictions certain mandatory local law provisions will apply to contracts with consumers regardless of the governing law of the contract. In some jurisdictions, a consumer may even have grounds for arguing that the local law of the jurisdiction in which they reside should apply to the contract instead.
Depending on the law of the jurisdictions in which the retailer is seeking to operate and the nature of the goods, services or digital content being sold, creating e-commerce platforms that generate contracts that predictably comply in all respects with all local contract law can be a challenging (if not impossible) task. Nevertheless, it is often possible for retailers to create and operate platforms across a specific selection of jurisdictions with a reasonable level of confidence that the contracts generated by the retailer's e-commerce platforms will comply with local law in those jurisdictions.
The types of contractual issues that the retailer will need to consider in each jurisdiction are as follows:
- Contract formation rules: local rules on contract formation will apply to the retailer's various e-commerce platforms in each of the jurisdictions in which those platforms operate. The retailer will want to ensure that its platforms comply with these rules so that it has enforceable contracts in place with its retail customers.
- Contract terms: broadly speaking, there are two areas for retailers to consider. First, ensuring that key commercial terms are properly incorporated into its contracts. For example, terms and conditions relating to pricing, payment and delivery. Second, ensuring that terms and conditions that allocate legal liability between the retailer and the consumer are incorporated and enforceable. Many jurisdictions operate under laws that aim to be favourable to the consumer; for instance, by restricting the retailers' ability to enforce terms that seek to exclude or limit their liability. Given the risk that local law may apply to the contracts generated by a retailer's e-commerce platforms, it is generally sensible to get local legal advice on the enforceability of any contractual terms that seek to limit or exclude the retailer's liability in the context of consumer claims.
- Governing law and jurisdiction: a retailer may be located in a different country from the country in which the consumer is located. As indicated above, this triggers the rules on choice of governing law and jurisdiction, including under the Rome I Regulation7 and the Brussels Regulation.8 This is a complicated area of law but, in general terms, it is usually prudent for retailers to include terms specifying which governing law and jurisdiction should apply to the contracts generated by their e-commerce platforms.
- E-commerce and consumer legislation: it is likely that there will be specific local laws that will apply to consumers generally and more specifically in respect of e-commerce contracts with consumers. In the EU, there are a number of pieces of legislation that cover this area and apply across all Member States. Primarily, these relate to information provision by e-commerce operators and fairness of terms in consumer contracts. A number of EU Directives will impose obligations on the retailer in these areas, such as the Geo-Blocking Regulation,9 the Unfair Commercial Practices Directive,10 the Unfair Terms Directive,11 the E-Commerce Directive12 and the Consumer Rights Directive.13 The retailer will need to ensure not only that its e-commerce platform provides the information required by these Directives and that its contracts with consumers are compliant with these Directives but also, for the reasons discussed above, that it has complied with any specific local laws that apply in this area.
- Data privacy: the retailer will, in almost all cases, be collecting personal data through the use of their e-commerce platform and is likely to be responsible for compliance with data protection laws in respect of that data. This will involve, inter alia, ensuring that they use personal data in a lawful manner, that personal data is appropriately secured and that individuals are informed and give consent to the use of their personal data. The key consideration for companies offering goods or services in the EU will be ensuring compliance with the General Data Protection Regulation14 (see Chapter 5 on data protection for a more detailed discussion on this).
- Competition: the European Commission generally regards internet marketing and sales through websites as 'passive selling' for the purpose of the vertical restraints block exemption. Therefore, customers from outside a franchisee's exclusive territory who place an order with the franchisee as the operator of the website cannot be prevented from making a purchase from the franchisee, and must be free to make purchases over the internet in general.
- Tax: local rules on sales tax are likely to apply to sales to consumers in other jurisdictions. Complying with these requirements may require a retailer to be registered with the tax authorities in the jurisdiction in which it is selling. In the course of running its e-commerce platform, the retailer may need to assess whether withholding tax will apply to any of its transactions (see Chapter 6 for a more detailed discussion on this).
- E-money: payment over the internet is now ubiquitous. Many of these transactions use e-money (a digital cash equivalent) stored on an electronic device or remotely on a server in an e-wallet. E-money is usually funded from a credit or debit card or a bank account and allows money to be sent instantly and securely. Although these commonly offer a cheaper and more efficient payment system for retailers, caution should be taken as these arrangements are likely to trigger the Electronic Money Directive15 and the Payment Services Directive.16 Depending upon the exact form of the arrangements, either the retailer or a third-party electronic money provider may be subject to these requirements.
- Virtual currencies: retailers may want to consider accepting virtual currencies such as bitcoin (distinct from e-money, as they are stand-alone currencies, rather than a digital version of fiat money) as a method of payment on their e-commerce platform. The recent emergence of virtual currencies in mainstream commerce (with large companies such as Microsoft and Expedia now accepting bitcoin for online payments) has left the law in this area playing catch-up. While some commentators have suggested that bitcoin should be governed by the Electronic Money Directive, others suggest it should fall under the Payment Services Directive. Despite much debate on the topic, the EU has not passed any specific legislation in relation to the status of bitcoin as a currency, and the European Banking Authority has highlighted the divergent approaches to regulating crypto assets that are emerging across EU Member States.17 Consequently, there is much uncertainty surrounding virtual currencies, and more significantly they are often unregulated, meaning retailers and consumers alike are not protected and may be at risk of losing their money should something go wrong.18 Some regulators, such as the Financial Conduct Authority in the United Kingdom, have released guidance19 warning that virtual currencies (or 'exchange tokens') such as bitcoin are currently unregulated in the United Kingdom (although consultations are ongoing on whether the regulatory perimeter should be expanded to regulate virtual currencies). Further, the introduction of EU legislation20 means that, from 10 January 2020, exchanges trading virtual currencies and providers of virtual currency wallets must perform anti-money laundering checks on customers. This could catch retailers looking to integrate virtual currency payments into their e-commerce channels.
- New payment methods: with the introduction of the Payment Services Directive, third parties are (upon becoming authorised in the relevant Member State) entitled to initiate payments from a consumer's bank account. These services, referred to as payment initiation services, allow retailers to accept payments directly from the consumer's bank account without requiring the consumer to supply debit or credit card details. While these payment methods are still under development, there are already a number of significant providers, particularly in EU Member States, where the use of card payments is lower.
- Open banking: retailers are making increasing use of open banking standards to provide consumers with more interactive experiences. Open banking allows third parties to access and retrieve data from a consumer's bank account (as long as the consumer has consented). Retailers are using this access to suggest new products to customers based on previous transactions and to allow consumers to see their balance before making a purchase.
- Merchant acquirers: to accept payments by card on their e-commerce platform retailers are likely to contract with a merchant acquirer, who acts as the link between the retailer, the card issuer and the card schemes. Since merchant acquirers take on the risk in each transaction, they commonly only contract on their standard terms, with little or no room for a retailer to negotiate (although this is of course subject to the specific commercial positions and negotiating power of the parties).
- Payment card industry data security standards (PCI DSS): since an e-commerce platform is likely to deal with credit and debit card data, the retailer must ensure that the platform complies with the requirements of PCI DSS. PCI DSS is a set of requirements on the storage and use of payment card data. Although PCI DSS does not have the force of law, it is a set of industry standards administered by significant payments stakeholders, including payment card schemes such as Visa and MasterCard, and non-compliance can result in significant fines.
- Deferred payment options: retailers seeking to increase sales may consider allowing consumers to purchase goods, services and digital content on finance. A recent trend has seen retailers offering 'buy-now-pay-later' services, whereby a retailer will partner with a funder to allow consumers to pay for goods in instalments (often on an interest-free basis). If the service is offered interest-free, the funder typically purchases the goods, services and digital content from the retailer at a discount but receives the full amount from the consumer in instalments – the amount of this discount will be a critical factor for the retailer as it eats into their profit margin. Retailers will also need to consider whether the funding amounts to providing credit which, in many Member States, is an activity requiring authorisation; although this is primarily an issue for the funder, the retailer could be subject to regulation as a credit broker.
The internet-enabled technologies that have revolutionised the retail landscape over the past 25 years continue to develop at a rapid pace. Global brand owners, seeking to operate their multichannel businesses and exploit the commercial opportunities that these developments present, find themselves needing to overcome the significant commercial challenges that are created by the borderless nature of the internet. This is achieved through careful negotiations with their commercial partners, which can include third-party franchisees. E-commerce retailers also find themselves needing to navigate through a sometimes bafflingly complex multi-jurisdictional legal landscape, which requires them to adopt sophisticated legal risk-mitigation strategies. For both brand owners and retailers, if these issues are successfully surmounted, substantial rewards are available.
1 Ben Hughes is a senior associate and Francesca Longsworth is an associate at Bird & Bird LLP.
3 See Merchant Savvy report 'Global Mobile eCommerce Statistics, Trends & Forecasts': https://www.merchantsavvy.co.uk/mobile-ecommerce-statistics/.
4 See 'Ericsson Mobility Report: November 2020', footnote 2.
5 See the Organisation for Economic Co-operation and Development report 'E-commerce in the time of COVID-19' http://www.oecd.org/coronavirus/policy-responses/e-commerce-in-the-time-of-covid-19-3a2b78e8/.
6 For example, see the rapid growth in fixed (wired)-broadband subscriptions as published on the International Telecommunication Union's website: http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx.
7 Regulation (EC) No. 593/2008.
8 Regulation (EC) No. 44/2001.
9 Regulation (EC) 2018/302.
10 Directive 2005/29/EC.
11 Directive 93/13/EEC.
12 Directive 2000/31/EC.
13 Directive 2011/83/EU.
14 Regulation (EU) 2016/679.
15 Directive 2009/110/EC.
16 Directive (EU) 2015/2366.
17 In January 2019, the European Banking Authority issued a report on crypto assets; the report is available at: https://eba.europa.eu/documents/10180/2545547/EBA+Report+on+crypto+assets.pdf.
19 See UK Financial Conduct Authority Policy Statement PS19/22, 'Guidance on Cryptoassets: Feedback and Final Guidance to CP 19/3'.
20 Directive (EU) 2018/843.