International Franchising

International franchisors inbound into the U.S. face a complex set of business decisions and legal regulations.  Even seemingly simple tasks–like properly executing a franchise registration application–can become a time-consuming and expensive endeavor (especially where the franchisor does not have an authorized signatory in the U.S.).  Knowing how and when to request waivers can save time and money.

Notary public working on a document with stamp and padsFranchise registration applications must be signed by the franchisor’s authorized representative. In addition, some of the signatures must be notarized.  Generally speaking, satisfying this requirement requires having the signature notarized at a U.S. embassy or obtaining an apostille. U.S. embassies will have policies regarding scheduling appointments, what documents to bring, and how to prepare documents to be notarized. In addition, notarial services can be significantly more expensive at the embassy than stateside. Finally, embassy representatives are not used to seeing standard franchise applications and disclosure documents, which can cause confusion and delays.

Alternatively, the franchisor can obtain an apostille, a specialized certificate that verifies that a document is legitimate and authentic. Apostilles are only effective between countries that are parties to the Hague Apostille Convention (which is many). First, the franchisor must translate the documents into the local language so they can be notarized under local law. Then the franchisor must obtain an apostille, which ensures the documents and signature are accepted by the U.S. examiner.

Unfortunately, both options can be costly and time-consuming. Therefore, inbound international franchisors and their counsel should inquire whether the U.S. examiner will grant a waiver if obtaining an apostille or notarization will create a financial hardship and undue delay. Examiners understand there are specific difficulties to international franchising and may waive the notary requirement or permit the signatory to obtain notarization when he or she is next in the U.S.  Franchisors or counsel should contact examiners to determine how to properly make the request.  Some examiners will accept requests made in a cover letter to the application or in a preliminary email exchange.

International franchising inbound to the U.S. can be very complex. Obtaining a waiver of the notarization requirement is one less headache, which allows franchisors and their counsel to focus on the substantive issues.

Fox Rothschild LLP has deployed a new mobile app to assist companies, including franchisors, as they rush to comply with the European Union’s General Data Protection Regulation (GDPR) – a complex set of new data privacy rules with major implications for businesses.  The app – GDPR Check – helps businesses catalog their data management practices and policies to determine necessary steps to comply with GDPR when it takes effect in May.

“The pending implementation of GDPR will impact all companies that process or control the personal data of any EU citizen,” said Mark G. McCreary, chief privacy officer at Fox Rothschild and co-creator of GDPR Check.  “Every business, regardless of where it is headquartered, will be responsible for complying with these sweeping new data privacy rules when collecting or processing Personal Data,” said Daniel L. Farris, co-chair of the Fox’s Technology Group and co-creator of GDPR Check.

Even if a business does not collect personal data from EU citizens, the GDPR requirements apply to that business if it provides services to another business that must comply with GDPR.  Failure to comply with the regulations can result in fines of up to €20 million (approx. US$24.7 million) or 4 percent of global annual revenue in the prior year.

GDPR Check maps an organization’s data management practices in 17 areas that are key to determining compliance, including:

  • Types of data collected
  • Privacy policies (external and internal)
  • Consent
  • Data retention
  • Breach readiness

The app produces a report for each key area that a company can share with its attorneys and compliance team.

GDPR is intended to protect the rights of EU citizens to control the use of their personal data, including customer data such as birthdates, mailing addresses, IP addresses, product purchases and payment information, as well as supplier data, employee data and “sensitive data” such as health information, race, and sexual orientation.

This is the second app Fox Rothschild has launched in the data privacy space. The firm also maintains Data Breach 411, which provides easy access to applicable state statutes and breach notification rules to enable in-house counsel and compliance professionals, in the midst of a data breach crisis, to quickly identify controlling law and relevant guidance.

GDPR Check is available for free download in the Apple App Store and Google Play stores.

As many Canadians, as well as foreign companies doing business in Canada, now know, the cornerstone of Canada’s Anti-Spam Law (CASL) is a general prohibition against sending any “commercial electronic message” without the prior express or implied consent of the recipient. A “commercial electronic message ” or “CEM” is broadly understood as any electronic message that encourages participation in a commercial activity. That’s a big deal, because one of the fundamental elements of CASL that makes it so onerous is that it is an ‘opt-in’ regime. Every other anti-spam law out there in the world provides for an ‘opt-out’ framework, meaning that senders have to implement an unsubscribe option which is identifiable, accessible and functional. But CASL requires senders to have consent first before anything can be sent, and obtaining that consent can pose a big wall to have to climb.

Chad Finkelstein

While express consent ought to be intuitive enough to be able to identify, CASL contains a number of instances of implied consent, any of which may be relied upon when sending a CEM. The most commonly relied upon example of implied consent is probably the permission that follows for the 2-year period after a customer purchases a product or service from you, but there are several others which your recipient may or may not comfortably fit into. In all cases, whether consent is expressly or implicitly given, you have to maintain and keep careful track of the categories of consent which your recipients fall under to ensure that they are removed from distribution lists should one of the eligible criteria expire or become unavailable.

And CASL has teeth! Statutory damages of up to $10,000,000 for corporations, or $1,000,000 for individuals. And the Canadian Radio Television Commission (or, the CRTC, which oversees and enforces CASL) has not shied from imposing significant fines on offenders in the tens and hundreds of thousands of dollars.

Oh, and did I mention the personal liability? Companies’ directors and officers can be found personally liable under certain provisions of CASL if they directed, authorized, assented to, acquiesced in or participated in the commission of a contravention of CASL!

And it was about to get worse. Until recently, Canadian businesses were planning around July 1, 2017, upon which date it was expected that the remedies available under CASL would no longer be limited to CRTC fines, but would also include a new private right of action, meaning that individuals and corporations could also sue alleged infringers of this law.

Copyright: viperagp / 123RF Stock Photo

In addition to the statutory damages already mentioned, courts would also be able to order people liable under CASL to also pay to the complainants an amount equal to their actual loss or damage (if any), plus up to $200 for each violation of sending unsolicited messages up to $1,0000,000 for each day on which a violation occurred.

And those damages were to be available per violation per person! This raised alarm bells for businesses about the virtual inevitability of a new breed of class action litigation with a view towards court-ordered award against alleged violators of CASL that could be potentially in the millions of dollars.

Fortunately, the federal government of Canada heard the concerns of the business community and, on June 7, 2017 announced that the private right of action under CASL has been suspended indefinitely. Phew!

The other requirements of CASL are still very much in effect, though, so businesses around the world who have Canadians on their email distribution lists ought to take a deep dive into the composition of those lists, the nature of the electronic communications being sent to recipients and internal recording-keeping and audit practices to ensure that one, mistakenly sent mass email does not snowball into a catastrophe.

Contributed by Chad Finkelstein

Chad is a partner at the Canadian law firm of Dale & Lessman LLP and a registered trademark agent.  Chad’s practice includes all areas of business law with an emphasis on franchise law, licensing and distribution.  He can be reached at cfinkelstein@dalelessmann.com.

Contributed by Judy Rost and Ryan Howe*

On February 1, 2017, the Franchises Act S.B.C. 2015, c. 35 (the “Act”) came into force in the province of British Columbia, Canada.

What this means for franchising in British Columbia:

The most important implication for franchisors with operations in British Columbia (“BC”) will be the franchise disclosure requirements stipulated under section 5 of the Act, and as prescribed by the Franchises Regulation, B.C. Reg. 238/2016 (the “Regulation”). Much like the existing legislation in Ontario and Alberta, the Act requires that a franchisor provide a prospective franchisee with a disclosure document at least 14 days prior to the earlier of:

(a)  the signing, by the prospective franchisee, of the franchise agreement or any other agreement relating to the franchise; and
(b)  the payment, by or on behalf of the prospective franchisee to the franchisor or the franchisor’s associate, of any consideration relating to the franchise.

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This 14-day “cooling off” period is identical to the requirements in Ontario under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 and ensures that franchisees have adequate time to consider their investment in the franchise system with their legal and tax advisors without being pressured by overzealous franchisors.

An immediate benefit to franchisees in BC is that the cooling off period prevents franchisors from collecting any fees or non-refundable deposits or any other form of consideration relating to the franchise. Currently, deposits and other monetary expressions of interest are common in BC, which places additional pressure on a prospective franchisee to sign the franchise agreement. The legislation will stop this practice and provide prospective franchisees in BC with some breathing room during their deliberations.

Notwithstanding the additional costs for franchisors which will be incurred by virtue of the preparation of disclosure documents for BC franchisees, for those franchisors who are already operating in the other disclosure jurisdictions, “wrap around” language in the current disclosure document should be relatively easy to implement, given the similarities between the Act and franchise legislation in the other Canadian disclosure jurisdictions.

Unfortunately, those franchisors who are currently operating solely in BC or in other jurisdictions that do not require disclosure, will have to incur the not insignificant cost of preparing a disclosure document which meets the requirements of the Act.

Continue Reading Here’s What You Need to Know about British Columbia’s New Franchise Law

The State Department announced that it will begin accepting applications for the FY 2018 Diversity Immigrant Visa Program—commonly called the diversity visa (DV) lottery—beginning Tuesday, October 4, 2016. Applicants who are selected and approved may apply for a green card starting on October 1, 2018.

Each year, the State Department randomly selects 50,000 immigrant visa applications from a pool of foreign national applicants who were born in certain countries with historically low rates of immigration to the United States. The State Department will accept diversity visa applications for FY 2018 beginning on Tuesday, October 4, until Monday, November 7.

Applicants who are selected in the lottery must meet certain requirements before becoming eligible to apply for lawful permanent residency (i.e., apply for a green card).

First, applicants must be born in countries that have historically low immigration rates. Individuals born in the following countries are ineligible to apply for a DV for fiscal year 2018: Bangladesh, Brazil, Canada, China (mainland-born**), Colombia, Dominican Republic, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories and Vietnam. Most notably, nationals of Ecuador are eligible to apply in this year’s diversity visa lottery program, a change from being ineligible in years past. Those not born in an eligible country may still be able to apply for a DV through a spouse (if that spouse was born in an eligible country) or, in certain circumstances, through a parent.

Secondly, each DV applicant must have at least a high school education or its equivalent or, alternatively, have two years of work experience in a position that requires at least two years of education, training or experience to perform. The State Department encourages applicants to avoid procrastination in applying, as heavy demand in their application system may cause delays or other technical errors. Applicants will be able to check if they were selected in the randomized lottery starting May 2, 2017.

Employers, including franchisors and franchisees, are often interested in having a qualifying employee apply for a diversity visa in order to avoid costly traditional employment-based green card applications (such as first conducting mandatory advertisements in connection with a PERM filing with the Department of Labor). Both employers who encourage their foreign employees to apply, as well as any other prospective individual applicants, should be mindful of complex requirements in order to avoid rejection, denial or other avoidable issues throughout the diversity visa application process.

**Note: Persons born in Hong Kong SAR, Macau SAR and Taiwan are eligible.

For more information, please contact Michael W. Stevenson, who contributed this post, or any member of Fox Rothschild’s Immigration Practice.

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The Ontario government has released highly anticipated draft regulations under the recently enacted Healthy Menu Choices Act (the “Act”) that clarify the Act’s menu labeling requirements. Still, uncertainties remain – for franchisors in particular.

The Act was passed on May 26, 2015, but it does not take effect until January 1, 2017. In the meantime, food service providers are well advised to take note of the Act’s requirements and prepare in advance.

Specifically, the Act is aimed at restaurant chains and other food service providers with 20 or more Ontario locations that operate under the same (or substantially the same) name and that offer the same (or substantially the same) food items.

However, part of the uncertainty for franchisors is the Act’s definition of a person who owns or operates a regulated food service premises, which is defined as “a person who has responsibility for and control over the activities carried on at a regulated food service premise, and may include a franchisor, a licensor, a person who owns or operates a regulated food service premise through a subsidiary and a manager of a regulated food service premise, but does not include an employee who works at a regulated food service premise but is not a manager.”

Thus, whether or not a franchisor may be liable under the Act turns on an opaque standard of how much responsibility and control the franchisor has over franchisee activities.

The recently released regulations help clarify the where, what and how of menu labeling.

What:  Regulated food service premises must post calorie counts for each “standard food item,” which means a food or drink item sold or offered in standardized servings (portion and content). The regulations add that a standard food item must also be a “restaurant-type food or drink item,” defined as food or drink that is either served in, or processed and prepared in, a regulated food service premise, and that is intended for immediate consumption without additional consumer preparation before consumption. The regulations provide certain exemptions, such as for free self-serve condiments not listed on the menu.

Where:  Caloric content must be posted on all menus, and “menu” is broadly defined. In addition to the traditional paper menu, online menus, menu applications, advertisements and promotional flyers all make the cut. However, the regulations provide exemptions for certain menus that do not list prices or standard food items available for delivery or take out.

How:  The regulations also address how calorie information must be displayed, including where the calorie count must be in relation to the name or price of the standard food item, the font, format and size of the calorie count and other requirements. Menus must account for standard food items that come in different flavors, varieties or sizes, and provide calorie ranges or specific calorie counts for each different option, depending on the circumstances. Calorie counts can be determined in one of two ways:  laboratory testing or by a nutrient analysis method. In either scenario, the person who owns or operates the regulated food service premise must reasonably believe the chosen method will provide accurate results.

Of course, this is just the tip of the iceberg when it comes to the details of the Act and its draft regulations. Experienced counsel can help food service providers determine if they are regulated by the Act and, if so, how best to comply with its requirements. While the draft regulations help illuminate the what, where and how of the Act, uncertainties remain – especially for franchisors. Under what circumstances franchisors may be liable for their franchisees’ violations of the Act is still an open question.

 

What Franchisors Need to Know About U.S. Investments Abroad and Foreign Investments in the U.S.

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Copyright: ivancov / 123RF Stock Photo

Although not a new issue or requirement, many U.S. companies, including franchisors and their parent companies, affiliates and investors, may not be aware of certain reporting requirements required by the International Investment and Trade in Services Survey Act (the Act).  In general terms, the Act governs the reporting of investments made in the U.S. by foreign persons and investments made by U.S. persons abroad. (Note that there are other specific filing requirements for airline operators, ocean and freight carriers, insurance companies, and financial service providers.) The Bureau of Economic Analysis (BEA) within the U.S. Department of Commerce is tasked with collecting the data and reporting the statistics.

U.S. Direct Investment Abroad

All U.S. persons (in the broad sense, including individuals or business enterprises) who own, directly or indirectly, 10% or more of the voting securities or equivalent interest in a foreign business enterprise, are subject to the BEA’s reporting requirements.  This includes U.S. private equity funds that own foreign affiliates directly or through U.S. portfolio companies that they control.

Foreign Direct Investment in the U.S.

All U.S. business enterprises in which a foreign person (again, in the broad sense, including an individual or business enterprise) owns, directly or indirectly, 10% or more of the voting securities or equivalent interest in a U.S. business enterprise, are also subject to the BEA’s reporting requirements.  This includes foreign ownership of any real estate in the U.S. except residential real estate held exclusively for personal use and not for profit-making purposes.

Reporting is Mandatory But Information is Kept Confidential

Reporting to the BEA is mandatory whether or not companies are contacted by the BEA.  Reporting requirements include quarterly surveys, annual surveys, and benchmark surveys that must be completed every 5 years.  Also, for new foreign direct investment in the U.S., an initial report must be filed no later than 45 days after the date a foreign direct investment in the U.S. is made.  Foreign direct investment includes any of the following by a foreign person:  (1) the establishment of a new U.S. legal entity, (2) the expansion of U.S. operations, or (3) the acquisition of a U.S. business enterprise.

Types of data collected by the BEA may include balance sheets, income statements, sales figures, taxes, employment information, research and development expenditures, capital expenditures, and exports and imports.  The Act protects the confidentiality of the data reported to the BEA, and the survey data can only be used for analytical and statistical purposes.  Exemptions from filing are available if any of the exemption criteria is met, but a Claim for Exemption from filing must still be filed with the BEA for each survey.

Penalties for Non-Compliance

Failure to file the mandatory BEA surveys may subject companies to fines and penalties and/or governmental orders directing compliance.  Even worse, a company’s willful failure to report may lead to a more significant fine. An individual’s willful failure to report may lead to a fine, imprisonment for not more than 1 year, or both.  To top it off, any officer, director, employee or agent of any company who or which knowingly participates in such violations may be punished by fines, imprisonment, or both, upon conviction.

It goes without saying that all companies, including franchisors which rely heavily on their Boards of Directors and management teams, should adhere to the BEA’s filing requirements and seek advice from their legal and tax professionals to avoid fines and/or imprisonment for non-compliance.

This post was principally authored by Sandra Romaszewski of our Warrington, Pennsylvania office, and originally appeared in a slightly different form on Fox Rothschild’s Emerging Companies Insider blog.

29674235_lOn April 1, 2015, franchise regulations took effect in the Ukraine, ending (in some respects) a decade-long wait for regulatory clarity. As explained in our January 22nd blog, the Ministry of Justice of Ukraine on October 1, 2014 adopted a new “Procedure for the State Registration of Commercial Concession (and Sub-Concession) Agreements” (the “Franchise Registration Procedure”). (In the Ukraine, franchises are called “Commercial Concessions”.) The Franchise Registration Procedure was to take effect on April 1, 2015, six months from its adoption.

The need for the Franchise Registration Procedure began in 2004, when amendments to the Civil and Commercial Code of Ukraine introduced franchise-specific legislation. The legislation required franchisors and franchisees to register franchise agreements with certain state offices. Unregistered franchise agreements could not be enforced against third parties. However, no regulations existed to provide a process for registering franchise agreements.

In the interim, while franchise agreements were deemed valid between the parties to the agreement, they were invalid vis-a-vis third parties. In the uncertainty, franchisors and franchisees incurred increased transaction costs, attempting to mitigate their risk by concluding additional agreements, such as equipment, supply and service contracts and license agreements.

Under the new Franchise Registration Procedure, registration is free and decisions should be issued within 5 working days from filing. While some procedural uncertainties still exist, the Franchise Registration Procedure should provide long-awaited clarity and protection to franchise relationships in the Ukraine.

After a decade-long wait, Ukrainian franchise regulations will become effective on April 21, 2015. The new regulations are a first step toward resolving uncertainty that has plagued Ukrainian franchises since 2004, when amendments to the Civil and Commercial Code of Ukraine introduced franchise-specific legislation.

The 2004 legislation was relatively innocuous: it required franchisors and franchisees to register their franchise agreements (including amendments and terminations) with the local state office that originally registered the Ukranian franchise. Absent registration, franchisors and franchisees could not enforce their franchise agreement against third parties. However, until recently, no regulations provided the nuts and bolts of how to register a franchise agreement.

registerIn the interim, franchise agreements were deemed valid between the parties to the agreement, but invalid vis-à-vis third parties. For example, tax authorities–either considering themselves third parties or simply refusing to acknowledge the unregistered franchise agreement–attempted to reduce tax credits resulting from payments made under franchise agreements. Attempting to mitigate the uncertainty, franchisors and franchisees incurred greater transaction costs by concluding additional agreements, such as equipment, supply and service contracts and license agreements.

But on October 21, 2014, the veil was (at least partially) lifted. The Ministry of Justice published Order No. 1601/5 (the “Order”), setting forth the procedures for registering franchise agreements. Some highlights include:

  • The Order takes effect on April 21, 2015.
  • Registration will be performed by the State Registration Service of Ukraine.
  • Applications may be filed in person, by mail or electronically.
  • Registration is free and decisions should be issued within 5 working days from filing.
  • Documentation confirming the existence of the franchisor’s intellectual property rights must be filed along with the registration. Unfortunately, however, the Order does not clarify what documentation should be filed if a franchisor’s trade secrets are subject to the franchise agreement.

While some uncertainties remain, the Order provides long-absent clarity and protection to franchise relationships in the Ukraine.

 

 

 

 

The South Korea Fair Trade Commission (“SKFTC”) recently imposed the maximum possible penalty—1.9 billion won (approximately US$1.88 million)—on a South Korean franchise for violating the Fair Transactions in Franchise Business Act (the “Act”).  Caffe Bene, a company with over 1,860 stores in fourteen countries and valued at 176.2 billion won (approximately $171 million), incurred the fine for passing disallowed costs on to its franchisees.

The penalty—the largest ever imposed by the SKFTC—demonstrates its intent to aggressively pursue Act violations and comes soon after major amendments to the Act early this year.

Copyright: monkeydluffy123rf / 123RF Stock Photo
Copyright: monkeydluffy123rf / 123RF Stock Photo

The violation stemmed from a partnership inked between Caffe Bene and KT Corporation (formerly Korea Telecom; “KT”).  The agreement offered 10% discounts to KT subscribers and split the costs equally between Caffe Bene and KT.  Despite opposition to the promotion by 40% of its franchisees, Caffe Bene forced its franchisees to implement the promotion and absorb the losses.  According to the SKFTC, Caffe Bene’s actions violated by the Act and its franchise agreements, which allocated marketing and promotion costs equally between Caffe Bene and its franchisees.

The SKFTC’s investigation further revealed that Caffe Bene required franchisees to redesign their stores, pay for “necessary equipment” from headquarters or a designated third-party, and purchase items that the franchise agreements designated as “optional.”  These practices generated 181.3 billion (approximately $176 million) in interior remodeling and equipment sales to franchisees between November 2008 and April 2012, accounting for nearly 56% of Caffe Bene’s total sales during that period.

This case is clearly an egregious case because the SKFTC’s findings were that the franchisor violated both the Act and its own franchise agreements. That said, it also highlights the risk/reward inherent in international franchising. We’ve all heard it before, but it bears repeating:  the failure to work with experienced local counsel, whether you are a domestic franchisor going abroad or an international franchisor coming to the United States, is dangerous. Here, it appears that significant changes to the South Korean Act were missed. While good counsel does not ensure success, it definitely helps to manage that risk.