Global Franchise Regulation Update | Lathrop GPM : vimarsana

European Union -
Proposed Contract Language to Address Schrems II (November 2020) -
..In November 2020, the European Commission published proposed contractual language regarding the transfer of personal data between the EU and other countries, in an attempt to address the Schrems II holding. The proposed contract language also attempts to help those transferring data incorporate safeguards for data transfers above and beyond the current contract language. The comment period closed December 10, 2020.
Please see full Publication below for more information.
© Lathrop GPM 2021Global Franchise Regulation Update* Regulatory Developments and Proposals since 2019 By: Carl E. Zwisler and Hannah H. Fotsch Updated February 2, 2021 *Does not include pandemic-related regulations. European Union European Commission Proposed Contract Language to Address Schrems II (November 2020) -- In November 2020, the European Commission published proposed contractual language regarding the transfer of personal data between the EU and other countries, in an attempt to address the Schrems II holding. The proposed contract language also attempts to help those transferring data incorporate safeguards for data transfers above and beyond the current contract language. The comment period closed December 10, 2020.-- In the Schrems II opinion issued by EU Court of Justice on July 16, 2020, the court ruled that the EU-US Privacy shield does not adequately protect personal data, in part, because any of it is accessible by the US National Security Agency. EU and US Department of Commerce are attempting to negotiate a resolution. © Lathrop GPM 2021 -2- -- Fines and penalties of up to the greater of €20 million or 4% of a company’s global annual sales are permitted for violations. -- Class action lawsuits and other judicial relief is also available. EU Vertical Block Exemption Regulation (VBER) Evaluation European Commission Launches Impact Assessment of Issues Raised in Vertical Guidelines Evaluation (October 23, 2020) -- EU competition law prohibits contracts that restrict competition within the EU under Article 101 of the Treaty on the Functioning of the European Union, and this prohibition applies to franchise agreements. Franchisors can avoid Article 101 by drafting their franchise agreements so that they qualify for the Vertical Agreements Block Exemption (Block Exemption), which is set to expire on May 31, 2022. In anticipation of the expiration of the Block Exemption, the European Commission (EC) is in the process of reviewing the Block Exemption and determining whether to let it expire, let it continue without changes, or let it continue with revisions. -- On September 8, 2020, the EC released its evaluation of the Block Exemption. The evaluation found that the Block Exemption is still necessary and relevant, but that it should be modified to adapt to the changing commercial landscape. Specifically, the evaluation found that the Block Exemption needs to be updated to provide a more robust structure regarding e-commerce, online sales and sales platforms, and whether price fixing or “most favored nation” clauses should remain a hardcore offense. -- On October 23, 2020 the EC initiated an Impact Assessment to review and analyze the issues raised by the evaluation It appears that the EC is inclined to renew the Block Exemption, with some significant changes which will relax some of its restrictions to adapt the law to modern forms of doing business. Australia Proposed Franchise Regulations (January 2021) -- One November 10, 2020, the Department of Industry, Science, Energy and Resources published a draft of proposed changes to the Franchising Code of Conduct and a supporting guide of the proposed changes. The proposed changes include the creation of a “key terms” sheet with a franchise agreement, disclosure requirements, prohibitions on the franchisor’s actions, regulations regarding the end of the franchise relationship, required dispute resolution mechanisms, and doubling the penalties for violating the Franchising Code of Conduct. Public comment was open until December 4, 2020. -- In March 2019, the Australian Parliamentary Joint Committee on Corporations and Financial Services published its report, Fairness in Franchising, which, among other things, suggested that the Australian Government create an inter-agency Franchising Task Force to examine the feasibility and implementation of the 71 their © Lathrop GPM 2021 -3- recommendations in the Fairness in Franchising report. By July 2019, the Franchising Task Force was convened. -- After seeking and receiving input about the relative costs and benefits of the various options for addressing some of the issues identified in the Fairness in Franchisingreport, in August 2020 the Australian Government released its proposed changes to the franchise laws and regulations, which include: •doubling the current penalties for breach of the franchise laws; •requiring additional dispute resolution provisions in franchise agreements; •adding pre-sale disclosure requirements relating to supply arrangements, marketing funds, exit or termination arrangements, and significant capital expenditure); and •creating a public register and website for franchises, and much more. -- On September 2, 2020, the Labor Party announced its desire to further increase the penalties a franchisor would face for violating the franchise laws and regulations from $133,200 to $10 million per violation. The Labor Party argued this is necessary to “effectively deter poor conduct and exploitative behavior.” Belgium Unfair Contract Terms and Abuse of Economic Power Acts (Effective June 1, and December 1, 2020) -- Abuse of power over the economic dependence of a company is a part of the B2B Relationships Act adopted by the Belgian Parliament in March 2019. Economic dependence can be created through distributorship or franchise agreements. For an abuse to be actionable, it must affect a significant part of the relevant Belgian market. It became) effective June 1, 2020. -- Unfair contract terms in B2B agreements will become void and unenforceable, while the remainder of the agreements will remain enforceable, if that is practical. Focused on the balance of rights and obligations of the parties, the law prescribes a “black list” and a “gray list” of “unfair terms.” Whereas the unfairness of terms on the gray list may be rebutted, terms on the black list are automatically null and void. -- Included on the black list is language granting a franchisor the unilateral right to interpret any clause of the agreement and a requirement that a franchisee waive any remedy it may otherwise have against a franchisor. The Unfair Contract Terms Law became effective December 1, 2020. Brazil New Franchise Law (Published December 27, 2019; Effective March 26, 2020) -- Amends existing franchise law: © Lathrop GPM 2021 -4- •Clearly states that the franchisee/franchisor relationship is not a consumer relationship, and is not an employment or joint employment relationship. •Creates eight new categories of information that must be included in Franchise Offering Circulars (“COF”). •Changes the waiting period, in most instances, between delivering the COF and when the franchisee may sign the franchise agreement or payment of fees to 10 days. •Allows franchisors to lease or sublease the commercial space to franchisees and to charge rent that exceeds the amount paid by the franchisor to the landlord, if the parties agree to this in the COF and franchise agreement, and the rent does not impose an excessive burden on the franchisee. •Requires franchise agreements that affect only Brazilian territory to be written in Portuguese. International agreements must either be drafted in or translated into Portuguese at the franchisor’s expense. •Requires franchise agreements that affect only Brazilian territory to be governed by Brazilian law. The governing law of international agreements may be negotiated by the parties. •Permits the use of arbitration as an alternative dispute resolution mechanism. •Removes the requirement that franchise agreements be signed in the presence of two witnesses. Cambodia Franchise Agreements Must be Registered with the Cambodian Ministry of Commerce (January 13, 2020) -- Beginning January 2020, franchise agreements must be recorded with the Cambodian Ministry of Commerce in order for the agreement to be enforceable against a franchisee or licensee. -- The parties must submit a notarized, fully-executed franchise or license agreement that includes the following finalized terms: (a) information about the parties, including the names, addresses and country of incorporation, (b) details about the marks, including the registration or application numbers, classification or marks, and any specifications about the marks, (c) whether the agreement is exclusive or non-exclusive and whether the license is a sublicense, (d) the term of the agreement, and (e) conditions on control of effectiveness and quality of goods or services. Additionally, a copy of the trademark registration or renewal must be filed with the franchise agreement and a copy of the business registration information. © Lathrop GPM 2021 -5- Canada Ontario Disclosure Laws Revised for Less Rigid Disclosure Requirements (Effective September 1, 2020) -- Ontario recently amended the Arthur Wishart Act, Ontario’s franchise disclosure law. The most notable changes include the following: •Permits franchisors to sign an agreement with a prospective franchisee beforeproviding the prospective franchisee with an FDD if that agreement either (a) requires the prospect to keep the information confidential, (b) prohibits the prospect from using the franchisor’s confidential information, or (c) designated a territory or specific location for the prospect. •Permits franchisors to accept a deposit from a prospective franchisee beforeproviding the prospect with an FDD so long as the amount is fully refundable, does not exceed 20% of the initial franchise fee and does not exceed $100,000, and is committed under an agreement that does not require the prospect sign a franchise agreement. •Requires franchisors to provide a statement of material change to prospective franchisees if a material change happens between providing the prospect with an FDD and signing a franchise agreement. The statement of material change must include two receipt pages that are signed by at least two officers or directors of the franchisor, where one of the receipt pages is for the franchisee to keep and one for the franchisor to receive once it’s been signed. •Revises the fractional franchise exemption, large franchisor exemption, small investment exemption, and exemption of pre-sale disclosure to franchisor’s officers and directors. •Expands the types of financial statements can be included in the FDD, including financial statements that were prepared in accordance with US GAAP or IFRS standards, as well as standards set out in the CPA Canada Handbook – Accounting. Ecuador Franchise Regulation Adopted in Commercial Code (May 29, 2019) -- On May 29, 2019, Ecuador adopted a new Commercial Code which incorporated franchise regulations. The franchise regulations appear to be designed to define franchising under national law, but impose few regulations on either franchisors or franchisees, beyond maintaining confidentiality about the franchised business. The Code sets out elements required to be in a franchise agreement which are typically found in franchise agreements. The law specifically authorizes reasonable noncompete covenants. Moreover, franchisees must indemnify franchisors for damages arising from “incorrect use of the franchise.” Franchisors are required to © Lathrop GPM 2021 -6- provide franchisees with operating manuals to assist them in the operation of their businesses. Egypt Revised Proposed Egyptian Franchise Law (January 2019).-- Introduced as part of a Regulatory Reform and Development activity initiative. Involves a unique comprehensive Regulatory Impact Assessment. -- Designed to “enhance the business environment through a better regulatory framework.” -- All franchises must be registered with Minister of Trade and Industry (MOTI). Franchisors must submit essential data, but there is no standard for reviewing documents or data submitted for registration. -- Franchisors must notify both prospective franchisees and existing franchisees of possible changes in conditions that could adversely affect the franchisee’s business. -- Legislation is so ambiguous that knowing how to comply would be impossible. -- Post-term non-compete covenants may prohibit franchisees from “competing with the franchise,” but what that means is unclear. -- All disputes must be resolved through arbitration. Franchisors and franchisees could not pursue injunctions or other remedies in courts—anywhere. -- Despite concern about facilitating access to financing for franchised businesses, the proposal fails to address actual barriers to franchise financing or actions that could be adopted to motivate lenders to finance franchises. -- Comments were solicited on the proposal until March 2019, but as of the date of this update, no further information has been shared. Guatemala Discussions in the Works for Guatemala Franchise Act (March 2020) -- Government officials in Guatemala are in discussions to craft a franchise law to regulate franchising in the country. No legislation has been drafted. IndonesiaFranchise Registration (Effective September 3, 2019) -- On September 3, 2019, the Minister of Trade Regulation issued Franchise Regulation, Number 91 of 2019 (MoTR 17/2019). MoTR 71/2019 which includes the following provisions: © Lathrop GPM 2021 -7- •Common control relationships are no longer prohibited. This allows franchisors to enter into franchise agreements with their own affiliates. •Removes the cap on the maximum number of units a franchisee may own. •Removes the requirement that 80% of raw materials, equipment or products by used in the franchise must be locally sourced; however, retailers still must use at least 80% domestic products for inventory. •Requires franchise agreements be offered in Indonesian language and must be governed by Indonesian law. •Permits franchisors to name more than one master franchisee so long as there is a clear separation of territory. -- Foreign franchisors must now register through the Online Single Submission System to obtain a Registration Number in order to submit disclosure documents to obtain a Franchise Registration Certificate. Malaysia Amendment of Malaysian Franchise Act (March 2020; Awaiting Effective Date) -- On March 6, 2020, the Franchise (Amendment) Bill was published in the Gazette after receiving its royal assent on February 20, 2020. The Ministry has yet to set an effective date for Amendment. The Amendment provides that a foreign franchisor that has already obtained approval under section 54 of the Act before the effective date of the Amendment is deemed to have registered its franchise under section 6 (1) of the Act. However, if a section 54 application is still pending on the effective date of the amended Act, the foreign franchisor must comply with the new registration requirement and subsequently register its franchise under § 6(1) of the Act. The registrations are essentially the same. The Amendment makes it a criminal offense for a franchisor to grant a franchise without first registering the franchise with the proper authorities, or for a franchisee of a foreign franchisor to fail to register the franchise agreement within 14 days of signing. •Creates a period of effectiveness for franchise disclosure documents once it has been registered. •Requires franchisors and franchisees to display their franchise registration information conspicuously. •Creates a new requirement that franchise agreements must include language regarding renewing or extending the term of the agreement. •States that search warrants which are issued under the Franchise Act will be valid and enforceable, and the information obtained pursuant to the search warrants will be admissible as evidence under the Franchise Act. © Lathrop GPM 2021 -8- -- This amendment to the Malaysian Franchise Act was passed to create clarity after the High Court’s decision in the Brainbuilder case, which held that both the franchisor and franchisee were responsible for registering a franchise agreement in accordance with the 1998 Franchise Act, and that since the foreign franchisor had failed to register the franchise under section 6 of the Act and the franchisee had failed to register the franchise agreement with the Minister of Commerce, the agreement was void and unenforceable. Malaysia - Dr H K Fong Brainbuilder Pte Ltd v Sg-Maths Sdn Bhd & Ors [2018] MLJU 682. The Malaysian Appeals Court has affirmed the High Court’s decision. Malaysia - Dr H K Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2021] 1 CLJ 155. Ministry of Domestic Trade and Consumer Affairs Considers Further Amendments to the Malaysian Franchise Act (September 2020) -- The Malaysian Ministry of Domestic Trade and Consumer Affairs has been reported to be considering a proposal that would limit the start-up capital needed to “start a new franchise business” to RM 50,000 ($12,038 USD). The goal is to facilitate “micro-entrepreneurship” by lowering the capital needed by franchisees to start a franchised business and to spur entrepreneurship. Myanmar Trademark Registration (Passed January 30, 2019; Effective 2020) -- Myanmar has adopted a trademark registration law where, once a trademark is registered, the trademark will be valid for a period of 10 years from the filing date and renewable every 10 years. Registration is a first-to-file. -- The law introduces criminal penalties for trademark infringement and counterfeiting, with penalties as much as three years’ imprisonment and a fine of up to MMK 5 million (USD 3,250). The new law also gives the judiciary the power to establish specific intellectual property courts; there is no word whether the Myanmar courts will establish such courts. -- Regulations are now being prepared and are expected to be published sometime in 2020. Namibia Namibia Competition Commission Director of Economics Proposes Franchise Regulation (October 4, 2019) -- The Government should develop a franchising regulatory framework and the goal is to reduce barriers to ending easy access to franchise brands for local entrepreneurs, and encourage ethical conduct of master licensees (Namibia Economist – October 4, 2019) Netherlands Dutch Parliament Passes Franchise Legislation (Effective January 1, 2021) © Lathrop GPM 2021 -9- -- The new Dutch Franchise Law requires: •Franchisors to deliver a disclosure document to prospects at least 4 weeks before a sale may be concluded, prohibits any amendments to the franchise agreement during the cooling off period, except those which benefit the prospective franchisee. •Franchisor’s to refrain from inducing a prospect to make payments or investments associated with the franchise agreement until the 4 weeks after an FDD has been delivered. •FDDs to include many customary discrete disclosures, plus “all other information that he/it knows, or can reasonably assume, to be relevant for conclusion of the franchise agreement.” •“Within the bounds of reasonableness and fairness, the prospective franchisee will take measures that are necessary to prevent him/it from concluding the franchise agreement under the influence of incorrect assumptions.” •After 4 weeks from date of delivery of FDD, franchisors must disclose: - any proposed amendments to the draft agreement; - an explanation the investment that the c

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