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Franchising in the United Kingdom

January 7, 2019

Introduction

The United Kingdom (UK) is a mature and successful franchise market, with more than 900 franchised systems operating in the territory and 97% of franchisee-owned businesses reporting profitability. (2015 BFA/Natwest Bank Survey.) Although a good deal of UK law is based on the law of the European Union, Brexit is unlikely to have any substantial impact on the regulation of franchising in the UK.

Regulation

There is no franchise-specific regulation in the UK, and franchising arrangements are primarily governed by contract law. Franchisors that are members of the British Franchise Association (BFA) must ensure that they comply with the BFA Code of Conduct. Membership is voluntary, and the code primarily ensures fairness in franchise contractual arrangements.

The Trading Schemes Act 1996 governs pyramid-selling schemes, and brands seeking to franchise in the UK should structure their franchising arrangements so as to fall outside the scope of this Act. To be exempt by virtue of the Trading Schemes (Exclusion) Regulation 1997, the parties should ensure:

  • the franchise is a single-tier trading scheme (with a single level of franchisees beneath the franchisor); and/or
  • the franchisor and all franchisees are registered for VAT.

Master franchising is permitted in the UK, but to avoid violating the Trading Schemes Act 1996, franchisors should require their master franchisee to register for VAT and to impose a contractual obligation on their subfranchisees to register for VAT.

There are no mandatory clauses for franchise agreements, and no registration requirements in the UK.

Disclosure and Misrepresentation

There is no statutory obligation to provide pre-contractual disclosures in the UK, and the principle of caveat emptor (buyer beware) applies. Nevertheless, it is good commercial practice for parties to undertake due diligence.

Franchisors should ensure that any information provided during negotiations is accurate and not misleading to avoid running afoul of the laws of misrepresentation. If a franchisor makes a misrepresentation (whether negligent or fraudulent) to a franchisee, and the franchisee reasonably relies on the statement in determining whether to enter into the franchise agreement, the franchisee may have a claim against the franchisor. If successful, the claim may entitle the franchisee to rescind the franchise agreement and seek damages.

It is common for franchisors to exclude or limit their liability for misrepresentation under the franchise agreement; however, the courts have, in some instances, refused to uphold such provisions in order to protect franchisees.

Good Faith

There is no express duty of good faith imposed on parties to a franchise agreement under English law. The question of whether there is an implied duty of good faith is something of a hot topic in English contract law. Recent case law has suggested that a duty of good faith may be imposed in agreements that create an ongoing relationship between the parties and are based on mutual cooperation, trust, and communication—such as franchise agreements—though other decisions have not found such a duty to exist. The courts remain divided on this issue. Yam Seng Limited v Initial Trade Corporation Limited [2013] EWHC 111.

Intellectual Property

The key intellectual property rights for a franchised business concept are trademarks, domain names, and copyrights (which may subsist in the franchisor’s operations manuals, website, and social media text and marketing materials).

Trademarks are protected in the UK by applying to register the trademark at the UK Intellectual Property Office, and in Europe, by applying to register the trademark at the EU Intellectual Property Office. Following the UK’s decision to leave the EU, it is recommended that those seeking trademark protection in the UK apply for UK trademarks instead of, or in addition to, EU trademarks, to ensure that their marks are protected in the UK after Brexit. Franchisors also should consider registering brand names and any logos used by the business as trademarks.

Unregistered trademarks may be protected by the law of passing off (a common law tort that prevents one from falsely holding out his goods or services as being those of another or having some association with another), although such claims involve court proceedings and are harder to establish, and are therefore more time-consuming and costly than enforcing registered trademarks.

Domain names are not registered centrally and, therefore, must be registered through a registrar. Domain names are registered for a fixed period and then must be renewed.

Copyright and database rights arise automatically once a work is created, and registration is not required in the UK. Business know-how not captured by copyright will be protected by the law of confidential information, and can also be protected by appropriately drafted contractual provisions and the law of trade secrets.

Competition Law

Franchise agreements in the UK are subject to UK and EU competition law. The UK Competition Act 1998 is based on the EU Treaty on the Functioning of the European Union (TFEU) and must be applied in a way that is consistent with EU competition law.

Article 101 of the TFEU prohibits agreements that may affect trade between EU member states and have, as their object or effect, the prevention, restriction, or distortion of competition within the internal market. Restrictive covenants and exclusivity clauses, common in franchise agreements, are in danger of running afoul of this prohibition.

Franchise agreements, however, are generally between entities at different levels of the supply chain. As such, they are considered vertical agreements and may be exempt from the provisions of Article 101 TFEU by virtue of the EU Vertical Block Exemption (VBE), provided certain conditions are met and the agreement does not contain any “hardcore restrictions.”

Indefinite in-term non-compete obligations or in-term non-compete obligations that last longer than five years are not permitted and will be void for the purposes of the VBE (although the remainder of the agreement may still rely on the VBE). It is therefore common practice in the UK for franchise agreements to adopt a five-year term. Post-term non-compete obligations are prohibited unless the franchisor’s ‘secret’ know-how is dependent on them, in which case they may be permitted, but for no longer than one year and provided they are limited geographically to the premises from which the franchisee operated its franchise.

Franchisors may allocate exclusive territories to franchisees and prohibit franchisees from making active sales outside their territory (i.e., by proactively seeking customers outside the territory). Franchisors may not prohibit passive sales to customers outside their territory (i.e., responding to inquiries from such customers). This is considered a “hardcore restriction” and will render the entire franchise agreement void for the purposes of the VBE. Internet or web-based sales are generally classified as passive sales and cannot be prohibited by franchisors. Franchisors cannot, for example, prevent franchisees from operating their own websites, although franchisors can impose quality standards, particularly in relation to representations of the brand and the general look, feel, and content of the website.

Price fixing and resale price maintenance obligations are also not permitted and will render the entire franchise agreement void for the purposes of the VBE, as resale price maintenance is a “hardcore restriction.” However, franchisors are permitted to set maximum prices and/or suggest prices to franchisees, provided that they are not compulsory (either explicitly or by applying indirect pressure on franchisees).

Dispute Resolution

There is no specific procedure for franchise disputes in the UK. Litigation through the court system is the most typical form of dispute resolution, although arbitration is becoming an increasingly popular choice due to its confidential nature and is often popular in deals with a cross-border element. Well-drafted arbitration clauses in franchise agreements are enforceable.

A franchise agreement should specify the law which will govern the contract in the event of any dispute. Such clauses are generally upheld by the English courts and courts of EU member states. Jurisdiction clauses, setting out which court will have jurisdiction to hear a dispute, should also be included. English courts generally uphold these clauses, although following the UK’s exit from the EU, exclusive jurisdiction clauses in favor of English courts may no longer be upheld by the courts of EU member states. If the franchisee has assets outside of the UK in an EU member state, arbitration should be considered as a preferred dispute mechanism.

Data Protection

The General Data Protection Regulation came into force in the UK on May 25, 2018. The changes to data protection laws under the new regime are far reaching, and include increased fines for breach, mandatory data breach reporting, new restrictions on international data transfers, and a “right to be forgotten.” Franchisors and franchisees should be aware that, even if they are not based in the European Economic Area (EEA)—the EU member states plus Iceland, Norway, and Lichtenstein—if they are transferring data in or out of the EEA or hold and process personal data relating to data subjects based in the EEA—will have to comply with these enhanced regulations. Franchise agreements should therefore include appropriate data protection provisions and obligations.

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For more information, please contact Dr. Mark Abell (+ 44 (0) 20 7905 6234 or mark.abell@twobirds.com) or Maureen A. O’Brien (+1 202.719.3563 or mobrien@wileyrein.com). 

Dr. Mark Abell is a partner in the London office of Bird & Bird.  He is the Global Head of Franchising at the international law firm Bird & Bird. His doctoral thesis was on the international regulation of franchising. He has advised the EU Parliament on its proposals for franchise legislation, and acted as an expert on franchising to the United Nations WIPO. Robert A. Smith is a partner and chair of the Franchise Group at Wiley Rein LLP. Maureen A. O’Brien is Of Counsel at Wiley Rein LLP.

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