The Importance of Hiring an Experienced International Attorney, Part 2
Part 1, in the previous issue of FUIR, covered the basics of legal requirements in other countries and provided sources for finding an experienced international franchise attorney. Part 2, below, digs into the specifics.
You are going to need to get up to speed on new issues that you may not be familiar with and that aren’t part of your current domestic franchise offering. The following is a list of common legal issues in international franchising that you should review with your international franchise attorney. A more comprehensive list of legal issues is available on this book’s companion site.
Can you get paid in U.S. dollars? Do local laws restrict local currencies from being sent outside the local market? What financial institutions will you work within transferring the funds so that you can get paid? Get a grip on your finances.
Taxes, repatriation, and financial statements:
Are you and/or your franchisees subject to reporting and payment obligations? Have you structured your international franchising model to best reflect your tax liability and revenue needs? Have you determined whether you or your franchisee will be responsible for payment of local withholding tax? Do your financial statements conform to local requirements? There are numerous financial considerations that will affect your bottom line.
Can you enforce your intellectual property rights in the local market? How much will it cost to register your trademarks abroad? How do you keep your secret sauce secret? Check out the country’s protections for trade secrets and confidential information. Many countries have different approaches to enforcing intellectual property rights, while other countries have agreed to jointly protect intellectual property registered under terms agreed across those countries (sometimes called conventions or protocols).
Does your local market restrict or regulate business competition? Can you locally enforce your covenant not to compete? A local market’s competition laws can significantly affect your franchisee’s rights and may restrict your ability to enforce your standards or protect your franchise system in the market.
Damages, liability, and indemnification:
Are indemnification agreements (provisions requiring a franchisee to defend and hold you harmless from money claims because of the franchisee’s or a third party’s actions) enforceable in the local market? Will the local market uphold your liquidated damages agreement (a specific amount that is payable as damages by the franchisee instead of having a court or arbitrator decide the amount)? These liability concerns should be reflected in your agreements.
Governing laws and dispute resolution:
Arbitration is a primary method for resolving disputes internationally because arbitration awards are more easily enforced because of several international conventions supporting their enforcement. Do you know whether you can enforce arbitration awards in the country, and under what conditions? What is the most advantageous place for you to conduct arbitration — should it be in the U.S. or a neutral country? In what language will disputes be resolved? What arbitration rules will govern the dispute? Under what circumstances will access to the courts be needed, and will a court judgment be enforceable?
Can you enforce your guarantee agreement? Was your guarantee agreement executed to be enforceable in the local market? For example, does your local market require that certain language related to liability be reflected in the agreement? Incorporate local law into your agreements.
Have you thought about extra-contractual formalities? Does the local market regulate the formalities of executing agreements? There may be rules or best practices on how contracts are executed and who has authority to enter into agreements.
Ownership, agency, and relationship:
Will you run afoul of any foreign or local ownership rules in your local market? Will your international franchise need to obtain a local partner to do business in the country? Do you or your franchisee have third-party contract rights that you should consider? Does the local market regulate the termination of the franchise relationship?
Are there any religious laws to consider that may affect the products or services your franchisee can offer, hours of operation, or location of the business?
Are you informed on how the U.S. anti-corruption laws that you must abide by at home may affect your deal? Are you or your franchise required to comply with trade, transparency, anti-money-laundering, and anti-bribery laws in the country?
Although generally, a U.S. franchisor doesn’t need to provide an FDD to an international franchisee prospect under the FTC Rule, it is possible that disclosure maybe required under your state law, so you should check with your attorney.
Finally, after you strike a deal, you are not going to take the money and run. You still must translate documents, marketing materials, signage, and training, and you have to schedule more on-site visits.
This is an excerpt from the book Franchise Management for Dummies by Michael Seid and Joyce Mazero.
Joyce Mazero, a shareholder with Polsinelli PC, a law firm with more than 875 attorneys in 22 offices, is co-chair of its Global Franchise and Supply Network practice. Contact her at 214-661-5521 or firstname.lastname@example.org. Michael Seid is managing director at MSA Worldwide. Contact him at 860-523-4257 or email@example.com.
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