Brexit: How the decision to leave the EU impacts upon UK Franchisors

This article summarises the legal and commercial implications of a UK exit from the EU (or "Brexit") for UK Franchisors and some of the challenges they will face, in particular in relation to product supply, competition law, intellectual property law, employment and immigration law, data protection law and cross-border dispute resolution.

Product supply

The Withdrawal Agreement also includes a Political Declaration. The Political Declaration sets out the framework for negotiations of the future UK-EU relationship, which are intended to proceed during the transition period. The Political Declaration makes it clear that the future economic relationship between the EU and the UK is to be a free trade agreement. The key terms of the proposed free trade agreement include (1) no tariffs, charges or quantitative restrictions on trade, (2) agreed rules of origin, (3) mutual recognition of trusted traders’ programmes and administrative co-operation in customs and VAT matters and (4) agreements on technical standards requirements going beyond WTO requirements. The EU and the UK have until the end of 2020 to agree a free trade agreement as the government have ruled out any extension to the transition period. If a free trade agreement cannot be agreed by then there will be a default to World Trade Organization rules and the EU would apply to the UK the same tariffs it applies to goods from other countries such as the US or China.

If your franchise relies on products being imported into the UK or involves the supply of products to franchisees in the EU then if at the end of the transition period no free trade agreement is negotiated you could face the possibility of tariffs being introduced and increased regulatory and administrative burdens imposed related to the import and export of products.

We have seen clients considering a number of different options to deal with the possibility of double tariffs after 2020.  These range from short-term solutions to bide time until there is more certainty, to the exploration of longer-term solutions.

For franchisors who trade with third party entities in the EU (such as suppliers, distributors, franchisees, and so on), the simplest approach is to put their customers on ex-works collection terms.  This does not of itself resolve issues relating to tariffs, but simply transfers the burden of the problem to the third party.  Admittedly this is likely to be difficult, though it may be an option for brands with significant bargaining power.

Another approach is simply to cease using the UK as a gateway to the EU, and to arrange for products to be shipped directly to the EU, avoiding potential double tariff issues.  This can be done on a short-to-medium term basis initially; with a view to then reviewing the arrangements once more information is available.

A short-term approach which we have seen many companies take is to arrange for stockpiling of goods up until the end of December 2020, while tariffs do not apply.  This ensures that business can continue as usual for a certain period post-2020, allowing companies to then assess the impact and make longer-term plans once more information is available.

A medium-to-long term approach is to establish a presence in mainland Europe for the purpose of importing and distributing products.  This could take the form of appointing a third party logistics provider to receive, store, and distribute products intended for countries in mainland Europe, or could involve a company setting up its own physical presence by acquiring a warehouse and setting up its own distribution hub. 

There are a number of potential practical options, and which is most appropriate will depend on the nature of your franchise business, the resources you have available, and how short or long-term a view you wish to take of Brexit.

Competition law

This area of law is extremely relevant to franchising particularly the vertical agreement block exemption. It is already well developed and UK competition law legislation is based on the EU model.

EU competition rules will continue to apply post-Brexit to agreements or conduct of UK businesses that have an effect within the EU in much the same way as agreements or conduct of US and Asian businesses are currently subject to EU competition law where their agreements or conduct affect EU markets. 

On 22 January 2019, the Government issued the Competition (Amendment etc.) (EU Exit) Regulations 2019, SI 1993 No. 93 (the "Competition SI"), which is expected to be brought into force as from the end of the transition period. The Competition SI makes legislative revisions adapting the EU competition regulations to become a set of domestic competition regulations. It revises the block exemptions by removing specific EU or inter-state references.

The impact of Brexit will mainly be felt in relation to the enforcement of competition law by the UK authorities.  The substance of UK competition law is very similar to that of EU competition law, and there is currently a statutory requirement (section 60 of the Competition Act 1998) to interpret the UK competition rules in a manner consistent with competition case law of the European Court of Justice.  Section 60 is revoked by the Competition SI and in its place a new provision, section 60A, is inserted with effect from Brexit.  The new section 60A merely requires the CMA and courts to avoid inconsistency between their decisions and EU law and the decisions of the European Court of Justice before exit day.

Brand protection

After the transition period, EU Trade Marks (EUTMs) will no longer have effect in the UK. The UK Government has provided that at the end of the transition period, the UK will automatically create a comparable UK trade mark for every registered EUTM, at no charge. However, this will not apply to pending EUTM applications, so franchisors with pending applications should apply to register a comparable UK trade mark in the 9 months after exit day to benefit from the same filing date as the related EUTM application.

Therefore there is technically no need for franchisors with existing EUTM registrations to refile for equivalent registrations in the UK, as comparable UK registrations will arise automatically. However, for new filings, companies are advised to dual-file in the EU and UK, particularly as we get closer to the end of the transition period. This is because EUTM applications pending at the end of the transition period will need to be re-filed in the UK anyway.

There is also the issue that some franchisors have EUTM registrations but only use their marks in the UK. Once the UK no longer forms part of the EU these EUTM registrations could be vulnerable to attack for non-use. Franchisors in this situation would have to consider expanding their use in the EU to defend their EUTM registrations and/or consider filing independent national UK applications which would survive any possible future demise of their EUTM based on non-use.

Other considerations include:

• Whether brand owners have any pending oppositions/cancellation actions at the EU Intellectual Property Office ("EU IPO"): actions which are only based on UK rights will fall away and parallel actions against the new comparable UK trade mark will need to be brought.
• Whether brand owners' existing EUTM legal representatives will remain entitled to represent them before the EU IPO after Brexit. Bird & Bird will be able to represent clients before both the UK and the EU IPOs.

Employment and immigration law

Many aspects of UK employment law are outside the scope of EU law or in excess of EU requirements, including minimum wage legislation, unfair dismissal rights and certain holiday and parental leave rights. In addition, numerous EU concepts have become entrenched in the workplace such as TUPE, many aspects of discrimination law and collective redundancy requirements and are less likely to change. EU employment laws that are considered to impose the greatest burden on businesses, such as agency worker rights are the most likely to be subject to change.

The UK will leave the EU single-market at the end of the implementation period, which will end free movement of people. However, the Government has committed to protect the rights of EU nationals and their family members who wish to stay in the UK after Brexit. The EU Settlement Scheme (Scheme) requires EU nationals to register in order to preserve their rights under UK law (including rights to work, pensions, healthcare and other benefits). The Scheme is mandatory for all EU nationals who wish to continue living in the UK after 31 December 2020.

The situation regarding immigration after 31 December 2020 will depend on what type of system the Government decides to adopt with a move to an Australian-style points-based system seeming likely. Under a points based system EU nationals who, unless they have settled or pre-settled status will in future be treated in the same way as non EU nationals.

If you have employees who are UK nationals working in an EU member state, they should follow the requirements specific to that member state. Cross-border workers who are based in the UK (who are British Citizens) but work in multiple EU member states would need to carefully plan their future activities as freedom of movement will cease to apply after Brexit, which may mean they will need to obtain multiple work permits, visas and/or residence permits in order to work in the EU.

The most important thing for franchise businesses to do at this stage is to ensure their existing employees can continue to work for them after the end of the transition period. Franchisors should audit their workforce in terms of immigration status, considering applications that could be made now (e.g. for registration under the Scheme, permanent residency), and communicate with concerned employees.

Data protection and cyber security law

In respect of EU personal data collected by franchise businesses before the end of the transition period, the Withdrawal Agreement requires the UK to continue to apply the EU’s GDPR rules to this data even after the end of the transition period, although a different arrangement may be agreed as part of future relationship negotiations.

In any case, UK businesses active in the EU – even if just offering services to people there, from the UK – will probably still have to comply with the EU GDPR. That's because the EU GDPR also applies to organisations located exclusively outside the EU, if they offer of goods or services to individuals in the EU, or "monitor" those individuals (which may cover online behavioural marketing, for instance).

The EUWA will bring the provisions of the GDPR onto the UK statute book once Brexit occurs, in order to ensure the UK data protection framework can operate effectively when the UK leaves the EU. The UK Data Protection Act 2018, which came into force in the UK at the same time as the GDPR took effect, is a piece of UK legislation, and therefore will be unaffected by Brexit. As such, the fundamental principles, obligations and rights that we have become familiar with since the GDPR took effect will remain the same, at least in the short term.

Where there will potentially be an immediate change is in respect of transfers of data between the EU and the UK post-Brexit.  This will impact UK franchisors who require master franchisees or franchisees in EU member states to collect and share customer personal information with them.

Under the GDPR, personal data normally cannot be transferred out of the EEA (i.e. the EU, plus Iceland, Liechtenstein and Norway), unless the data will continue to be "adequately" protected after it leaves the EEA. After the end of the transition period, this legal restriction will likely apply when personal data is going to be sent from the EEA to the UK.

According to the Political Declaration that accompanied the Withdrawal Agreement, the European Commission and UK hope to assess and then formally recognise each other's’ data protection rules as providing "adequate" protection for data sent from one territory to the other. This should allow organisations throughout the EEA to freely send personal data to the UK, and vice-versa, without them having to take extra steps to protect the transferred data, thereby minimising costs and friction for businesses. The EU Commission has announced an intention to assess the UK's data protection framework with a view to adopting an adequacy decision but this may not be in place by the end of 2020. 

After the end of the transition period, in the absence of an adequacy decision, exporters of personal data from the EEA to the UK will need to primarily rely on extra commitments by UK data importers to protect the data they receive (and to flow those safeguards through to other recipients of the data, in the case of onward transfers). The UK Information Commissioner's Office has provided further guidance on the form of these extra commitments; most likely, it would mean putting in place contracts with EEA-based data exporters, based on the European Commission's standard contractual clauses.

Cross-border dispute resolution (DR)

Disputes where one party is based in the UK and another in an EU Member State (for example a master franchise agreement between a UK franchisor and a master franchisee based in France) may be affected by a Brexit.

Franchisors can still choose English law as the governing law of their franchise agreements in EU member states. The courts of EU member states will still be bound by the provisions of the Rome I and Rome II Regulations (which govern parties' choice of law), and will therefore continue to give effect to a choice of English law even after the UK ceases to be a member of the EU. Both Regulations will disappear from the UK statute book at the end of the transition period, but will be re-incorporated into UK law under the terms of the EUWA.

Franchisors should be aware that the question of which court will have jurisdiction over any dispute is more complex than choice of law because the Regulation governing this area will disappear from the UK statute book at the end of the transition period and will not be reincorporated into UK law. Franchisors can  continue to choose English courts as their jurisdiction of choice to deal with disputes under franchise agreements as long as the clause states that the English courts have exclusive jurisdiction.

The UK has been a party to The Hague Convention on Choice of Court Agreements 2005 ("The Hague Convention") as an EU member state since 1 October 2015 and will continue to be so until the end of the transition period. At the end of the transition period the UK will probably accede, in its own right, to The Hague Convention in the event that the UK and the EU are unable to reach agreement on these areas in a future relationship agreement.

The Hague Convention requires exclusive jurisdiction clauses in the signatory states to be upheld by the courts of those states and also provides in signatory states, for the enforcement of judgments concerning contracts containing such clauses. This means that an exclusive jurisdiction clause, drafted in accordance with The Hague Convention rules, in favour of the English courts, will be upheld by UK and EU courts if entered into after the end of the transition period. In addition, enforcing a UK judgment concerning a contract containing an exclusive jurisdiction clause will be enforceable in EU member states where the counterparty has assets. This is a very important mechanism in maintaining the enforceability of English court judgments in EU member states after the end of the transition period. This is a complex area and franchisors should seek advice if they have concerns regarding the validity of jurisdiction clauses entered into before the end of the transition period.

The enforceability of international arbitration awards will continue unaffected by Brexit. Parties can therefore continue to agree to arbitrate their disputes on an agreement after Brexit in the same way as before.

If you would like more information on the effect of Brexit on cross-border disputes please look at the Dispute Resolution/ Brexit section of our website.

Franchisors should be aware that…….

There could be a gradual repeal of EU regulations and restrictions seen to be burdensome. For example, relaxation of competition law rules to allow the inclusion of more territorial restrictions than are currently permitted by the EU competition rules in purely UK franchise agreements.

If you plan to sell new goods or services onto both the UK and EU markets, you should note that parallel regulatory regimes, under both UK and EU law, may emerge. The risk of this happening is largely dependent on the nature of the UK's future relationship with the EU but, if parallel regimes do emerge, you will need to consider who should be responsible for achieving compliance and who should bear the consequences of non-compliance (franchisor or the master franchisee?).

Franchisors with a large number of franchise agreements and commercial contracts, particularly with entities within the EU, should audit these contracts to determine the effect Brexit will have on rights and obligations under these agreements, considering the issues referred to above.

The commercial impact of the cost of increased trade barriers between the EU and the UK could have an adverse impact for some franchisors with networks in other EU member states due to, for example, the impact of the restriction of free movement of persons and the increased cost and difficulty in the import and export of goods between the UK and EU because of tariffs and regulatory compliance.

The shape of the UK's future relationship with the EU will be the subject of fierce debate between UK and EU negotiators over the coming year. Franchisors operating in Europe in particular in businesses involving product supply will need to monitor progress carefully and be prepared to respond swiftly to any developments.

This article is part of our Brexit series