www.iflweb.com TAKING A FOREIGN BRAND TO THE UNITED STATES TAKING THE LEAP: BRINGING A FOREIGN BRAND TO THE UNITED STATES John R.F. Baer, Greensfelder, Hemker & Gale, P.C., Chicago, Illinois, United States, Anders Fernlund, NOVA, Stockholm, Sweden, Susan Grueneberg, Snell & Wilmer, L.L.P., Los Angeles, California, United States and Jane W. LaFranchi, Marriott International, Inc., Bethesda, Maryland, United States Increasingly, franchise concepts that begin in one country soon find that expansion involves not only domestic growth, but also development in other jurisdictions including the United States. Over the past decade, advances in electronic communication have made this type of expansion even easier. This article’s focus is on the challenges a non-U.S. franchisor will face in entering the U.S. market. The authors consider it an interesting exercise to address 20 questions that any non-U.S. franchisor will have as it considers taking the leap and bringing its brand to the U.S. Some of these questions tackle a mix of business and legal considerations; others are primarily focused on legal concerns. The answers reflect the experiences of foreign counsel who has assisted local clients in entering the U.S. market, U.S. counsel who have advised foreign clients interested in the U.S. market, as well as in-house counsel who has worked to bring an acquired foreign brand into the U.S. * * * This article was originally prepared as a paper given at the Annual Conference of the International Bar Association in Boston, October 2013. * For a more extensive review of many of the issues considered in this paper, see Susan Grueneberg, “In-bound Transactions: Introducing a Non-U.S. Franchise Program to the United States” in FUNDAMENTALS OF INTERNATIONAL FRANCHISING (W. Woods ed., ABA Forum on Franchising, 2d ed, 2013) (2001). 3 International Journal of Franchising Law Volume 12 – Issue 2 – 2014 © Claerhout Publishing Ltd. TAKING A FOREIGN BRAND TO THE UNITED STATES www.iflweb.com 1. Most “foreign brands” that want to is geographically closest might not be the easiest or enter the U.S. are probably not best for expansion. For example, from Sweden, taking this step (leap) as the first Finland is one of the closest foreign territories. step. We will assume that the foreign However, the Finnish language is totally different brand is franchised in its home from Swedish and hardly any Swedes speak Finnish. country and that the franchisor has The expanding franchisor would have an easier already exported its system to other expansion into England when it comes to language countries, closer to home. Does the barriers. An expanding franchisor should review franchisor take the same approach when expanding to the U.S. as it did information published by certain governmental when going into its neighboring authorities such as the U.S. Commercial Service, the countries? trade promotion arm of the Department of Commerce, or similar types of entities in the For many non-U.S. franchisors, a presence in the franchisor’s home country. The relevant service U.S. is a desirable goal. However, it is also a giant should have commercial research and studies on leap for most. You leave your familiar environment, which neighboring countries have the most the culture you are accustomed to and you take your similarities from a business and cultural perspective system far away, to a new continent. Is it just to the franchisor’s home country. another small step for man or a giant leap for mankind? Only the franchisor that has already exported its system to another country should consider Most franchise systems start locally and expand in a expanding to the U.S. Only after experiencing spiral-shaped pattern from their first location. They obstacles on a smaller scale will it be possible to start in familiar neighborhood and expand unit by survive an expansion to the U.S. Only armed with unit. As long as they expand within their home the attitude and willingness to adjust to another legal country, they can use the same franchise agreement, system and another cultural system and with an the same manual, the same training and probably the openness to new approaches along the way, will it same approved suppliers. They can expand safely in even be worthwhile for a foreign franchisor to a familiar manner. consider “taking the leap.” However, when the franchisor reaches a natural boundary, a state line or a new country, it needs to stop and investigate if there will be any obstacles. The obstacles can be purely business related. Before establishing a business anywhere in the world, the franchisor should make sure that the business itself will work. Do the end-users in the target country appreciate the goods or services provided? Is there a market and is the market ready for the way the “Only the franchisor that has goods or the services are provided? In some countries, workers have a hot lunch sitting down in a already exported its system to restaurant. In other countries, the same workers another country should consider bring a bag lunch or get a take-away sandwich for lunch. Some countries will have high labor costs expanding to the U.S. Only after which may make a personnel-intensive franchise experiencing obstacles on a system unprofitable. smaller scale will it be possible to Most franchisors choose to start their expansion abroad by establishing in a country that feels survive an expansion to the U.S.” familiar or close to home. Beware: the country that International Journal of Franchising Law 4 Volume 12 – Issue 2 – 2014 © Claerhout Publishing Ltd. www.iflweb.com TAKING A FOREIGN BRAND TO THE UNITED STATES 2. This is a common theme from foreign For any expansion into the U.S., the foreign franchisors: “We’ve always done it franchisor must become acquainted with the federal our way. It works in every other disclosure law applicable to all franchises in the country – Why won’t it work in the U.S. known as the Franchise Rule of the U.S. U.S.?” Federal Trade Commission (“FTC”)1 and the requirements for a Franchise Disclosure Document Outside the U.S., there has been relatively little (“FDD”) (See Question 14). A detailed step by step regulation around franchising. It has been easy to explanation of the contents of the FDD is beyond the expand a franchise system to other countries and in scope of this paper, but a helpful discussion can be most cases, there has not even been a reason to found in the U.S. chapter of the ABA Forum on consider if what is expanded falls under the Franchising book, International Franchise Sales definition of franchising. Laws. 2 During the last 20 years many countries in the world In addition to disclosure regulations the foreign have introduced disclosure laws. Due to this franchisor will encounter new fields of laws that circumstance, franchisors have become aware that even their home country counsel may not be aware the definition of franchising may vary from country of, like business opportunity laws and franchise to country. Franchisors have become familiar with relationship laws (See Questions 16 and 19). It can different rules in different countries and the fact that also be somewhat awkward when a foreign one has to produce different documentation when franchisor learns that it will now have to comply entering a new country. However, the variation of with U.S. anti-terrorism laws and laws on money- the information that needs to be disclosed is not that laundering (See Question 15). Even visa vast. When exporting to neighboring countries the requirements will start a debate on whether or not to variations may not even be noticeable. With good consider exporting the franchise system to the U.S. counsel the franchisor may even prepare a disclosure document that may be used in more than one 3. Should the franchisor use master jurisdiction. With that approach, it is easy to franchising or development understand why a franchisor may ask: “It works in agreements for the U.S. market? If every other country – why won’t it work in the so, how big a territory should the U.S.?” franchisor grant to the master franchisee or area developer? When expanding a franchise system to the U.S. the franchisor has to choose the method for expansion. Establishing a subsidiary and beginning direct franchising is very time consuming and expensive. It will probably become the long-term focus of the franchisor which could be detrimental to the franchisor’s existing business. Instead, the “In addition to disclosure regulations the foreign franchisor 1 The complete name of the FTC Rule is “Disclosure Requirements and Prohibitions Concerning Franchising and will encounter new fields of laws Business Opportunity Ventures,” 16 C.F.R. §§ 436 and 437 (2007). that even their home country 2 John R. F. Baer and Susan Grueneberg, United States of America, in INTERNATIONAL FRANCHISE SALES counsel may not be aware of, like LAWS (M. Lindsey and A. Loewinger eds, ABA Forum on Franchising, 2011 updates) (2006). See also David W. business opportunity laws and Oppenheim, “New disclosure protocol under the revised FTC franchise rule,” International Journal of Franchising Law, franchise relationship laws.” 2008/5-6, pp 37-41. 5 International Journal of Franchising Law Volume 12 – Issue 2 – 2014 © Claerhout Publishing Ltd. TAKING A FOREIGN BRAND TO THE UNITED STATES www.iflweb.com “… the franchisor’s contractual bigger player and usually has more financial strength. The area developer usually handles the relationship with an independent obligations of a franchisor for the territory it has been granted. To ease the burden on the franchisor, operator in the U.S.