U.S. FRANCHISE REGULATION AS A PARADIGM FOR THE EUROPEAN UNION.

• Author: Emerson, Robert W.

INTRODUCTION 746 PART I: THE EUROPEAN PARLIAMENT CALLS FOR REFORM OF EU FRANCHISE REGULATION 748 PART II: JUSTIFICATIONS FOR FRANCHISE REGULATION 756 A. Legislative Motivations for Implementing Pre-Sale Disclosure 759 and Franchise Relationship Regulation in the United States 1. Pre-Sale Disclosure Regulation 759 2. The Debate on Franchise Relationship Laws 760 B. Regulatory Justifications in the Context of Franchising 762 1. Franchise Regulation Exists to Combat Informational Deficits 762 2. Franchise Regulation Exists to Rectify Power Imbalance 765 PART III: COMPARING FEDERAL AND STATE REGULATION OF FRANCHISES IN THE UNITED STATES 769 A. Federal Regulation 771 1. The Substance of the Franchise Disclosure Document ("FDD ") 774 2. Analyzing the Franchisor's Disclosure Requirements (Items 1-4) 775 3. Analvzing the Franchisee's Commitments (Items 5-10) 777 4. Exploring the Franchisor's Commitments (Items 11-16, 21-22) 779 5. Renewal, Termination, Transfer and Dispute Resolution (Item 17) 781 6. A Public Figure's Involvement (Item 18) and Financial Performance Representations (Item 19) 782 7. Outlets and Franchisee Information (Item 20) 783 B. FRANCHISE REGULATION IN CALIFORNIA 784 1. California's Registration and Disclosure Statute 784 2. A Model for Franchise Relationship Laws; The CFRA 786 3. Termination and Non-Renewal under the CFRA 788 4. Buyback Obligations under the CFRA 789 5. The Death of a Franchisee under the CFRA 789 6. A Right to Sell the Franchise under the CFRA 790 7. Arbitration and Legality of Out-of-State Venue Provisions under the CFRA 791 8. Violations of the CFRA Termination and Non-Renewal 792 PART IV: A CRITICAL ASSESSMENT OF SOLUTIONS PROPOSED BY THE 792 EUROPEAN PARLIAMENT: POSSIBILITIES FOR REFORM CONCLUSION 799 INTRODUCTION

Franchising, as a concept, dates back to the thirteenth century or earlier, over four hundred years before it was first adopted as a business model. (2) Moreover, since the 1800s. franchising has helped to foster the entrepreneurial spirit. (1) Notwithstanding its longevity, regulation of the franchise business model is a fairly recent phenomenon. Many jurisdictions--including the EU and a number of its Member States--have no dedicated body of regulation to govern the rights and obligations of the parties, either in the period leading up to the signing of the franchise agreement or at any point during the life cycle of the contractual relationship. (4) For several reasons, the regulatory gap in EU law leaves room for potential abuse and opportunistic behavior by enterprising franchisors. This gap encourages some franchisors to engage in regulatory arbitrage by seeking out jurisdictions that offer an attractive regulatory structure in a bid to monopolize jurisdictions in the EU that offer relatively little to no regulation. (5)

First, the dynamic of the franchisee's dependence on the franchisor creates a power imbalance which requires the prospective franchisee to rely on the franchisor for full disclosure of pertinent information during the bargaining phase. (6) This relationship is borne out of the franchisor's commercial expertise and its direct, hands-on, ongoing, and incremental operational experience of the franchise in the marketplace. The franchisee's dependence on the franchisor extends throughout the contract's lifespan, as the franchisee relies on the franchisor for training and, most importantly, for technical and business support to ensure the commercial success of the franchise operation. (7)

Second, franchisors often have a significant economic advantage in relation to prospective franchisees. Some franchisors require a minimum net worth for franchisees which can range from $100,000 to over $300,000 in U.S. dollars. (8) The three largest, publicly traded European franchisors, conversely, have an average market capitalization equivalent to 1.131 trillion U.S. dollars. (9)

Third, the parties typically have unequal bargaining power both during the negotiation stage and throughout the duration of the contract. (10) In the United States, many states have adopted some form of legislation to help protect franchisees. Among the laws passed are numerous acts attempting to create more equal bargaining power between franchisees and franchisors during the negotiation phase and the life of the franchise agreement."

In this article, we first look at the call made by the European Parliament for reform of regulation governing franchises ("franchise regulation"). After considering the justifications underpinning franchise regulation, we proceed to look at the binary legal framework that has emerged in the United States to ensure the protection of franchisees and would-be franchisees. Finally, we critically review the solutions proposed by the European Parliament and provide our own recommendations for reform of EU franchise regulation.

PART I: THE EUROPEAN PARLIAMENT CALLS FOR REFORM OF EU FRANCHISE REGULATION

Some parts of the EU and UK have functioning systems of franchises without complex regulatory regimes in place. Indeed, the UK does not have specific legislation dealing with franchises. (12) In contrast, France has, effectively, franchise regulation and an extensive history of franchising, (13) and it functions with only two sections of the Commercial Code dedicated to the business model. (14) The methods used by France and the UK, however, do not work for everyone as has been shown in the current systems of many Member States. (15) Many parts of Europe do not have laws dedicated to franchises, which has led to underperformance, among other issues. Based on these problems, we propose a less laissez-faire approach that models the more effective U.S. system.

In September 2007, as a result of the underperformance of the EU franchise sector relative to the United States and Australia, the European Parliament ("EP") passed a Motion calling upon the European Commission to open a public consultation to gather information on the "real situation in franchising." (16) The information was to be used to draft non-legislative guidelines to improve the state of the EU franchising sector. (17) In response, the European Franchise Federation ("EFF") published the EFF European Code of Ethics for Franchising in December 2016. (18)

Due to the underutilization of the franchising model in the EU when compared with the United States and Australia, the Motion aims to find ways to increase the use of franchising as a business model throughout the entire EU retail sector. (19) While franchising represents 5.95 percent of GDP in the United States and 10.83 percent of GDP in Australia, it represents a mere 1.89 percent of the EU's GDP, (20) with the bulk of the turnover (83.5 percent) generated by the franchise sector coming from only seven Member States. (21)

The franchising sector makes a significant contribution to the GDP of a select number of Member States. Approximately 9,971 franchise networks operate in the EU, with nearly 405,000 outlets scattered across the EU, generating a turnover of almost [euro]215 billion ($300 billion). (22) With the withdrawal of the UK from the EU, the gross turnover generated by this sector is likely to drop, widening the chasm even further. (23) The turnover of the franchise sector in the UK amounts to 7.48 percent of the overall turnover for the franchise sector in the EU. (24)

Franchising is a business model with a significant cross-border dimension, (25) able to enhance cross-border activity and competition within a Single Market for the retail sector of Member States. The EU's Single Market eliminates barriers and other regulatory obstacles that can stand in the way of the movement of goods and services. (26) The Single Market system is designed to encourage competition and trade, improve efficiency, raise the quality of goods and services, and help decrease prices. (27) This system has helped EU economic growth and improved the lives of European business owners and consumers. (28) Further, it spurs business development by permitting venture through shared investment in a franchise agreement. This in turn leads to (29) job creation, SME (30) and entrepreneurship development, and the acquisition of new skills. (31) There are many advantages of opening up a franchise, such as access to capital, motivated management, speed of growth, staffing leverage, ease of supervision, increased profitability, improved valuations, penetration of secondary and tertiary markets, and reduced risk. (32)

In order to lay the groundwork for reform, the EP flags certain key causes for the relative underperformance of the sector in the EU. (33) Among the key inhibiting factors flagged by the EP are the variations in both the existing franchise legislation in Member States (34) and measures against unfair trading practices. (35)

The EP suggests that these variations in legislation create technical barriers that often discourage franchisees and franchisors from expanding operations across borders. This in turn undermines cross-border activity within the EU, which impedes the functioning of the Single Market and limits consumer choice within the EU. (36)

In a union of twenty-seven Member States (after the UK's withdrawal), only six countries have franchise-specific national regulation. (37) Much of the franchise legislation introduced on a national level protects the interests of prospective franchisees by focusing on the pre-contractual disclosure by the franchisor, without the enactment of enforcement provisions ensuring the continuation of the franchise relationship. (38) Such regulation focuses on disclosure laws which are intended to reduce risk for franchisees by ensuring that key information relating to the franchise operation and the franchisor is disclosed to the prospective franchisee prior to the signing of the franchise contract. (39) These disclosure laws aim to reduce long-term risks to which franchisees are exposed during the course of the...