UK: Does Brexit Mean Frexit? How The Decision To Leave The EU Impacts Upon UK Franchisors

Last Updated: 21 September 2016
Article by Mark Abell and Shelley Nadler

It is news to nobody that on 23 June 2016, the UK voted 51.9% to 48.1% in favour of leaving the EU, but franchise lawyers and their clients in the UK have yet to understand what it means for them. This article explains the processes that will follow, and summarises the legal and commercial implications of a UK exit from the EU (or "Brexit") for UK Franchisors and the challenges their UK lawyers will enjoy, in particular in relation to competition law, intellectual property law, employment and immigration law, data protection and cyber security law and cross-border dispute resolution.

Brexit: process and timings

Referendum outcomes are advisory, not legal binding, but create a strong political pressure to act. Under Article 50 of the Lisbon Treaty, an EU Member State may, in accordance with its constitutional requirements, decide to withdraw and implement this by notifying the European Council. The Council will negotiate a withdrawal agreement with that State on behalf of the EU. The withdrawal agreement must be agreed by a qualified majority of the Council, with consent of the European Parliament.

EU Treaties will cease to apply to the withdrawing State from the date the withdrawal agreement comes into force or, failing such agreement being concluded, two years after the Council was notified of the withdrawal (unless the Council unanimously agrees to extend this period). Now that Theresa May has become Prime Minister, it will be for the Government, working with  Parliament, to determine "when" or indeed "if" to trigger Article 50 and commence negotiations of the terms of a Brexit.

The next general election is due to be held in 2020. Theresa May may wish to call an earlier general election to endorse his/her mandate for leadership. Under the Fixed Term Parliaments Act 2011, this would require a two-thirds majority in the House of Commons.

What happens to EU law now?

There will be no immediate change to English or Scottish law as a result of the referendum decision and so franchisors should not be panicked into taking steps to change their franchise or other agreements at present. Things will become clearer over the coming months. However it is worthwhile understanding some of the technical issues in place.

Broadly speaking, EU legislation is either directly applicable in the UK (e.g., Regulations) or only once transposed into domestic legislation (Directives). Upon a Brexit, directly applicable EU law, including Treaty provisions and Regulations, will cease to have legal force in the UK, unless Parliament passes equivalent domestic legislation. Directives that have been transposed into UK primary legislation will continue to operate, but the UK statute will no longer be required to comply with the Directive from which it derives: UK Parliament will be free to amend the legislation as it sees fit. Secondary legislation introduced under the powers set out in European Communities Act 1972 ("ECA 1972") to implement EU law will lapse when the ECA 1972 is repealed, subject to the enactment of saving provisions. Directives are likely to continue to be relevant to the interpretation of UK statutes that derive from them where there are ambiguities.

The Court of Justice of the European Union ("CJEU") case law is likely to continue to be persuasive in UK courts after a Brexit, particularly with respect to UK law derived from or harmonised with EU law. This influence will diminish over time as UK law diverges. Some UK statutes contain a requirement to interpret the legislation consistently with CJEU rulings: this requirement will continue to be effective after a Brexit unless and until the UK statute is amended. Depending on the UK's new status in relation to the EU (which is to be negotiated), the UK may join the European Free Trade Association ("EFTA") (and then also the Lugano Convention on Jurisdiction and Judgments) and possibly the European Economic Area ("EEA").

Brexit implications for UK franchisors in practice

Overall

The effect of a Brexit on UK franchisors will depend on the UK's future relationship with the EU. If the UK joins EFTA and through it joins the EEA, the position in relation to many aspects of legal practice will remain unchanged. This must be a real possibility and if it is the outcome, there is likely to be less upheaval from a legal point of view.

If the more Eurosceptic vein of thought prevails, it is likely that the UK will negotiate a looser arrangement with the EU via a series of bilateral and multilateral trade agreements and/or reliance on the rules of the World Trade Association, OECD and G20, of which it will remain a member.

Competition law

This area of law is extremely relevant to franchising. It is already well developed and 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 and parallel EU and UK enforcement action will become possible. But the Commission will have reduced powers, e.g. no power to carry out on-site investigations (dawn raids) in the UK nor to ask the Competition and Markets Authority to investigate on its behalf.

Importantly for franchising, new block exemption measures at UK level will be needed, as the UK Competition Act currently relies on the EU block exemption regulations (which will no longer apply following a Brexit). It may mean that the UK adopts a more US "Chicago School" "rule of reason" style of approach to restrictions on issues such as exclusivity and price maintenance. This would allow franchisors far greater flexibility in their franchise agreements.

English intellectual property law

The effects of a Brexit on the franchisors brand protection strategy will be significant.

It is likely that community rights, such as registered and unregistered community designs and EU trade marks ("EUTM"s) (formerly referred to as Community Trade Marks or CTMs), will no longer have effect in the UK and there will be questions about what will happen to the "UK portion" of such rights obtained before Brexit. If existing rights automatically reduce in geographical scope to exclude the UK their value will diminish, which will have a commercial impact on the rights holder. This is something that franchisors with EUTMs need to keep an eye on as it may at some point mean that they have to re-apply for some of their trade marks in the UK.

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.

Employment and immigration law

A number of areas of UK employment law, such as the National Minimum Wage and the law relating to unfair dismissal, are outside the scope of EU law and likely to be unaffected even when we cease to be part of the EU. Other areas — including unlawful discrimination, certain family-friendly rights, working time, collective redundancy consultation and business transfers — have been influenced by the EU, often having a basis in European Directives or case law. However, in many instances the UK provides protection in excess of the EU minimum requirement and changes are unlikely.

EU employment laws that are considered to impose the greatest burden on businesses — such as agency worker rights, collective consultation and working time rights — are the most likely to be subject to change, but many other EU employment laws (including those covering discrimination) have become entrenched in the UK's legal and ideological framework, and drastic changes to these seem much less likely.

The position on immigration is less clear. Labour shortages, a loss of talent and mobility restrictions are all ways in which businesses could be affected depending on how the government elects to regulate or remove EU nationals' right to live and work in the UK. Extending the current Points-Based System to apply to EU nationals is possible but not a foregone conclusion.

Franchisors should audit their workforce in terms of immigration status, considering applications that could be made now (e.g. for permanent residency), and communicate with concerned employees. In the longer term, if and when the government proposes that laws be amended or repealed, employers should also review employment contracts (with a view to addressing any unenforceability risks that might arise), policies, procedures and benefit schemes, and check any European Works Council arrangements.

Changes to immigration laws in relation to EU citizens currently living and working in the UK could have a substantial impact on your franchisee's employees particularly in the food and beverage and hospitality industries.

Data protection and cyber security law

Various EU provisions are likely to come into force in the UK before a Brexit takes place. These include the General Data Protection Regulation (GDPR), due to come in force on 25 May 2018, the Network & Information Security (NIS) Directive ("Cyber Directive"), likely to be implemented by Spring 2018, and a new directive for the police and criminal justice sector that must be transposed by Member States by 6 May 2018.

Post-Brexit, any UK business which processes or monitors EU citizens' personal data in connection with its offer of goods, services or monitoring activities, or has a group company or staff operating within the EU, will still have to comply with the GDPR. Beyond that, the extent to which the GDPR will need to be adopted in the UK will depend heavily on the type of relationship adopted with the EU. However, it seems likely that either the GDPR or a law that looks very like it will be required in the UK given that the UK's current law is in need of refreshment (it is nearly 20 years old) and given the way that EU data transfer laws operate.

The UK will wish to continue to trade with the EU post Brexit, therefore closely comparable data protection and cyber security laws in many areas will be necessary to avoid barriers to trade.

Franchisors with franchisees in Ireland or other EU member states will need to be very careful to ensure that they comply with EU data protection and cyber security laws even after Brexit.

Cross-border dispute resolution (DR)

Disputes where one party is based in the UK and another in an EU Member State may be affected by a Brexit. Other disputes may also be affected if the subject matter has some connection with a Member State.

The Brussels Regulation currently governs jurisdiction and the enforcement of judgments within the EU. The Lugano Convention sets out very similar rules, so if the UK becomes a signatory to this convention post-Brexit little will change. Otherwise, the position will depend on negotiated bi-lateral and multi-lateral agreements with other countries, or the possible ratification by the UK, in its own right, of the Hague Convention on Choice of Court Agreements (which the EU has ratified).

Franchisors should be aware that.......

Brexit may provide grounds for termination of a contract, depending on the specific facts and drafted terms (e.g., the material adverse change or force majeure clauses in a contract). The question is particularly relevant to franchise agreements that have the EU as the territorial scope. Parties might argue that a contract has become frustrated as a result of Brexit.

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, and/or a decision not to implement laws akin to the new GDPR.

Franchisors with a large number of commercial contracts, particularly with entities within the EU, should consider in due course auditing these contracts to determine the effect Brexit will have on rights and obligations under these agreements.

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 monitoring of currency fluctuations.

Conclusion

The impact of Brexit on franchising in the UK is far from certain. Franchisors will need to keep a watching brief as various areas of law develop in response to the political changes that look likely to take place over the next two years or so.

www.twobirds.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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