There remains a question about franchisor liability under the FCPA. Franchising has been a successful model in the U.S. and now many corporations are looking at overseas expansion opportunities. Franchise law has become well developed across the U.S., with many states developing laws to protect the rights and obligations of both parties in a franchise agreement.
There are no reported FCPA enforcement actions regarding franchisors. However, the factors in a franchise relationship would appear to lead to clear FCPA responsibility of the franchisor for its overseas franchisee’s actions. Additionally, court interpretation of the FCPA has held that it is applicable where conduct is used “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. As everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. Nevertheless, many U.S. companies view franchisees as different from other types of more direct sales representatives, such as company sales representatives, agents, resellers or even JV partners, for the purposes of FCPA liability.
The Master Franchise model is typically the most used model in international franchise expansion. It generally revolves around a Master Franchise agreement between the U.S. based franchisor and a franchisee in a specific geographic territory. This franchisee then contracts with third-party sub-franchisees within the specified territory. Typically, the U.S.-based franchisor will have no contractual relationship with the international sub-franchisees. The master franchisee acts as the franchisor in the local market and recruits, trains, and provides other support in the local area on behalf of the U.S. franchisor. Here the FCPA exposure is both direct and indirect.
While some believe that a franchisor may not have direct involvement in conduct prohibited by the FCPA, as there may not be the requisite corrupt intent required under the statute. However, unless a franchisor has an adequate compliance program in place, a franchisor may well find itself in the shoes of Frederic Bourke and sustain a finding of conscious indifference.
Three key takeaways:
- Consider the different types of international franchise agreements to help assess your compliance risk.
- There are no reported FCPA enforcement actions involving international franchisors, yet.
- Franchisors must conduct thorough research in both the foreign market they hope to enter and on their potential franchisees.