New Zealand Considers ' and Rejects ' Franchise Regulation

While the United States shares a common language and common law background with the United Kingdom and New Zealand, those countries have gone in a different direction in regulation of franchising. A report by New Zealand's Ministry of Economic Development, issued in the past year, affirms the hands-off approach of New Zealand, modeled on the system in the United Kingdom, even as the country seeks to protect prospective franchisees.

The United Kingdom has no law that requires disclosure or registration of franchises being offered for sale, and to this author's knowledge, there have been no serious attempts to enact such legislation. Does this mean that franchising has not had its issues in the business community in that country? Certainly not.

While disclosure has not been codified as a means of eliminating the information vacuum in the United Kingdom, many franchisors provide information to prospective franchisees through a disclosure document that, in principle, resembles those prescribed in other nations. As for relationship issues, such as terminations, renewals, and restrictions on transfers, the English law is notably quiet in the sense that there are few decisions peculiar to franchising on any of these or any of the other relationship issues (sourcing, rights of association, and the like) that some countries have felt compelled to address. This means that an aggrieved franchisee in the United Kingdom must seek remedies through common-law principles governing the conduct of business generally. In this framework, it is not surprising that there are few meaningful precedents that protect the rights of franchisees. Stated differently, freedom of contract is still the guiding principle.

New Zealanders are often said to be more English than the English, and this is almost true with respect to franchise regulation. Generally, New Zealand follows the United Kingdom's laissez-faire approach to franchise regulation. Of particular interest is the fact that there is no definition of “franchising” within the New Zealand legal system, although the Franchise Association of New Zealand (“FANZ”) has adopted a voluntary code of conduct with such a definition. Nevertheless, how can you regulate something when you are not even sure what that “something” is?

A second notable fact about New Zealand is that it purportedly has more domestic franchise systems per capita than any other country in the world. Although its population is small (less than 5 million people), a quick study shows that franchising is a powerful force in the New Zealand business community. FANZ is a well-organized and respected trade association, and New Zealand has a group of distinguished lawyers who focus much of their practices on franchise law, even if they might not have a clear picture of what franchising is.

Within the last year, Simon Power, who is in charge of New Zealand's Ministry of Economic Development, focused his attention on the issue of franchise regulation, and, in a recently issued report, concluded that although there is some abuse in the field of franchising, it is not sufficient to warrant legislation. Thus, like the United Kingdom, New Zealand franchisees must rely primarily upon the common law for protection from informational and relationship challenges. The Contractual Remedies Act, although not aimed specifically at franchising, provides various remedies where there has been misrepresentation in contractual dealings, and New Zealand's Fair Trading Act, a consumer-protection law, prohibits conduct in trade that is misleading or deceptive or is likely to mislead or deceive. New Zealand franchisors, following the customs of neighbor and close ally Australia, generally provide informational statements to franchise prospects, and members of FANZ must do so to comply with FANZ's voluntary code of conduct. Otherwise, freedom of contract seems to rule.

U.S. Franchising

The United States, of course, has been the mother country when it comes to franchise regulation. In the United States, franchise regulation has gone in two directions, and as such, has had a significant influence on how other nations regulate franchising. On the informational issues, disclosure requirements began in 1970 with the adoption of the California Franchise Investment Law, and 14 other states followed California's lead, so that by the mid-1970s, states with more than half of the U.S. population required franchisors to register their offerings and to provide certain mandated information to prospective franchisees. In 1979, the Federal Trade Commission implemented its Disclosure Rule, which set minimum disclosure requirements at the national level. The states remained free to regulate the franchise sales process, but only if their law provided more protection to prospective franchises than the FTC's Disclosure Rule.

On issues of relationship, with certain industry exceptions, about 17 U.S. states have adopted laws that protect franchisees from abusive behavior by franchisors after the franchise relationship has commenced. The federal government, on the other hand, has been hands-off, except in the petroleum and automotive industries.

Conclusion

In summary, the United Kingdom and New Zealand have been careful not to interfere in the franchise community marketplaces, while the United States has made it a mixed bag. As a result, American franchisors encounter a regulatory environment that is more costly (because of the dual level of regulation and the state registration requirements), a marketplace that is often difficult to enter, and a higher degree of liability for compliance failures. Perhaps our government officials should ask: How does the United States stay competitive, given this environment?

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Stockton LLP. He can be contacted at [email protected] or 404-815-6366.

While the United States shares a common language and common law background with the United Kingdom and New Zealand, those countries have gone in a different direction in regulation of franchising. A report by New Zealand's Ministry of Economic Development, issued in the past year, affirms the hands-off approach of New Zealand, modeled on the system in the United Kingdom, even as the country seeks to protect prospective franchisees.

The United Kingdom has no law that requires disclosure or registration of franchises being offered for sale, and to this author's knowledge, there have been no serious attempts to enact such legislation. Does this mean that franchising has not had its issues in the business community in that country? Certainly not.

While disclosure has not been codified as a means of eliminating the information vacuum in the United Kingdom, many franchisors provide information to prospective franchisees through a disclosure document that, in principle, resembles those prescribed in other nations. As for relationship issues, such as terminations, renewals, and restrictions on transfers, the English law is notably quiet in the sense that there are few decisions peculiar to franchising on any of these or any of the other relationship issues (sourcing, rights of association, and the like) that some countries have felt compelled to address. This means that an aggrieved franchisee in the United Kingdom must seek remedies through common-law principles governing the conduct of business generally. In this framework, it is not surprising that there are few meaningful precedents that protect the rights of franchisees. Stated differently, freedom of contract is still the guiding principle.

New Zealanders are often said to be more English than the English, and this is almost true with respect to franchise regulation. Generally, New Zealand follows the United Kingdom's laissez-faire approach to franchise regulation. Of particular interest is the fact that there is no definition of “franchising” within the New Zealand legal system, although the Franchise Association of New Zealand (“FANZ”) has adopted a voluntary code of conduct with such a definition. Nevertheless, how can you regulate something when you are not even sure what that “something” is?

A second notable fact about New Zealand is that it purportedly has more domestic franchise systems per capita than any other country in the world. Although its population is small (less than 5 million people), a quick study shows that franchising is a powerful force in the New Zealand business community. FANZ is a well-organized and respected trade association, and New Zealand has a group of distinguished lawyers who focus much of their practices on franchise law, even if they might not have a clear picture of what franchising is.

Within the last year, Simon Power, who is in charge of New Zealand's Ministry of Economic Development, focused his attention on the issue of franchise regulation, and, in a recently issued report, concluded that although there is some abuse in the field of franchising, it is not sufficient to warrant legislation. Thus, like the United Kingdom, New Zealand franchisees must rely primarily upon the common law for protection from informational and relationship challenges. The Contractual Remedies Act, although not aimed specifically at franchising, provides various remedies where there has been misrepresentation in contractual dealings, and New Zealand's Fair Trading Act, a consumer-protection law, prohibits conduct in trade that is misleading or deceptive or is likely to mislead or deceive. New Zealand franchisors, following the customs of neighbor and close ally Australia, generally provide informational statements to franchise prospects, and members of FANZ must do so to comply with FANZ's voluntary code of conduct. Otherwise, freedom of contract seems to rule.

U.S. Franchising

The United States, of course, has been the mother country when it comes to franchise regulation. In the United States, franchise regulation has gone in two directions, and as such, has had a significant influence on how other nations regulate franchising. On the informational issues, disclosure requirements began in 1970 with the adoption of the California Franchise Investment Law, and 14 other states followed California's lead, so that by the mid-1970s, states with more than half of the U.S. population required franchisors to register their offerings and to provide certain mandated information to prospective franchisees. In 1979, the Federal Trade Commission implemented its Disclosure Rule, which set minimum disclosure requirements at the national level. The states remained free to regulate the franchise sales process, but only if their law provided more protection to prospective franchises than the FTC's Disclosure Rule.

On issues of relationship, with certain industry exceptions, about 17 U.S. states have adopted laws that protect franchisees from abusive behavior by franchisors after the franchise relationship has commenced. The federal government, on the other hand, has been hands-off, except in the petroleum and automotive industries.

Conclusion

In summary, the United Kingdom and New Zealand have been careful not to interfere in the franchise community marketplaces, while the United States has made it a mixed bag. As a result, American franchisors encounter a regulatory environment that is more costly (because of the dual level of regulation and the state registration requirements), a marketplace that is often difficult to enter, and a higher degree of liability for compliance failures. Perhaps our government officials should ask: How does the United States stay competitive, given this environment?

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Stockton LLP. He can be contacted at [email protected] or 404-815-6366.