IP Protection May Promote Additional Franchise Growth in Africa

The market for food franchises alone exceeds US$300 million per year. Perhaps this explains why, in the last year, Burger King signaled its plans to enter South Africa's fast food market, Subway is working its way across North Africa, and Kahala recently signed a master franchise agreement that includes a goal of opening eight stores in Africa within the next four years.

Retailers have also indicated their plans for expansion in Africa. GAP announced plans to open franchised stores in Egypt and Morocco. Pick n Pay, a large South Africa retailer, intends to expand its presence in nations such as Mozambique and Mauritius. These examples are not exclusive; the U.S. Commercial Service, the U.S. Department of Commerce's trade promotion agency, estimated that more than 200 international franchises are currently running successful operations on the continent.

The potential opportunities under the franchising model are also not exclusive to international franchisors expanding into African markets. They also apply to domestic African small and medium business enterprises (“SMEs”) that adopt the franchise framework. The African Development Bank has noted that only 15% of franchised SMEs fold, in comparison with an 80% failure rate among independent businesses. Considering that SMEs comprise 90% of private businesses in Africa, the franchising framework can be effective to promote SME development, increase private sector development, and contribute to poverty reduction and wealth creation. If these trends continue to hold, the economic boost will likely continue. This growth, however, is also still contingent on continued legislative and economic reforms in Africa.

Legal Infrastructure

In our book, Franchising in Africa: Legal and Business Considerations, we underscore that having a strong legal infrastructure will increase the presence of foreign franchisors on the continent. Certain African countries have sought to address concerns about the legal infrastructure by drafting and enacting legislation specific to franchising and/or enacting laws that protect transactions key to the franchise relationship. Within the last few years, South Africa and Tunisia have enacted franchise legislation to mandate pre-sale disclosure for franchise operations. South Africa passed its franchise disclosure legislation in 2008 as part of its consumer protection laws. In 2010, Tunisia enacted its pre-sale disclosure rules along with laws that dictate the terms that must be contained in franchise agreements. Angola has had franchise-specific regulations in effect since 2003 that govern the franchise relationship, and Nigeria has passed laws requiring registration of agreements containing any exchange of intellectual property. Other African countries will likely begin to enact similar laws.

Intellectual Property

The exchange of intellectual property is an essential aspect of the franchise relationship that requires more legislative protection on the African continent. Some Western franchisors have expressed concerns that many African countries lack adequate intellectual property protections.

On the most basic level, a franchisor grants a franchisee the right to use its intellectual property, often in the form of the franchisor's trademarks, trade name and trade secrets, for a limited term and under certain specified terms and conditions. Because the franchisor's trademarks, trade name and trade secrets are key wealth creators for companies, the rule of law is very important to maintaining and protecting the franchisor's intellectual property. If a franchisor's intellectual property is misused, it can damage an entire brand's reputation and have a detrimental financial impact as well.

It is imperative that intellectual property rights (“IPRs”) are recognized and respected to ensure continued investment on the continent. Further, effective IPRs enforcement mechanisms that are compatible with international standards will have the effect of assuring potential investors that their IPRs will be protected. It is notable that countries like South Africa have become models for franchise growth in Africa. One likely reason for this is a more robust history of intellectual property protections in that country than in many others on the continent. Another encouraging note is that, of the African countries surveyed in our book, local legal experts reported that many African countries either require or local experts recommend that parties to a franchise agreement file a registered user agreement or a short trademark license agreement with the trademark authorities. Generally, this filing will enable the parties to pursue an action against any third-party infringers. The only country where this course of action is not currently recommended is Egypt because of the difficulty in having the local trademark office deregister a license, especially in the event of a dispute between the parties.

While the existence of legal mechanisms to protect IPRs does not speak to the practical realities of successful enforcement against third-party infringers, it is clearly a step in the right direction to continue the increasing trends of foreign investment on the continent in franchising and other industries.

The information for this article is based on excerpts from Franchising in Africa: Legal and Business Considerations, a book edited by the authors and published by LexNoir Foundation.

Kendal Tyre is a partner and Diana Vilmenay-Hammond is an associate at Nixon Peabody LLP in Washington, DC. Tyre can be contacted at [email protected] or 202-585-8368, and Vilmenay-Hammond can be contacted at [email protected] or 202-585-8296

Recent flurries of activity in Africa's franchisor sector indicate that franchisors continue to see Africa as an increasingly attractive market for expanding their brands. However, further developments in the protection of an investor's intellectual property will be vital for continued foreign investment on the continent.

Franchise Growth

While much of the world struggles with the ongoing effects of the economic downturn, numerous African countries are enjoying strong economic growth. According to current research, the largest driving forces of this growth are wholesale and retail commerce, transportation, telecommunications and manufacturing. The same research indicates that Africa will attain middle-class majorities by the year 2030 and that consumer spending on the continent will expand to US$2.2 trillion. To put this in perspective, consider that, according to McKinsey and Company, Africa currently has more middle-class consumers than India, despite the fact that
India has a larger population.

The market for food franchises alone exceeds US$300 million per year. Perhaps this explains why, in the last year, Burger King signaled its plans to enter South Africa's fast food market, Subway is working its way across North Africa, and Kahala recently signed a master franchise agreement that includes a goal of opening eight stores in Africa within the next four years.

Retailers have also indicated their plans for expansion in Africa. GAP announced plans to open franchised stores in Egypt and Morocco. Pick n Pay, a large South Africa retailer, intends to expand its presence in nations such as Mozambique and Mauritius. These examples are not exclusive; the U.S. Commercial Service, the U.S. Department of Commerce's trade promotion agency, estimated that more than 200 international franchises are currently running successful operations on the continent.

The potential opportunities under the franchising model are also not exclusive to international franchisors expanding into African markets. They also apply to domestic African small and medium business enterprises (“SMEs”) that adopt the franchise framework. The African Development Bank has noted that only 15% of franchised SMEs fold, in comparison with an 80% failure rate among independent businesses. Considering that SMEs comprise 90% of private businesses in Africa, the franchising framework can be effective to promote SME development, increase private sector development, and contribute to poverty reduction and wealth creation. If these trends continue to hold, the economic boost will likely continue. This growth, however, is also still contingent on continued legislative and economic reforms in Africa.

Legal Infrastructure

In our book, Franchising in Africa: Legal and Business Considerations, we underscore that having a strong legal infrastructure will increase the presence of foreign franchisors on the continent. Certain African countries have sought to address concerns about the legal infrastructure by drafting and enacting legislation specific to franchising and/or enacting laws that protect transactions key to the franchise relationship. Within the last few years, South Africa and Tunisia have enacted franchise legislation to mandate pre-sale disclosure for franchise operations. South Africa passed its franchise disclosure legislation in 2008 as part of its consumer protection laws. In 2010, Tunisia enacted its pre-sale disclosure rules along with laws that dictate the terms that must be contained in franchise agreements. Angola has had franchise-specific regulations in effect since 2003 that govern the franchise relationship, and Nigeria has passed laws requiring registration of agreements containing any exchange of intellectual property. Other African countries will likely begin to enact similar laws.

Intellectual Property

The exchange of intellectual property is an essential aspect of the franchise relationship that requires more legislative protection on the African continent. Some Western franchisors have expressed concerns that many African countries lack adequate intellectual property protections.

On the most basic level, a franchisor grants a franchisee the right to use its intellectual property, often in the form of the franchisor's trademarks, trade name and trade secrets, for a limited term and under certain specified terms and conditions. Because the franchisor's trademarks, trade name and trade secrets are key wealth creators for companies, the rule of law is very important to maintaining and protecting the franchisor's intellectual property. If a franchisor's intellectual property is misused, it can damage an entire brand's reputation and have a detrimental financial impact as well.

It is imperative that intellectual property rights (“IPRs”) are recognized and respected to ensure continued investment on the continent. Further, effective IPRs enforcement mechanisms that are compatible with international standards will have the effect of assuring potential investors that their IPRs will be protected. It is notable that countries like South Africa have become models for franchise growth in Africa. One likely reason for this is a more robust history of intellectual property protections in that country than in many others on the continent. Another encouraging note is that, of the African countries surveyed in our book, local legal experts reported that many African countries either require or local experts recommend that parties to a franchise agreement file a registered user agreement or a short trademark license agreement with the trademark authorities. Generally, this filing will enable the parties to pursue an action against any third-party infringers. The only country where this course of action is not currently recommended is Egypt because of the difficulty in having the local trademark office deregister a license, especially in the event of a dispute between the parties.

While the existence of legal mechanisms to protect IPRs does not speak to the practical realities of successful enforcement against third-party infringers, it is clearly a step in the right direction to continue the increasing trends of foreign investment on the continent in franchising and other industries.

The information for this article is based on excerpts from Franchising in Africa: Legal and Business Considerations, a book edited by the authors and published by LexNoir Foundation.

Kendal Tyre is a partner and Diana Vilmenay-Hammond is an associate at Nixon Peabody LLP in Washington, DC. Tyre can be contacted at [email protected] or 202-585-8368, and Vilmenay-Hammond can be contacted at [email protected] or 202-585-8296