US Franchisors Expanding Abroad Must Consider FCPA Risks

Franchising has gained popularity as a form of international expansion, but it comes with some unusual Foreign Corrupt Practices Act risks. The government’s enforcement of the FCPA focuses, in part, on a company’s awareness of alleged misconduct and the degree of control a company exerts over intermediaries that act on its behalf. In franchising, a franchisor not only licenses the use of a trademark to an independent franchisee, but also continues to exert some degree of control over aspects of the franchisee’s operations, such as advertising and training. Yet, despite the control a franchisor may exercise over its franchisee, and despite the FCPA’s broad language, there has not been to date an FCPA enforcement action against a franchisor for franchisee-related conduct. Nevertheless, depending on the details of the franchising agreement and the degree of practical control over the franchisee, a franchisor may have potential FCPA exposure from the foreign operations of its franchisee. U.S. franchisors looking to expand their brand overseas need to be attentive to the risks in doing so.