Many Western brands have shunned Russia as a result of the invasion of Ukraine, but some have remained open in the nation and claim they are unable to close them.
Complex franchise agreements preclude Marks and Spencer, Burger King, and hotel firms Marriott and Accor from exiting.
The companies have outsourced their Russian activities to third parties, and they do not own the enterprises that wear their names.
In Russia, the companies’ combined outlets number about a thousand.
M&S has 48 stores open and Burger King has 800 restaurants open, while Marriott and Accor both have 28 and 57 hotels open.
According to a report by the BBC, the brands are bound by formal franchise agreements, making it difficult to remove their names from Russia’s shopping malls and high streets.
For decades, many Western companies have had such partnerships. Marks & Spencer outlets, for example, have been run by FiBA, a Turkish business that has held the rights to sell the retailer’s products across Eastern Europe since 1999. In response to the war, the retail behemoth has announced that it has halted supplies to FiBA.
Restaurant Brands International, which owns Burger King, also told the BBC that its stores are operated by franchisees.
These “long-standing legal agreements are not easily changeable in the foreseeable future,” it said.
According to reports, hotel chains Marriott, IHG, and Accor, which owns the Ibis and Novotel brands, are all operating in Russia under identical agreements.
Marriott told the press that its Russian hotels were owned by third parties, but that it would “continue to review the ability for these hotels to remain open,” implying that it was looking at its franchise agreements.
A business method of selling products or services is franchising. It entails a franchisor, who has established the brand’s name, and a franchisee, which pays a fee for the right to do business and sell the franchisor’s products under the franchisor’s name.
According to Graeme Payne of legal firm Bird&Bird, who specialises in UK and worldwide franchising, franchising is beneficial to Western firms that wish to penetrate markets in different countries but lack local knowledge, money, or aptitude to do so.
“You would as a member of the public… think why don’t they just close their stores? But just from a pure business and contractual perspective, it’s very difficult to do so without some far reaching legal consequences,” said Mr Payne.
Those consequences might have major financial ramifications for Western corporations, as they risk being sued by franchisees if they breach any franchise agreements, which are sometimes ten or more years old.
If a franchise owner is proven to have ties to Russian President Vladimir Putin or has been sanctioned, a transaction could be cancelled from a UK perspective, according to Victoria Hobbs, a partner at Bird&Bird who works with franchise disputes.
Despite the fact that many franchise agreements include a language that specifies “if the franchisee does something to damage our name, we can terminate,” according to Hobbs, the difficulty in Russia right now is that many franchisees are not doing anything wrong.
“It is quite challenging for them because, from an English law perspective, they don’t really have a right to bring the agreement to an end – that’s the problem,” she said.
According to John Pratt, a partner with the largest team of specialist franchise lawyers in Europe, even if a brand was successful in obtaining a UK court order against a franchise in Russia, “the Russian courts would not enforce it.”
Meanwhile, the companies are doing everything they can to assist with the situation, and they have all expressed support for Ukraine following Russia’s incursion.
Accor, which operates 57 branded hotels in Russia and employs 3,500 people there, has halted all new hotel openings as well as services and deliveries to hotels affected by the sanctions.
While many brands remain trapped in Russia, Yum Brands, the parent company of KFC and Pizza Hut, announced that it was finalising an arrangement with its principal franchisee to temporarily cease Pizza Hut operations.
Hobbs, a lawyer at law firm Bird&Bird, believes that brands are “extremely concerned” about potential reputational harm from continuing to operate in Russia.
“They are worried obviously on a human and moral level about what is happening, but I also think they are worried [that] a number of companies have been threatened with boycotts.”
(Adapted from BBC.com)