ELIZABETH SARDINAS—On March 16, 2022, Ukrainian President Volodymyr Zelenskyy addressed the U.S. Congress, calling for American companies to exit the Russian market. In response to Russia’s invasion of Ukraine and President Zelenskyy’s remarks, over 600 companies, including American Airlines, Deloitte, Netflix, and Spotify, have completely withdrawn from Russia. Similarly, Representative Carolyn B. Maloney introduced a bill meant to prohibit the U.S. from conducting business with companies currently operating in Russia. For franchises, however, preexisting legal relationships make the decision to withdraw complicated.
A franchise is an arrangement between a franchisor and a franchisee. The franchisee pays a fee and royalties to the franchisor, and in turn, the franchisor allows the franchisee to use its business model, brand name, and intellectual property. These franchise relationships are outlined in franchising agreements, which set out the rights and duties of each party. These arrangements are especially attractive to western brands who want to enter an international market but lack the expertise, money, or ability to enter.
Companies like Burger King and Subway have cited the existence of these complicated contractual relationships with franchisees to explain their inability to withdraw from Russia. Franchise agreements do not create an employer-employee relationship—instead, the franchisee is an independent business owner. Thus, Alexander Kolobov, Burger King’s partner in Russia, has further frustrated the company’s desire to exit the country amid the war by refusing to terminate and suspend operations. According to Burger King, his decision, as the main operator in Russia, is final. Although it has not completely withdrawn from Russia, Burger King has suspended corporate support and intends to redirect profits it receives from the Russian franchises to the United Nations’ refugee agency. This, however, may not be the solution that President Zelenskyy was hoping for as many Russian franchisees are “self-sufficient.”
So, is there really no way for these franchises to withdraw from Russia? Yale management professor Jeffrey Sonnenfeld suggested that the absence of force majeure clauses in most franchise agreements could be to blame. A force majeure clause limits the liability of parties if there is an event outside the parties’ control. Often, force majeure clauses cover natural disasters, war or terrorism, labor strikes, epidemics, and sometimes include broad language meant to encompass other unforeseeable events. But, according to Sonnenfeld, force majeure clauses were mostly eliminated from franchise agreements. That is not to say that if they had not been eliminated, it would completely excuse the unilateral termination of franchise agreements. The effect of force majeure clauses depends on the language in the provision. In fact, U.S. courts tend to interpret these clauses narrowly. Moreover, even if a brand had a force majeure or similar clause in the contract and was successful in getting a U.S. court to grant judgment against the Russian franchise, there is no guarantee that a Russian court would enforce the judgment.
Franchisors have another option: buy out franchisees. Starbucks, with over 130 stores in Russia, has taken this route. Sonnenfeld argues that this option is always open to franchisors and instructs companies to offer franchisees “a price they can’t refuse.” This may be the best option for brands that want to exit the Russian market but are met with resistance from franchisees, such as occurred in Burger King’s case. While an expensive option, it is one that companies should consider if they are set on leaving Russia.
The current Russia-Ukraine war serves as a lesson to companies doing business internationally. Moving forward, franchisors should take care to include well-defined termination clauses in franchise agreements, like a force majeure clause that specifically outlines the events that will relieve the parties of obligations under the contract.