McDonald's No Poach Clause in Franchise AgreementsRecently, McDonald’s has been receiving much attention for its closure of restaurants in Russia due to Russia’s aggression into Ukraine. As part of the coverage, news outlets have been reporting on some of the underlying infrastructure McDonald’s invested in as part of its efforts to expand into Russia. As noted in the Washington Post, as part of its Russian expansion, McDonald’s:

  • Built a plant outside Moscow to process beef, produce sauces, and test for quality control.
  • Brought in agronomists to help Russian farmers grow non-native potatoes.
  • Introduced bakers from Canada, the United States, and Europe to develop baking systems for the chain.
  • Flew in meat experts to help Russian ranchers raise their cattle.
  • Modified its menu to cater to local palates.

Whether expanding internationally through franchising or master franchising, the initiatives taken by McDonald’s highlight certain complexities that brands encounter when expanding into foreign markets. If a US franchisor does not properly address supply chain matters in its franchise agreement or master franchise agreement, then the franchisor may find itself in an immediate dispute in relation to sourcing necessary products.

While most brands will not have the resources that McDonald’s has to address supply chain issues, each franchisor must examine the challenges and hurdles to offering its products and services in a foreign jurisdiction before selling a franchise or master franchise. Once these challenges are evaluated, the franchisor must then consider whether its franchisees or master franchisees will be responsible for sourcing products and ensuring that supply chain issues are solved.

In addition, similar to McDonald’s, each US franchisor considering foreign expansion must also examine its products and services and determine:

  • If its products and services can adapt well to the foreign market, and if not,
  • What changes and modifications (if any) can be made to the products and services to be more competitive in each respective foreign market.

When drafting international franchise or master franchise agreements, franchise companies have no issue focusing on key business terms such as the initial fees, royalty fees, development schedules, etc. It is easy to overlook the basic fundamentals, such as supply chain issues. However, if the responsibility of the respective parties is not clearly spelled out in the agreement with respect to supply chain issues, then there is a strong likelihood that a court or arbitrator would find the US franchisor responsible for any gaps in the supply chain.