You can’t leave and stay: some American companies want to, but cannot leave the Russian market

More than 400 companies have announced their withdrawal from Russia since its February 24 invasion of Ukraine, according to a list compiled by the Yale School of Management. However, for some brands, it's easier said than done. CNBC.

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Ukrainian President Volodymyr Zelensky, in his address to the US Congress on March 16, repeated calls for all global brands to leave Russia — a market “drenched in Ukrainian blood” — as part of an ongoing effort to put economic pressure on the rogue state.

Fast food giants Burger King and Subway, British retailer Marks & Spencer and hotel chains Accor and Marriott are among the companies unable to leave Russia due to complicated franchise agreements.

“Unlike company-owned operations, a franchise company that enters the international market takes on a binding long-term contractual obligation to an experienced counterparty,” said Dean Furnaris, franchise and distribution partner at Wiggin and Dana.

On the subject: 'Poisoning or sudden illness': Ukrainian intelligence reports that Russia is preparing to overthrow Putin

Under such contracts, a company, known as a franchisor, transfers its brand to a counterparty, known as a franchisee, who then owns and operates the brand at a specific location. Companies looking to expand their footprint in a particular market may find such agreements operationally or financially beneficial. But, being legally bound by contracts, once signed, this leaves no room for maneuver.

This has made it more difficult for some Western brands to move away from Russia, even as many of their peers have suspended operations or exited the market entirely due to their condemnation of Moscow's invasion and the resulting logistical problems.

"Company-owned brands are more likely to close outlets quickly because they don't have to deal with the level of franchise relationships," said Ersa Jackson, a member of Clark Hill's franchising and licensing team.

Termination of corporate support

Burger King, owned by Restaurant Brands International, announced last week that it was ending corporate support for its more than 800 franchised restaurants in Russia and refusing to approve any expansion. However, outlets continue to operate under the local main franchisee.

Similarly, Subway has no corporate outlets in Russia, but its approximately 450 independent franchised restaurants continue to operate in the country. This comes as competitors such as McDonald's, which owns most of its restaurants in Russia, have said they will temporarily close 850 of their restaurants in the country, at an estimated loss of $50 million per month.

“We do not directly control these independent franchisees and their restaurants and have limited understanding of their day-to-day operations,” Subway said in a statement.

Meanwhile, retailer Marks & Spencer, which has 48 stores in Russia, said it had stopped deliveries to its franchisor, Turkish company FiBA, but they continue to "discuss" the brand's continued operation in Russia.

Hotel chains Accor and Marriott have also suspended the opening of new locations in Russia, but their existing locations continue to be used by third parties.

Legal battlefield

While all of these companies have expressed concerns about the war and have made various commitments to divert profits from Russia or make individual donations to Ukrainian refugees, their continued presence on Russia's main streets remains largely at the discretion of their rights holders.

“Some franchisees don’t want to stop because they say the Russians aren’t the problem and the brand should continue to serve its customers,” said Craig Traktenberg, partner at law firm Fox Rothschild.

And since most franchisors have invested heavily in their local outlets and continue to support them, any action on their part to close operations seems unlikely.
"If the franchisee is still ready and willing to operate, a franchisor's unilateral decision to close a location could result in litigation due to a lost business opportunity for the franchisee," Clark Hill's Jackson said.

This puts many Western brands in a difficult position as to how to fulfill their legal obligations to protect their brands in a world that is overwhelmingly anti-Russian.

“Franchise companies and their brands are in a very difficult position when it comes to Russia. On the one hand, there is a growing public and governmental opinion in the West that all non-essential business with and within Russia should be stopped in anticipation of some future uncertain event such as a ceasefire or a Russian withdrawal from Ukraine,” Furnaris said.

“At the same time, leaving the market from Russia will be perceived very differently by the Russian government and, more importantly, by its people,” he added.

Brand reputation management

Heightening Western sanctions and further supply chain disruptions could give franchisors some hope for a contract release as franchised brands may no longer have the funds to operate.

Most likely, companies will have to weigh the legal and financial implications of terminating a contract with a longer lifespan for their brand.

“This business decision may overlap with a moral decision. Ultimately, the question is which solution best protects the brand,” Traktenberg said.

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Meanwhile, the fallout could usher in a new era for franchising arrangements where participants may be more likely to anticipate risks of conflict in the future, such as "civil unrest, uprisings and related events."

“It could be argued that trademark provisions support closure if the brand’s reputation is damaged by continued operation,” Traktenberg added.

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